(Former name, former address and former fiscal year, if changed since last report)

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 Date File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☑ No ☐

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

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

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

As of October ~~27, 2017,~~30, 2018, the registrant had ~~73,316,650~~74,269,661 shares of Common Stock ($0.01 par value) outstanding.

The following glossary provides definitions for certain acronyms and terms used in our periodic filings with the United States Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our filings, including this document.

See accompanying notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

												Three Months Ended						Nine Months Ended
	Three Months Ended						Nine Months Ended					September 30,						September 30,
	September 30,						September 30,					2018			2017			2018			2017
	2017			2016			2017			2016					(As Revised)						(As Revised)
Net revenue	$	30,670		$	57,773		$	109,208		$	187,415	$	18,346		$	30,670		$	65,723		$	109,208
Cost of revenue		7,472			4,677			16,032			15,588		2,379			7,472			8,179			16,032
Gross profit		23,198			53,096			93,176			171,827		15,967			23,198			57,544			93,176
Operating expenses:
Sales and marketing		12,825			16,662			41,775			56,153		7,358			12,825			25,488			41,775
Research and development		19,552			16,516			46,589			58,440		14,483			19,552			43,216			46,589
General and administrative		15,714			17,653			47,882			46,275		8,906			11,310			29,333			31,883
Legal													16,009			4,404			37,494			15,999
Charges related to litigation award and settlements		150,850			—			155,300			—		30			150,850			770			155,300
Total operating expenses		198,941			50,831			291,546			160,868		46,786			198,941			136,301			291,546
Operating income (loss)		(175,743	)		2,265			(198,370	)		10,959
Operating loss													(30,819	)		(175,743	)		(78,757	)		(198,370	)
Other income:
Interest income		510			281			1,410			762		483			510			1,470			1,410
Other income (expense), net		(83	)		—			(44	)		44		—			(83	)		(472	)		(44	)
Total other income		427			281			1,366			806		483			427			998			1,366
Income (loss) before income taxes		(175,316	)		2,546			(197,004	)		11,765
Income tax expense (benefit)		(8,996	)		(379	)		(15,976	)		523
Net income (loss)		(166,320	)		2,925			(181,028	)		11,242
Unrealized gain (loss) on available-for-sale securities, net of tax		13			(158	)		64			78
Total comprehensive income (loss)	$	(166,307	)	$	2,767		$	(180,964	)	$	11,320
Net income (loss) per common share:
Loss before income taxes													(30,336	)		(175,316	)		(77,759	)		(197,004	)
Income tax expense (benefit) (See Note 1)													158			(9,036	)		455			(16,096	)
Net loss													(30,494	)		(166,280	)		(78,214	)		(180,908	)
Unrealized gain on available-for-sale securities, net of tax													89			13			89			64
Total comprehensive loss												$	(30,405	)	$	(166,267	)	$	(78,125	)	$	(180,844	)
Net loss per common share:
Basic	$	(2.30	)	$	0.04		$	(2.51	)	$	0.16	$	(0.41	)	$	(2.28	)	$	(1.06	)	$	(2.50	)
Diluted	$	(2.30	)	$	0.04		$	(2.51	)	$	0.15	$	(0.41	)	$	(2.28	)	$	(1.06	)	$	(2.50	)
Weighted average common shares outstanding
Basic		72,285,146			71,640,536			72,133,417			71,592,145		74,254,177			72,810,827			73,997,016			72,366,618
Diluted		72,285,146			74,328,963			72,133,417			74,545,823		74,254,177			72,810,827			73,997,016			72,366,618

See accompanying notes to unaudited condensed consolidated financial statements.

							Nine Months Ended September 30,
	Nine Months Ended September 30,						2018			2017
	2017			2016						(As Revised)
Cash flows from operating activities:
Net income (loss)	$	(181,028	)	$	11,242
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net loss							$	(78,214	)	$	(180,908	)
Adjustments to reconcile net loss to net cash used in operating activities:
Inventory obsolescence reserve		5,543			3,244			1,498			6,331
Depreciation and amortization		5,505			4,534			5,689			5,505
Stock-based compensation		13,048			17,471			9,417			13,048
Deferred income tax benefit		(8,505	)		(6,494	)		—			(7,684	)
Excess tax benefits on stock options and awards		—			(675	)
Loss on disposal of property and equipment								108			—
Impairment on property and equipment								1,487			—
Write-off of notes receivable and other assets due from stockholders								26			—
Amortization of investment discount		942			1,592			107			942
Changes in operating assets and liabilities:
Accounts receivable		(2,595	)		13,711
Accounts receivable, net								8,796			(2,595	)
Inventories		705			3,009			753			(83	)
Prepaid expenses and other current assets		(10,855	)		(662	)		(2,304	)		(10,855	)
Accounts payable, accrued expenses and other current liabilities		(10,117	)		(12,870	)
Accounts payable, accrued expenses and other current and noncurrent liabilities								11,733			(2,958	)
Accrued sales allowances								(7,309	)		(8,100	)
Deferred revenue		940			—			—			940
Accrued litigation award and settlements		137,033			—			(469	)		137,033
Net cash provided by (used in) operating activities		(49,384	)		34,102
Net cash used in operating activities								(48,682	)		(49,384	)
Cash flows from investing activities:
Purchase of investments		(108,503	)		(85,482	)
Purchases of investments								(50,588	)		(108,503	)
Proceeds from sales of investments		22,303			7,146			11,855			22,303
Proceeds from maturities of investments		75,951			75,971			78,467			75,951
Purchases of property and equipment		(13,598	)		(7,349	)		(3,974	)		(13,598	)
Net cash used in investing activities		(23,847	)		(9,714	)
Net cash provided by (used in) investing activities								35,760			(23,847	)
Cash flows from financing activities:
Proceeds from issuance of common stock		836			1,576			736			836
Excess tax benefits on stock options and awards		—			675
Shares withheld for future payment of employees' withholding tax liability		(42	)		—			—			(42	)
Proceeds from exercise of stock options		3,550			3,475			1,032			3,550
Repurchase of common stock		—			(16,100	)
Net cash provided by (used in) financing activities		4,344			(10,374	)
Net cash provided by financing activities								1,768			4,344
Change in cash and cash equivalents		(68,887	)		14,014			(11,154	)		(68,887	)
Cash and cash equivalents, beginning of period		104,642			79,515			31,999			104,642
Cash and cash equivalents, end of period	$	35,755		$	93,529		$	20,845		$	35,755
Supplemental cash flow disclosures:
Cash paid for income taxes	$	1,917		$	9,254
Cash paid (refunded) for income taxes, net							$	(7	)	$	1,917
Non-cash capital expenditures	$	2,666		$	71		$	1,316		$	2,666

See accompanying notes to unaudited condensed consolidated financial statements.

1.	Nature of Business and Basis of Presentation

Insys Therapeutics, Inc., which was incorporated in Delaware in June 1990, and our subsidiaries (collectively, “we,” “us,” and “our”) maintain headquarters in Chandler, Arizona.

We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. As of September 30, ~~2017,~~2018, we have two marketed products: SUBSYS®, a proprietary sublingual fentanyl spray for BTCP in opioid-tolerant adult patients; and SYNDROS®, a proprietary, orally administered liquid formulation of dronabinol for the treatment of ~~CINV~~nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetic treatments and anorexia associated with weight loss in patients with AIDS.

The accompanying unaudited condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. GAAP, pursuant to rules and regulations of the SEC. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, ~~2016,~~2017, included in our Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017, are not necessarily indicative of results to be expected for the full fiscal year or any other periods.

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make a number of estimates and judgments that affect the reported amounts of assets and liabilities ~~revenues, expenses,~~ and ~~related~~ disclosure of contingent assets and ~~liabilities.~~liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. On an ~~on-going~~ongoing basis, we evaluate our estimates, including those related to revenue recognition (which isare affected by prescriptions dispensed, wholesaler discounts, patient discount programs, rebates, returns, and chargebacks), inventories, fair value of investments, legal liabilities and settlements, stock-based compensation expense, impairment, uncertain tax positions, and deferred tax valuation allowances. We base our estimates on historical experience and on various other assumptions that are believed by management to be reasonable under the circumstances. Actual results ~~may~~could materially differ from these estimates.

~~Certain prior period amounts have been reclassified to conform with current period presentation.~~

All significant intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.

As of September 30, 2018, the Company had an accumulated deficit of $289.8 million as well as negative cash flows from operating activities for the nine months ended September 30, 2018.

While we have no outstanding debt and $113.0 million in cash and cash equivalents and investments as of September 30, 2018, the Company expects its negative cash flows from operating activities to continue. However, management believes that our existing cash and cash equivalents and investments, together with interest thereon, will be sufficient to sustain operations for at least the next 12 months from the issuance of these unaudited condensed consolidated financial statements. As our research and development activities mature and develop over the next several years, the Company will likely require substantial funds to continue such activities, depending upon events that are difficult to predict at this time. In addition, as the Company continues to contend with existing litigation (and resolve such proceedings as appropriate) and to fund other legal expenses related to our former employees, we may require additional funding. In this regard, management’s plans, in order to meet any additional operating cash flow requirements, include the pursuit of strategic alternatives related to our opioid-related assets, as well as financing activities such as public offerings and private placements of our common stock, preferred stock offerings, and issuances of debt and convertible debt instruments.

There are no assurances that such additional funding will be obtained and that the Company will succeed in its future operations. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected.

Revision of Previously Issued Financial Statements for Correction of Immaterial Errors

During the three months ended September 30, 2018, we identified an error related to the accounting for uncertain income tax positions in the interim and annual financial statements for the year ended December 31, 2017. We determined that we had incorrectly applied the accounting guidance when implementing Accounting ~~Pronouncements~~

~~Effective January 1, 2017, we adopted ASU~~Standards Update (“ASU”) No. 2016-09, ~~Compensation—~~“Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment ~~Accounting. Among other requirements,~~Accounting” on January 1, 2017 by inadvertently omitting the ~~new guidance requires all~~impact on the unrecognized tax ~~effects related~~benefit (“UTB”) reserves for state taxes. In addition, we identified errors in the calculation of weighted average shares outstanding, which impacted net loss per share for the three and nine months ended September 30, 2017, and for the year ended December 31, 2017. We assessed the materiality of these errors on our prior annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108 and concluded that the errors were not material to ~~share-based payments at settlement (or expiration) to be recorded through~~our audited financial statements for the ~~income statement. Previously, tax benefits in excess~~year ended December 31, 2017, the unaudited condensed consolidated financial statements for any of ~~compensation cost ("windfalls") were recorded in equity, and tax deficiencies ("shortfalls") were recorded in equity~~the quarterly periods within the year ended December 31, 2017, nor to the ~~extent~~quarterly periods ended March 31, 2018 and June 30, 2018. However, the impact of ~~previous windfalls, and then~~these errors was material to the accompanying unaudited condensed consolidated financial statements. To correctly present uncertain income ~~statement. As required, this change was applied prospectively to all excess~~ tax ~~benefits~~position liabilities, income tax expense (benefit), and ~~tax deficiencies resulting from settlements.~~

~~Under~~net loss per share in the ~~new guidance, the windfall tax benefit is to be recorded when it arises, subject to normal valuation allowance considerations. Excess tax benefits that were not~~appropriate periods, management revised its previously ~~recognized because the related tax deduction had not reduced current taxes payable were recorded through a cumulative effect adjustment~~issued consolidated balance sheet and statement of stockholders’ equity as of December 31, 2017, the date of the adoption. As required, upon adoption, this change was applied on a modified retrospective basis, with a cumulative effect adjustment of change in accounting principle of approximately $368,000 as a deferred tax asset with a corresponding valuation allowance of $368,000, which were offset in retained earnings. Additionally, our condensed consolidated statement of ~~cash flows now presents excess tax benefits as an operating activity, adjusted prospectively with no adjustments made to prior periods.~~

~~Additionally, ASU No. 2016-09 addressed~~operations and comprehensive loss for the ~~presentation of employee taxes paid on~~year ended December 31, 2017, the statement of cash flows. We are now required to present the cost of shares withheld from the employee to satisfy the employees’ income tax liability as a financing activity on the statement of cash flows rather than as an operating cash flow. This change was applied on a retrospective basis, as required, but did not impact theunaudited condensed consolidated ~~statement~~statements of operations and comprehensive loss for the three and nine months ended September 30, 2017, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, ~~2016.~~2017. Certain amounts in prior periods as previously reported have been reclassified to conform to the current period presentation.

5The following tables summarize the impact and financial statement line items impacted by the revision adjustments (in thousands, except per share data):

Effective January 1, 2018, we adopted the requirements of ASU ~~2016-09 also permits entities~~No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606),” and all the related amendments (“new revenue standard”). The new revenue standard aims to ~~make an accounting policy election related~~achieve a consistent application of revenue recognition within the United States, resulting in a single revenue model to ~~how forfeitures will impact~~be applied by reporting companies under U.S. GAAP. Under the new model, recognition of ~~compensation cost~~revenue occurs when a customer

obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for ~~stock-based compensation~~those goods or services. In addition, the new revenue standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We used the modified retrospective transition method for all contracts that were not completed as of the adoption date. In addition, we have applied the practical expedient to ~~either~~contract modifications, as allowed by the SEC, but did not have any material contract modifications to be included in the initial adoption of ASC Topic 606. The comparative information for 2017 presented below has not been restated and continues to be reported under ASC Topic 605, “Revenue Recognition.” We recognize revenue when we transfer control of our products to our customers, as our contracts have a single performance obligation (delivery of our product to their preferred location). Our sales revenue from SUBSYS® continues to be recognized when product is delivered to wholesale pharmaceutical distributors and specialty retail pharmacies (collectively, our customers). In accordance with the new revenue standard, our sales revenue from SYNDROS® is now recognized when product is delivered to our customers, where revenue was previously deferred until the right of return no longer existed, which occurred at the earlier of the time SYNDROS® units were sold to health care facilities or dispensed through patient prescriptions, or the expiration of the right of return. It is common for our contracts to include product sales allowances (including returns, discounts and rebates) that can decrease the transaction price and are therefore considered to be variable consideration. In accordance with the new revenue standard, we estimate the ~~total number~~amount of ~~awards~~variable consideration promised in the contract using the expected value (probability weighted estimate) method. We do not have any significant extended payment terms as payment is received shortly after the point of sale. See Note 2, Revenue Recognition, for ~~which~~additional discussion of our revenue recognition policy and variable consideration estimates. The impact of adopting the ~~requisite service period will not be rendered, as currently required, or~~new revenue standard on our unaudited condensed consolidated financial statements is shown in the tables below.

The cumulative effect of the changes made to ~~account~~our January 1, 2018 unaudited condensed consolidated balance sheet for forfeitures as they occur. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur. As required, this change was applied on a modified retrospective basis; however, as of December 31, 2016, we had estimated no forfeitures relating to the outstanding equity awards. As a result, no adjustment was required.

~~Going forward,~~ the adoption of ~~ASU 2016-09 could cause volatility in~~ the ~~effective tax rate,~~new revenue standard was as follows (in thousands):

The impact of adopting the ~~excess tax benefits associated with~~new revenue standard on our unaudited condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

The impact of adopting the ~~exercise~~new revenue standard on our unaudited condensed consolidated balance sheets, excluding the cumulative effect of stock options could generate a significant discrete income tax benefit in a particular interim period, potentially creating volatility in net income and net income per share period-to-period and period-over-period.adoption on January 1, 2018 disclosed previously, was as follows (in thousands):

Effective January 1, ~~2017,~~2018, we adopted ASU No. ~~2015-11, Inventory (Topic 330)~~2016-01, “Financial Instruments—Overall (Subtopic 825-10): ~~Simplifying the~~Recognition and Measurement of ~~Inventory. Prior~~Financial Assets and Financial Liabilities,” and ASU No. 2018-03, “Technical Corrections and Improvements to ~~January 1, 2017, we measured inventory at~~Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” These standards amended the ~~lower~~Financial Instruments topic of ~~cost or market. This guidance~~the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard requires usthat unrealized gains and losses on investments in equity securities to measure inventory at the lower of cost and NRV, which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling pricesbe recognized in ~~the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.”~~net income (loss). The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements.

Effective January 1, 2018, we adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The guidance clarifies how certain cash flow transactions are classified in the statement of cash flows. The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements.

Effective January 1, 2018, we adopted ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” Prior to January 1, 2018, U. S. GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset was sold to an outside party, which was an exception to the principle of comprehensive recognition of current and deferred income taxes in U. S. GAAP. This guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements.

Effective January 1, 2018, we adopted ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” The ASU requires modification accounting to a share-based payment award unless all of the following are the same immediately before and after the change: the award’s fair value; the award’s vesting conditions; and the award’s classification as an equity instrument or a liability instrument. The adoption of this guidance did not have a material impact on our unaudited condensed consolidated financial statements.

Effective January 1, 2018, we adopted ASU No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update).” The standard addresses any uncertainty or diversity of views in practice regarding the application of ASC Topic 740 in situations where a registrant did not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of the 2017 Tax Cuts and Jobs Act (the “Act”) for the reporting period in which the Act was enacted. The Company recognized the provisional tax impacts of the Act in the fourth quarter of 2017. The Company completed its analysis of the Act, in conjunction with the completion of the Company's tax returns for 2017, and recorded a $0.7 million reduction of tax expense.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The standard expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, and supersedes ASC Topic 505-50, “Equity – Equity Based Payments to Non-Employees.” Previously, the fair value of share-based payment awards to nonemployees was determined by the measurement date, which was the earlier of the date at which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. This concept caused significant differences in the accounting for share-based payment to nonemployees as compared to share-based payments to employees. Furthermore, the previous guidance required employers to revalue share-based payments to nonemployees at each reporting period if a measurement date could not be established, causing fluctuations in the resulting expense from period to period. The new standard eliminates the measurement date concept and requires the fair value of share-based payments to nonemployees to be measured on the grant date, consistent with share-based payments to employees. We early adopted the standard during the three months ended June 30, 2018. We remeasured the fair value of our equity-classified share-based payments to nonemployees for which a measurement date had not been established as of the adoption date of January 1, 2018. Because we had previously remeasured our share-based payments to nonemployees at each reporting period, the adoption did not result in a cumulative effect adjustment to opening retained earnings.

In ~~May 2017,~~August 2018, the FASB issued ASU No. ~~2017-09, Compensation—Stock Compensation~~2018-13, “Fair Value Measurement (Topic ~~718)~~820): ~~Scope of Modification Accounting, to provide guidance about which changes~~Disclosure Framework—Changes to the ~~terms or conditions~~Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of ~~a share-based payment award require an entity to apply modification accounting~~disclosures. The amendments remove, modify, and add certain disclosure requirements in Topic ~~718. Specifically,~~820, “Fair Value Measurement.” The amendments on changes in unrealized gains and losses, the ~~ASU requires modification accounting~~range and weighted average of significant unobservable inputs used to ~~a share-based payment award unless all of the following are the same immediately before and after the change: the award’s~~develop Level 3 fair ~~value; the award’s vesting conditions;~~value measurements, and the ~~award’s classification as an equity instrument~~narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or ~~a liability instrument. The~~annual period presented in the initial fiscal year of adoption. All other amendments should be applied ~~prospectively~~retrospectively to ~~an award modified on or after the adoption date, and~~all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, ~~2017.~~2019. Early adoption is permitted, including adoption in an interim period. Furthermore, an entity is permitted to early adopt any ~~interim period, for reporting periods for which financial statements have~~removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date. We do not ~~yet been issued. We are currently evaluating the impact of~~expect this amendment to have a material impact on our consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, ~~Receivables—~~“Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” to amend the amortization period for certain purchased callable debt securities held at a premium. The ASU shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments should be applied on a modified retrospective basis and are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of this amendment on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U. S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party, which is an exception to the principle of comprehensive recognition of current and deferred income taxes in U. S. GAAP. The amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments should be applied on a modified retrospective transition basis, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact of these amendments on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments effected by this ASU affect entities required to present a statement of cash flows and provide specific guidance on a variety of cash flow issues to reduce current and potential future diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented. We are currently evaluating the impact of these amendments on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, ~~Financial~~“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments effected by this ASU affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income and are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. We ~~are currently evaluating the~~do not expect this amendment to have a material impact ~~of these amendments~~ on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, ~~Leases:~~“Leases: (Topic 842),” to provide guidance on recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP guidance. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP guidance. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. ~~In transition, lessees and lessors are~~Originally, entities were required to ~~recognize and measure leases at the beginning of the earliest period presented~~adopt ASU 2016-02 using a modified retrospective approach. ~~The modified retrospective approach includes a number~~In July 2018, the FASB issued ASU No. 2018-11“Leases: (Topic 842): Targeted Improvements,” which provides entities with an additional optional transition method of ~~optional practical expedients that entities may elect~~recognizing the cumulative effect of applying the new standard as an adjustment to ~~apply. These practical expedients relate~~beginning retained

earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the ~~identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability~~FASB also issued ASU No. 2018-10, “Codification Improvements to ~~use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects~~Topic 842, Leases,” which clarifies how to apply ~~the practical expedients will, in effect, continue~~certain aspects of ASU 2016-02. We expect to ~~account for leases that commenced before the effective date in accordance~~adopt ASU 2018-10 and ASU 2018-11 on January 1, 2019, concurrent with previous U.S. GAAP guidance unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous U.S. GAAP guidance. We are currently evaluating the impact of these amendments on our consolidated financial statements and related disclosures; however, based on our current operating leases, we do not expect that the adoption of ~~this guidance~~ASU 2016-02. We currently expect that most of our operating lease commitments will be subject to the update and recognized as right-of-use assets and operating lease liabilities upon adoption. We expect the standard to have a material impact on our ~~consolidated financial statements.~~

~~In January 2016,~~assets and liabilities for the ~~FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition~~addition of right-of-use assets and Measurement of Financial Assets and Financial Liabilities, which amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is not permitted. These amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are currently evaluating the impact of these amendments on our consolidated financial statements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard aims to achieve a consistent application of revenue recognition within the United States, resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. In March 2016 and April 2016, the FASB issued ASU No. 2016-08 and ASU No. 2016-10, respectively, which further clarified the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09 and the identification of performance obligations and licensing, respectively. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. These standards will be effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is permitted,lease liabilities, but not before December 15, 2016, the original effective date of the standard. We are currently analyzing ASU 2014-09, and the related ASUs, to evaluate the impact of the new standard on existing contracts with our customers and will complete our analysis by December 31, 2017. As part of our analysis, we initiated a contract review process which includes an evaluation of our performance obligations and variable consideration. Our evaluation is still ongoing; however, based on the evaluation of our current contracts and revenue stream, most will be recorded consistently under both the current and new standard. We primarily sell products and recognize revenue upon delivery to customers, at which point the earnings process is deemed to be complete. Our performance obligations are clearly identifiable and we do not ~~anticipate significant changes~~expect it to ~~the assessment~~have a material impact to our results of ~~such performance obligations~~operations or the timing of our revenue recognition upon adoption of the new standard. We believe our primary business processes are consistent with the principles contained in the ASU. We are evaluating if any changes to those processes, our internal controls or systems are needed upon adoption of the new standard, and will complete our evaluation by December 31, 2017. We plan to adopt the new guidance on January 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of that date. Upon adoption, we will recognize the cumulative effect of adopting this guidance as an adjustment to the opening balance of accumulated deficit. We continue to evaluate the impact of the new standard on our financial statement disclosures and will complete the evaluation by December 31, 2017. Additionally, we will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust our assessment and implementation plans accordingly.liquidity.

2.	Revenue Recognition

We recognize revenue from the sale of SUBSYS® and SYNDROS®. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.

SUBSYS® was commercially launched in March 2012 and is monitored by an FDA-mandated REMS program known as the TIRF REMS. We sell SUBSYS® in the United States to wholesale pharmaceutical distributors and directly to retail pharmacies, collectively our customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. SUBSYS® currently has a shelf life of 36 or 48 months from the date of manufacture, depending on the manufacture date. We record revenue for SUBSYS® at the time the customer receives the shipment.

SYNDROS® was commercially launched in July 2017. We sell ~~SYNDROS®~~all of our products in the United States to our customers. See Note 10, Product Lines, Concentration of Credit Risk and Significant Customers, for information on revenues disaggregated by product line and route to market.

To determine revenue recognition for contractual arrangements that we determine are within the scope of ASC Topic 606, we perform the following five steps: (i) identify each contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods we transfer to the customer. We recognize revenue from the sale of our commercially approved products, SUBSYS® and SYNDROS®, when we transfer control of our products to our customers, as our contracts have a single performance obligation (delivery of our product to their preferred location). Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Any shipping and handling activities that we perform, whether before or after a customer has obtained control of the products, are considered activities to fulfill our obligation to transfer the products, and are recorded as incurred within sales and marketing expenses. We offer the following discounts to our customers:

Wholesaler and Retailer Discounts. We offer discounts to certain wholesale ~~pharmaceutical~~ distributors and ~~directly~~specialty retailers based on contractually determined rates. We record receivables due from the wholesalers and retailers net of these discounts upon shipment to the respective wholesale distributors and retail pharmacies.

Prompt Pay Discounts. We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We record receivables net of these cash discounts.

Stocking Allowances. We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a new product and on the first order made by certain wholesale distributors and retail pharmacies ~~collectively our customers, subject~~based on contractually determined rates. We record receivables due from the wholesalers and retailers net of these discounts upon shipment to ~~rights of return within a period beginning six months prior to,~~the respective wholesale distributors and ~~ending~~retail pharmacies. The extended payment terms are not greater than 12 months ~~following, product expiration. SYNDROS® currently has~~and therefore do not include a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture date. Given the limited sales history of SYNDROS®, the Company currently cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on product shipments of SYNDROS® until the right of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold to healthcare facilities or dispensed through patient prescriptions, or expiration of the right of return. Units dispensed are generally not subject to return, exceptfinancing component.

As is customary in the ~~rare cases where the product malfunctions or the product~~pharmaceutical industry, it is damaged in transit. The Company estimates patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actual patient prescriptions dispensedcommon for ~~a given period, adjustments~~our contracts to ~~revenue may be necessary in future periods.~~

~~We recognize estimated~~include product sales allowances ~~as a reduction of product sales in~~that can decrease the ~~same period the related revenue is recognized.~~transaction price and are therefore considered to be variable consideration. Product sales allowances, which include product returns, patient discount programs, rebates and chargebacks, are variable consideration and are based on amounts owed or to be claimed on the related sales. ~~These~~We estimate variable consideration when determining the transaction price using the expected value method. We assess whether variable consideration is constrained and only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on historical data, and take into consideration the terms of our agreements with customers and third-party payers and the levels of inventory within the distribution channels that may result in future discounts taken. In certain cases, such as patient assistance programs, ~~we recognize the cost of patient discounts as a reduction of revenue~~our estimates are based on estimated utilization. If actual future results vary, we may need to adjust these estimates, which could have an effect on ~~product~~ revenue in the period of adjustment. Our product sales allowances include:

Product Returns. We allow customers to return product for credit beginning six months prior to, and ending 12 months following, the product expiration date. SUBSYS® currently has a shelf life of 36 or 48 months from the date of manufacture, depending on the manufacture date, and SYNDROS® currently has a shelf life of 24 or 36 months from the date of manufacture, depending on the manufacture date. We have monitored actual return history since product launch, which provides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the

time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products.

Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before, and up to 12 months following, the product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits on returned ~~product.~~products. Accordingly, we may have to adjust these estimates, which could have ana material effect on ~~product sales~~net revenue and earnings in the period of adjustment. The allowance for product returns is included in accrued sales allowances.

~~Wholesaler and Retailer Discounts.~~ We offer discounts to certain wholesale distributors and specialty retailers based on contractually determined rates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors and retail pharmacies.

~~Prompt Pay Discounts~~. We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. We account for cash discounts by reducing accounts receivable by the full amount of the discount.

~~Stocking Allowances~~. We may offer discounts and extended payment terms, generally in the month of the initial commercial launch of a new product and on the first order made by certain wholesale distributors and retail pharmacies based on contractually determined rates. We accrue the discount as a reduction of receivables due from the wholesalers and retailers upon shipment to the respective wholesale distributors and retail pharmacies.

Patient Discount Programs. We offer discount card programs to patients, in which patients receive discounts on their prescriptions that are reimbursed by us to the retailer. We estimate the total amount that will be redeemed based on a percentage of actual redemptions applied to inventory in the distribution and retail channels. The allowance for patient discount programs is included in accrued sales allowances.

~~Rebates~~Rebates.. We participate in certain rebate programs, which provide discounted prescriptions to qualified insured patients. Under these rebate programs, we pay a rebate to the third-party administrator of the program, generally two to three months after the quarter in which prescriptions subject to the rebate are filled. We estimate and accrue these rebates based on current and estimated future contract prices, historical and estimated future percentages of products ~~sold~~prescribed to qualified patients and estimated levels of inventory in the distribution channel. The allowance for rebates is included in accrued sales allowances.

Chargebacks. We provide discounts primarily to authorized users of the FSS of the General Services Administration under an FSS contract negotiated by the Department of Veterans Affairs and various organizations under Medicaid contracts and regulations. These organizations purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail price and the price the organization paid for the product. We estimate ~~and accrue~~ chargebacks based on estimated wholesaler inventory levels, current contract and estimated future prices and historical chargeback activity. ~~Estimated chargebacks are recognized~~

As of September 30, 2018, the majority of our accounts receivables were related to product sales. For the three and nine months ended September 30, 2018, the Company had no material bad-debt expense and there were no contract assets, contract liabilities or deferred contract costs recorded on the unaudited condensed consolidated balance sheets as ~~a reduction~~ of ~~revenue in the same period the related revenue is recognized. The allowance for chargebacks is included as a reduction to accounts receivable.~~ September 30, 2018.

3.	Short-Term and Long-Term Investments

Our policy for short-term and long-term investments is to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations, and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Short-term and long-term investments consist of corporate and various government agency and municipal debt securities, commercial paper, as well as certificates of deposit that have maturity dates that are greater than 90 days. Certificates of deposit and commercial paper are carried at cost, which approximates fair value. We classify our

marketable securities as available-for-sale in accordance with FASB ASC ~~No.~~Topic 320, ~~Investments~~“Investments — Debt and Equity Securities. ~~Available-for-sale~~” Investments in debt securities that are classified as available-for-sale are carried at fair value with unrealized gains and losses reported in stockholders’ equity, net of related tax effects. There were no reclassifications on available-for-sale securities during the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in impairment of the fair value of the investment. If we had unrealized gains and losses and declines in value judged to be other than temporary, we would have been required to include those changes in other ~~income/expense~~income (expense) in the unaudited condensed consolidated statements of operations and comprehensive ~~income (loss).~~loss. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security. The cost of securities sold is calculated using the specific identification method. At September 30, ~~2017,~~2018, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of ~~$2,996,000, $85,891,000,~~$1,998,000, $79,719,000, and ~~$55,514,000~~$12,451,000 in cash and cash equivalents, short-term and long-term investments, respectively.

Cash, cash equivalents and investments consisted of the following at September 30, ~~2017~~2018 (in thousands):

	Cost		Unrealized Gains		Unrealized Losses			Other- Than- Temporary Impairment Losses		Fair Value		Cash and Cash Equivalents		Short-term Investments		Long-term Investments		Cost		Unrealized Gains		Unrealized Losses			Other- Than- Temporary Impairment Losses		Fair Value		Cash and Cash Equivalents		Short-term Investments		Long-term Investments
Cash	$	10,266	$	—	$	—		$	—	$	10,266	$	10,266	$	—	$	—
Cash and cash equivalents																		$	5,285	$	—	$	—		$	—	$	5,285	$	5,285	$	—	$	—
Money market securities		22,493		—		—			—		22,493		22,493		—		—		13,562		—		—			—		13,562		13,562		—		—
Marketable securities:
Certificates of deposit		24,067		—		—			—		24,067		—		11,988		12,079		11,823		—		—			—		11,823		—		8,822		3,001
Commercial paper		10,462		—		—			—		10,462		1,498		8,964		—		12,936		—		—			—		12,936		1,398		11,538		—
Corporate securities		60,183		2		(113	)		—		60,072		—		38,111		21,961		41,873		—		(150	)		—		41,723		—		39,008		2,715
Federal agency securities		36,365		—		(117	)		—		36,248		1,498		14,697		20,053		26,207		—		(188	)		—		26,019		600		19,032		6,387
Municipal securities		13,562		1		(11	)		—		13,552		—		12,131		1,421		1,678		—		(11	)		—		1,667		—		1,319		348
Total marketable securities		144,639		3		(241	)		—		144,401		2,996		85,891		55,514		94,517		—		(349	)		—		94,168		1,998		79,719		12,451
	$	177,398	$	3	$	(241	)	$	—	$	177,160	$	35,755	$	85,891	$	55,514	$	113,364	$	—	$	(349	)	$	—	$	113,015	$	20,845	$	79,719	$	12,451

~~Investments~~Cash, cash equivalents and investments consisted of the following at December 31, ~~2016~~2017 (in thousands):

	Cost		Unrealized Gains		Unrealized Losses			Other- Than- Temporary Impairment Losses		Fair Value		Cash and Cash Equivalents		Short-term Investments		Long-term Investments		Cost		Unrealized Gains		Unrealized Losses			Other- Than- Temporary Impairment Losses		Fair Value		Cash and Cash Equivalents		Short-term Investments		Long-term Investments
Cash	$	49,331	$	—	$	—		$	—	$	49,331	$	49,331	$	—	$	—
Cash and cash equivalents																		$	12,183	$	—	$	—		$	—	$	12,183	$	12,183	$	—	$	—
Money market securities		54,015		—		—			—		54,015		54,015		—		—		15,317		—		—			—		15,317		15,317		—		—
Marketable securities:
Certificates of deposit		26,114		—		—			—		26,114		—		13,855		12,259		18,447		—		—			—		18,447		—		7,474		10,973
Commercial paper		1,485		—		—			—		1,485		—		1,485		—		10,560		—		—			—		10,560		1,499		9,061		—
Corporate securities		39,562		—		(135	)		—		39,427		500		25,681		13,246		59,613		—		(206	)		—		59,407		1,500		39,622		18,285
Federal agency securities		30,660		4		(92	)		—		30,572		—		10,854		19,718		37,793		—		(203	)		—		37,590		1,500		20,015		16,075
Municipal securities		35,811		2		(81	)		—		35,732		796		26,363		8,573		10,446		—		(29	)		—		10,417		—		9,017		1,400
Total marketable securities		133,632		6		(308	)		—		133,330		1,296		78,238		53,796		136,859		—		(438	)		—		136,421		4,499		85,189		46,733
	$	236,978	$	6	$	(308	)	$	—	$	236,676	$	104,642	$	78,238	$	53,796	$	164,359	$	—	$	(438	)	$	—	$	163,921	$	31,999	$	85,189	$	46,733

The amortized cost and estimated fair value of the marketable securities by maturity, are shown below (in thousands):

The following table shows the gross unrealized losses and the fair value of our investments, with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

~~We did not have any unrealized gains or losses or decline in values judged to be~~Marketable securities are reviewed quarterly for possible other than temporary ~~during the three and nine months ended September 30, 2017 and 2016.~~impairment. This review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the expectation for that security’s performance and the creditworthiness of the issuer. We did not have any unrealized gains or losses or decline in values judged to be other than temporary during the three and nine months ended September 30, 2018 and 2017.

4.	Fair Value Measurement

FASB ASC ~~No.~~Topic 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as quoted prices in active markets;

Level 2:

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we held short-term and long-term investments, as discussed in Note 3,Short-Term and Long-Term Investments, that are required to be measured at fair value on a recurring basis. Except as discussed in Note 6, Property and Equipment, Net, we had no assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017. Substantially all available-for-sale investments held by us at September 30, ~~2017~~2018 and December 31, ~~2016~~2017, have been valued based on Level 2 inputs. Available-for-sale securities classified within Level 2 of the fair value hierarchy are valued utilizing reports from an independent third-party public quotation service based on closing prices on the last business day of the period presented. In addition, we use the public quotation service to perform price testing by comparing quoted prices listed in reports provided by the asset managers that hold our investments to quotes listed through the public quotation service. These asset managers utilize an independent pricing source to obtain quotes for most fixed income securities and utilize internal procedures to validate the prices obtained. Our Level 3 asset represents ~~our~~an investment in ~~a long-term corporate convertible promissory note and a warrant to purchase shares issued in connection with the convertible promissory note, which converted to~~ convertible preferred stock ~~on December 31, 2016. This stock~~that is not listed on any security exchange. The fair value of the preferred stock approximates its carrying value at September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

Our ~~investments measured at fair value on a recurring basis~~assets and liabilities subject to the disclosure requirements of ASC Topic 820 at September 30, 2018, were as follows (in thousands):

Our assets and liabilities subject to the disclosure requirements of ASC Topic 820 at December 31, 2017, were as follows (in thousands):

~~Our investments measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2016 were as follows (in thousands):~~

The following table presents additional information about assets measured at fair value on a recurring basis and for which we utilize Level 3 inputs to determine fair value for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):

Inventories are stated at lower of cost or NRV. Cost, which includes amounts related to materials and costs incurred by our contract manufacturers, is determined on a first-in, first-out basis. Inventories are reviewed periodically for potential excess, dated or obsolete status. Management evaluates the carrying value of inventories on a regular basis, taking into account such factors as historical and anticipated future sales compared to quantities on hand, the price we expect to obtain for products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.

The components of inventories, net of allowances, are as follows (in thousands):

As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, raw materials inventories consisted of raw materials used in the manufacture of the dronabinol API for SYNDROS® in our U.S.-based, state-of-the-art dronabinol manufacturing facility, the fentanyl API for SUBSYS®, and component parts and packaging materials used in the manufacture of both SUBSYS® and SYNDROS®. Work-in-process ~~consists~~consisted of actual production costs, including facility overhead and ~~tolling~~tooling costs of in-process dronabinol, SUBSYS® and SYNDROS® products. Finished goods inventories consisted of finished SUBSYS® and SYNDROS® products and deferred SYNDROS® cost of revenue of ~~$58,000.~~$0 and $59,000 as of September 30, 2018 and December 31, 2017, respectively. There was no deferred SYNDROS® cost of revenue as of September 30, 2018, due to the adoption of ASC Topic 606 on January 1, 2018. Non-current raw materials ~~and supplies~~ and finished goods represent those inventories not expected to be consumed or sold within 12 months of the balance sheet date and are included in other assets in our unaudited condensed consolidated balance sheets. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, all work-in-process inventory is expected to be used within 12 months of the balance sheet date and, therefore, is classified as current ~~inventory.~~assets in our unaudited condensed consolidated balance sheets. We maintain an allowance for excess and obsolete inventory, as well as inventory where its cost is in excess of its NRV. Inventories at September 30, ~~2017~~2018 and December 31, ~~2016~~2017, were reported net of these reserves of ~~$13,100,000~~$2,631,000 and ~~$6,800,000,~~$13,664,000, respectively. During the three and nine months ended September 30, 2018, we decreased these reserves by approximately $7,463,000 and $12,531,000, respectively, for the destruction of previously reserved product, partially offset by an increase to the reserves of approximately $495,000 and $1,498,000, respectively. During the three and nine months ended September 30, 2017, ~~and 2016,~~ we increased these reserves by ~~$3,300,000~~approximately $3,372,000 and ~~$1,900,000,~~$6,331,000, respectively.

6.	Property and Equipment, Net

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives; leasehold improvements are recorded at cost and depreciated using the straight-line method over the shorter of their estimated useful lives or remaining lease term. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. When property and equipment is disposed of, the related costs and accumulated depreciation are removed from the unaudited condensed consolidated balance sheets, and any gain or loss is reported in other income (expense) in the period the transaction takes place. During the three and nine months ended September 30, 2018, we recorded losses on the disposal of property and equipment of $0 and $108,000, respectively. There were no such charges during the three and nine months ended September 30, 2017.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. Impairment charges are reported in the period the impairment is identified. During the three and nine months ended September 30, 2018, we recorded impairment charges in research and development of $0 and $1,487,000, respectively. The charge during the nine months ended September 30, ~~2017~~2018 was the result of a decision to abandon a partially constructed device manufacturing machine with a cost of $1,487,000 and ~~2016, we increased these reserves by $6,300,000~~no associated depreciation, and ~~$3,200,000, respectively.~~was written down to its fair value of $0. There were no such charges during the three and nine months ended September 30, 2017.

6.7.	Commitments and Contingencies

Other than the matters that we have disclosed below, we from time to time become involved in various ordinary course legal and administrative proceedings, which include intellectual property, commercial, governmental and regulatory investigations, ~~employee related~~employee-related issues and private litigation, which we do not currently believe are either individually or collectively material.

We record accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters. Our loss estimates are generally developed in consultation with outside counsel and outside accounting experts and are based on analyses of potential outcomes. As legal and governmental proceedings, disputes and investigations are inherently unpredictable and in part, beyond our control, unless otherwise indicated, we cannot reasonably predict the outcome of these legal proceedings, nor can we estimate the amount of loss, or range of loss, if any, that may result from these proceedings. While our liability in connection with certain claims cannot be currently estimated, the resolution in any reporting period of one or more of these matters could have a significant impact on our consolidated financial condition, results of operations, liquidity, and cash flows for that future period, and could ultimately have a material adverse effect on our consolidated financial position and could cause the market value of our common shares to decline. While we believe we have valid defenses in these matters, litigation and governmental and regulatory investigations are inherently uncertain, and we may in the future incur material judgments or enter into material settlements of claims.

Consistent with the practice of many publicly-traded companies, we have entered into, and continue to enter into, indemnity agreements with our executive officers and certain members of our board of directors. These indemnity agreements broadly provide for us to advance expenses (including attorneys’ fees) incurred in connection with any legal proceeding, as well as indemnification for any and all expenses, actually and reasonably incurred, in connection with the investigation, defense, settlement or appeal of such a proceeding, in connection with matters related to their position. These indemnity agreements provide that the indemnitee shall repay all amounts so advanced if it shall ultimately be determined by final judicial decision from where there is no further right of appeal that the indemnitee is not entitled to be indemnified.

Like other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies in the United States. As a result, interaction with government agencies occurs in the normal course of our operations. The following is a brief description of pending governmental investigations that we believe are potentially or actually material at this time. It is possible that criminal charges and substantial payments, fines and/or civil penalties or damages or exclusion from federal health care programs or other administrative actions, as well as a corporate integrity agreement, deferred prosecution or deferred exclusion agreement, or similar government mandated compliance document that institutes significant restrictions or obligations, could result for us from any government investigation or proceeding. In addition, even certain investigations that are not discussed below and which we do not deem to be material at this time could be determined to be material and could have a material adverse effect on our financial condition, results of operations and cash flows.

HHS Investigation. We received a subpoena, dated December 9, 2013, from the ~~Office of Inspector General of the HHS~~OIG in connection with an investigation of potential violations involving HHS programs. This subpoena was issued in connection with an investigation by the U.S. Attorney’s Office for the Central District of California and requested documents regarding our business, including the commercialization of SUBSYS®. We continue to cooperate with this investigation and have produced substantial documents in response to the subpoena and have provided other requested information.

On April 13, 2018, the United States intervened in part and declined to intervene in part in five lawsuits: United States ex rel. Guzman v. Insys Therapeutics, Inc. (CV 13-5861 JLS (AJWx)), United States ex rel Doe v. Insys Therapeutics, Inc. (CV 14-3488 JLS (AJWx)), United States ex rel. Andersson v. Insys Therapeutics, Inc. (CV 14-9179 JLS (AJWx), United States ex rel. Erickson v. Insys Therapeutics, Inc. (CV 16-2956 JLS (AJWx), and United States ex rel. Doe v. Insys Therapeutics, Inc. (CV 16-7937 JLS (AJWx)). Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits.

The States of California, Colorado, Indiana, Minnesota, New York, North Carolina, and Virginia (the “Plaintiff States”) elected to intervene in part and declined to intervene in part in United States ex rel. Guzman v. Insys Therapeutics, Inc. (CV 13-5861 JLS (AJWx)) and United States ex rel. Doe v. Insys Therapeutics, Inc. (CV 16-7937 JLS (AJWx)). The States of

Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, and Washington declined to intervene.

The United States’ Complaint in Intervention, which was ordered unsealed on May 11, 2018, brings claims for False Claims Act: Presentation of False Claims pursuant to 31 U.S.C. § 3729(a)(1)(A), False Claims Act: Using False Statements to Get False Claims Paid pursuant to 31 U.S.C. § 3729(a)(1)(B), Payment by Mistake, and Unjust Enrichment. This case is currently stayed, and we continue to have ongoing discussion with respect to the DOJ Investigation (as discussed below). The qui tam plaintiffs may pursue the claims in which either the United States or the above-mentioned states declined to intervene.

HIPAA Investigation. On September 8, 2014, we received a subpoena issued pursuant to HIPAA from the U.S. Attorney’s Office for the District of Massachusetts. The subpoena requested documents regarding SUBSYS®, including our sales and marketing practices related to this product. This investigation also relates to activities in our patient services hub. We continue to cooperate with this investigation and have produced a substantial number of documents in response to the subpoena and have provided other requested information.

DOJ Investigation and Agreement in Principle. We collectively refer to the HHS and HIPAA investigations discussed above as the “DOJ ~~Investigation”.~~Investigation.” In connection with our cooperation, we have been engaged in discussions with the DOJ about these matters, including a resolution of potential liability exposure.

Management accrued, as of September 30, 2017, an aggregate of $150,000,000, which ~~represents~~represented our ~~current~~ best estimate of the minimum liability exposure ~~which~~that we ~~expect~~expected to be paid out over five years in connection with the DOJ Investigation. This ~~current best~~ estimate ~~on the terms~~ reflected ~~in the foregoing sentence, reflects~~ a minimum exposure at which management ~~has~~had determined a willingness to settle these matters. The accrual was recorded in accrued litigation award and settlements on our unaudited condensed consolidated balance sheets and as an operating expense on our unaudited condensed consolidated statements of operations and comprehensive ~~income (loss). There can be no assurance~~loss.

On August 8, 2018, we announced that ~~future discussions~~we reached an agreement in principle with the ~~government~~DOJ to ~~resolve these matters will~~settle the DOJ’s civil and criminal investigation into inappropriate sales and commercial practices by some former company employees. Our initial estimate of the minimum liability exposure we previously accrued in connection with the DOJ Investigation of $150,000,000 expected to be ~~successful,~~paid over five years remains unchanged as of September 30, 2018, with the potential for contingency-based payments associated with certain events that, if they were to occur, management estimates would require additional payments ranging from $0 to $75,000,000. This agreement in principle is subject to the ~~approvals we need will be obtained or~~negotiation of final settlement documents with the government. We expect that ~~any potential~~a final settlement ~~will be agreed to on~~would include other material non-financial terms and conditions ~~acceptable~~which will also be subject to negotiation, including criminal pleas by our subsidiary related to the actions of our former employees. Once executed, these agreements will require cooperation with the federal government’s prosecutions, enhancements to our compliance program, fulfillment of reporting and monitoring obligations, and management certifications, among other requirements. In addition, compliance with the terms of these agreements will impose additional costs and burdens on us, including in the form of employee training, third party reviews, compliance monitoring, reporting obligations and management attention. More importantly, if we fail to comply with the final agreement with DOJ and OIG, the DOJ or OIG may impose substantial monetary penalties or exclude us from federal healthcare programs, including Medicare, Medicaid or the DOJ. We are unable to predict when these matters will be resolved or what further action, if any, the government will take in connection with them. In addition, there are ongoing discussions related to contingency based paymentsVA, which would have a material adverse effect on our business, financial condition and results of operations.

Because other material, non-financial terms and conditions remain subject to the ~~government associated with future events, that if triggered, would require payments~~negotiation of upfinal settlement documents, we cannot provide assurances as to ~~$75,000,000 in~~ the ~~aggregate.~~ timing of the execution of final documentation and, like any pending negotiation, there is uncertainty as to the outcome. Moreover, any such final settlement is likely to involve entry into final agreements, which will impose significant costs and burdens and obligations on our business operations and could materially and adversely affect our results of operations and financial conditions as we implement and adhere to such requirements.

At this time, ~~we are unable to predict if these future events are probable and as a result, no accrual has been recorded. Based on~~ the ongoing uncertainties and potentially wide range of outcomes and contingencies associated with any potential resolution of the matter under investigation by the DOJ, the ultimate amount of potential liability may materially exceed the $150,000,000 accrual we have established. Thisaforementioned accrual does not currently meet the more likely than not standard for tax deductibility; therefore, we have recognized no tax benefit for it in ~~the~~these unaudited condensed consolidated financial statements. ~~Due to the uncertainty around the ultimate outcome of this~~

~~matter, it~~It is possible that some or all of this accrual may meet the more likely than not standard in the future, at which time the benefit would be recognized.

~~Former Employee~~SEC Investigation. On January 11, 2018, the SEC's Los Angeles Regional office requested that the Company voluntarily provide information on the Company's: (1) restatement of the Company’s interim unaudited condensed consolidated financial statements as of and for the quarters ended September 30, June 30, and March 31, 2016 and 2015, filed on April 7, 2017; (2) sales and marketing practices; and (3) compliance program, internal controls and enhancements thereto. The Company provided such information and cooperated with the SEC's investigation, including responding to requests or demands for documents and other information. On October 4, 2018, the SEC notified the Company in writing that it had concluded its

investigation and, based on information as of the date of the notification, it does not intend to recommend an SEC enforcement action against the Company.

Health Care ~~Practitioner~~Professionals and Former Employees Related Investigations.

Investigations of Health Care Professionals. A number of health care practitioners who formerly interacted with our company are under investigation or have been charged in criminal proceedings. In addition to the below investigations that are specifically directed at us, we have received governmental agency requests for information, including subpoenas, from at least the following governmental bodies: the USAO and/or HHS OIG of California (Los Angeles), Central District of California, Colorado, Connecticut, Eastern District of Michigan, Eastern District of New York, Florida (Jacksonville), Kansas, Middle District of Florida, Middle District of Pennsylvania, New Hampshire, New Jersey, Northern District of California, Northern District of Texas, Rhode Island, Southern District of Alabama, Southern District of New York, Southern District of Ohio, Western District of New York, and the states of Arizona, Delaware, Maryland and New York, regarding specific health care professionals with which we have interacted with in those states. In addition, at least the following health care practitioners formerly interacting with our company have been charged as follows:

On or about June 23, 2015, a nurse practitioner located in Connecticut, who served on our speaker bureau in connection with our speaker programs designed to educate and promote product awareness and safety for external health care providers, pled guilty to violating the federal Anti-Kickback Statute in connection with payments of approximately $83,000 from us.

~~A number of our former employees have been charged in criminal proceedings related to our federal investigations and below we set forth certain information related thereto.~~

On or about ~~February 18,~~November 7, 2016, ~~one of our former sales employees~~a health care professional located in ~~Alabama~~Michigan who served on our speaker bureau pled guilty to ~~a conspiracy to violate the federal Anti-Kickback Statute~~healthcare fraud in ~~regard to two Alabama health care professionals who prescribed our product SUBSYS®. These~~connection, in part, with receiving payments from us.

On February 23, 2017, two Alabama health care professionals who served on our speaker bureau in connection with our speaker programs designed to educate and promote product awareness and safety for external health care providers, were charged by the U.S. Attorney’s Office for the Southern District of Alabama, and on or about February 23, 2017, were convicted on 19 of 20 counts brought against them, which included charges related to distribution of a controlled substance, drug conspiracy, health care fraud conspiracy and money laundering.

On or about ~~July 11,~~March 22, 2017, the U.S. Attorney’s Office for the District of New Hampshire filed an indictment against a ~~former district sales manager pled guilty to~~physician assistant, who served on our speaker bureau, charging him with violating the federal Anti-Kickback Statute and conspiring to violate the federal Anti-Kickback Statute ~~related~~in connection with payments received for serving as an Insys promotional speaker. The physician assistant pled not guilty.

On or about October 20, 2017, a health care professional in Rhode Island, who served on our speaker bureau pled guilty to ~~her activities~~health care fraud and conspiracy to receive kickbacks in connection with payments of approximately $188,000 from us.

On or about March 14, 2018, the U.S. Attorney’s Office for the Southern District of ~~Alabama, as well as~~New York filed an indictment against five health care professionals who served on our speaker bureau, charging them with conspiracy to violate the ~~Middle~~federal Anti-Kickback Statute, violation of the federal Anti-Kickback Statute, and ~~Southern Districts~~conspiracy to commit honest services fraud, and charged certain of them with aggravated identity theft, false statements, and wrongful disclosure of individually identifiable health information.

On or about June 4, 2018, a Florida ~~including~~health care professional who served on our speaker bureau pled guilty to conspiracy to receive healthcare kickbacks in connection, in part, with receiving payments from us.

On or about June 28, 2018, an Ohio health care professional who served on our speaker bureau was indicted for violating the federal Anti-Kickback Statute in connection with receiving payments of more than $103,000 from us.

Investigations of Former Employees. A number of our former employees have been charged in criminal proceedings related to our federal investigations and the following is certain information related thereto.

On or about February 18, 2016, one of our former sales employees located in Alabama pled guilty to a conspiracy to violate the federal Anti-Kickback Statute in connection with two convicted Alabama health care ~~providers.~~professionals mentioned above. On or about April 23, 2018, the former sales employee was sentenced to six months’ home confinement.

On or about June ~~19,~~8, 2016, a former district sales manager in New York and a former sales representative in New Jersey were charged in a federal court in Manhattan, New York, with violating the federal Anti-Kickback Statute in connection with interacting with health care professionals who prescribed our product and served on our speaker bureau. On June 1, 2017, the former district sales manager was charged in a superseding indictment with additional charges of honest services wire fraud and aggravated identity theft in connection with falsifying sign-in sheets for our speaker programs. ~~Both of these former employees in New York and New Jersey have pled not guilty.~~ On or about ~~October 13, 2016,~~March 16, 2018,

records were unsealed indicating that the two former employees each pled guilty to the following counts contained in a ~~former prior authorization specialist and manager~~superseding indictment: conspiracy to violate the Anti-Kickback Statue, violation of ~~our patient services hub was charged by~~ the ~~U.S. Attorney’s Office for the District~~Anti-Kickback Statue, violation of ~~Massachusetts with~~HIPAA, conspiracy to commit honest services wire fraud, in connection with our provision of prior authorization support related to our patient services hub. On April 5, 2017, the U.S. Attorney’s Office for the District of Massachusetts filed an information charging this former employee with one count of wire fraud conspiracy;and aggravated identity theft, and that the former ~~employee~~sales representative also pled guilty to ~~that information on June 19, 2017.~~ health care fraud.

On or about December 8, 2016, the U.S. Attorney’s Office for the District of Massachusetts issued an indictment against six former employees, including Michael L. Babich, our former President, CEO and director, on charges including racketeering conspiracy, conspiracy to commit mail fraud, conspiracy to commit wire fraud, conspiracy to violate the Anti-Kickback Statute and forfeiture (the “Original Indictment”). On or about October 26, 2017, the U.S. Attorney’s Office for the District of Massachusetts issued a superseding indictment in connection with ~~this~~the Original Indictment and added charges against our ~~founder and~~ former President, CEO and director, Dr. John N. Kapoor. After Dr. Kapoor’s indictment, he agreed to put his ownership inof our common stock in a trust to be controlled independently, which was effective as of February 27, 2018. The related voting trust agreement was filed with the SEC on a Current Report on Form 8-K on March 1, 2018. On September 11, 2018, the U.S. Attorney’s Office for the District of Massachusetts filed a second superseding indictment which contained one count of racketeering conspiracy for all the defendants. This superseding indictment includes a request for forfeiture upon conviction of any interest or property acquired or maintained in violation of such charges, which expressly includes any and ~~he resigned from~~all shares of the Company’s common stock or options to purchase such stock, salaries, bonuses and other benefits.

As prescribed by the indemnity agreements we entered into with these former executives, we are responsible for any and all expenses, actually and reasonably incurred. We have recognized expenses associated with criminal and civil defense of Dr. Kapoor of approximately $8,500,000 and $19,500,000, respectively for the three and nine months ended September 30, 2018. The Company is disputing the reasonableness of a portion of these expenses as they relate to the criminal defense and is analyzing the reasonableness of the civil defense expenses. We continue to accrue all of these costs in our ~~board~~unaudited condensed consolidated statements of ~~directors (and~~operations and comprehensive loss. As of September 30, 2018, the ~~Science~~company has made cash payments of $5,600,000 related to these legal expenses incurred as part of Dr. Kapoor’s criminal defense. If such disputed amounts are subsequently determined not to be due and ~~Research~~payable, we would recognize a reversal of these expenses in a future period. The reversal of these expenses could have a material impact on our unaudited condensed consolidated statements of operations and ~~Development Committee), which would effectively result in ending~~comprehensive loss. If it is subsequently determined that all of these costs are reasonable, and the company is forced to pay the remaining ~~involvement he had in the management of the Company.~~ balance, this could have a material adverse impact on our cash position and liquidity.

On or about February 8, 2017, a former district sales manager in the Northeast was charged in federal court in New Haven, Connecticut, with violating the federal Anti-Kickback Statute in connection with interacting with health care professionals who prescribed our product and served on our speaker bureau.

On April 5, 2017, the U.S. Attorney’s Office for the District of Massachusetts filed an information charging a former prior authorization specialist and manager of our patient services hub with one count of wire fraud conspiracy; the former employee pled guilty to that information on June 19, 2017.

On or about ~~October 20,~~July 11, 2017, a ~~health care professional~~former district sales manager pled guilty to conspiring to violate the federal Anti-Kickback Statute related to her activities in ~~Rhode Island, who served on our speaker bureau~~the Southern District of Alabama, as well as the Middle and Southern Districts of Florida, including in connection with ~~our speaker programs designed to educate and promote product awareness and safety for external~~the two convicted Alabama health care ~~providers,~~professionals mentioned above.

On or about May 30, 2018, a former specialty sales professional pled guilty to ~~health care fraud and~~a second-degree charge of conspiracy to ~~receive kickbacks~~commit commercial bribery related to her activities in ~~connection with payments of approximately $188,000 from us.~~New Jersey.

Except as otherwise indicated, we understand that each of these indicted individuals have entered pleas of not guilty to the charges against them.

Given the ongoing investigations related to our company ~~and our current~~ and former employees, as well as other individuals associated with our company, including health care professionals, it is possible that additional individual or company criminal charges and convictions and pleas could result from our ongoing federal and state government investigations and related proceedings and the foregoing disclosure and the disclosure below is merely intended to provide general insight into the comprehensive nature of the scope and breadth of investigations that are being conducted related to our company and is not,

nor is it intended to be, an exhaustive listing of every charge, conviction or pleading in connection with our company. ~~We continue to assess these matters to ensure we have an effective compliance program.~~

~~State Related~~Ongoing State-Related Investigations. We have received CIDs or subpoenas, as the case may be, from at least each of the following state’s Office of the Attorney General (or similarly named and authorized office) ~~of the State of~~which have ongoing investigations directed at our company: Arizona, Colorado, Florida, ~~Illinois,~~Kansas, Kentucky, Maryland, ~~Massachusetts,~~ Minnesota, Missouri, ~~New Hampshire,~~ New Jersey, New York, North Carolina, ~~Oregon,~~ Pennsylvania, Rhode Island, Virginia and Washington. Moreover, we have received an administrative subpoena from the California Insurance Commissioner. In addition, we understand that numerous physicians

practicing within several of the aforementioned states have received subpoenas from ~~each applicable~~certain state Attorney General or Department of Justice ~~office~~offices in connection with interactions with us. Generally, these CIDs and subpoenas request documents regarding SUBSYS®, including our sales and marketing practices related to SUBSYS® in the applicable state, as well as our patient services hub. We are cooperating with each of these investigations and have produced, or anticipate producing, documents in response to these CIDs, subpoenas and related requests for information from each office.

Resolved State-Related Investigations. Our company has resolved investigations conducted by certain states’ Office of the Attorney General (or similarly named and authorized office) as follows:

In connection with the investigation by the ODOJ, we entered into a settlement agreement with the ODOJ, referred to as an AVC, and made monetary payments totaling approximately $1,100,000. The AVC requires us to maintain certain controls and processes around our promotional and sales activity related to SUBSYS® in Oregon. This AVC expressly provides that we do not admit any violation of law or regulation. This settlement was reached as a result of our cooperation with the ODOJ's investigation and after producing documents in response to certain CIDs and related requests for information from the ODOJ. All monetary payments in connection with this settlement were made prior to December 31, 2015.

In connection with the investigation by the ~~State of Illinois, on August 25, 2016, the~~ Illinois Office of the Attorney General, such office filed a complaint against us on behalf of the State of Illinois ~~against us~~on August 25, 2016, in the Circuit Court of Cook County, Illinois, Chancery ~~Division. The complaint asserts~~Division, asserting a claim for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act in connection with the sales and marketing of SUBSYS® ~~in Illinois. In settlement of this action, on~~. On August 18, 2017, the Circuit Court of Cook County entered a Final Judgment and Consent Decree, which, among other things, provided for a monetary payment of $4,450,000 by Insys and requires us to maintain certain controls and processes around our promotional and sales activity related to SUBSYS® in Illinois. The Final Judgment and Consent Decree expressly provides that we do not admit any violation of law or regulation. All monetary payments in connection with this Final Judgment and Consent Decree were accrued in the unaudited condensed consolidated balance ~~sheet~~sheets as of June 30, 2017 and the payments in connection with this settlement were made prior to September 30, 2017.

In connection with the investigation by the State of New Hampshire, we entered into a settlement agreement with the State of New Hampshire referred to as an assurance of discontinuance, and made monetary payments totaling approximately $2,900,000 to the State of New Hampshire and a charitable contribution of $500,000 to be used by a New Hampshire charitable foundation in preventing or remediating problems related to abuse, misuse or misprescribing of opioid drugs. The assurance of discontinuance expressly provides that we do not admit any violation of law or regulation and requires us to maintain certain controls and processes around our promotional and sales activity related to SUBSYS® in New Hampshire. This settlement was reached as a result of our cooperation with the State of New Hampshire investigation and after producing documents in response to certain requests for information by the State of New Hampshire. These amounts were accrued in the consolidated balance sheet as of December 31, 2016 and the payments in connection with this settlement were made during the three months ended March 31, 2017.

In connection with the investigation by the State of Massachusetts, we entered into a settlement with the State of Massachusetts, which was entered by the Superior Court of the Commonwealth of Massachusetts in a Final Judgment by Consent ~~after the close of the quarter.~~on October 5, 2017. The Final Judgment by Consent provided for a monetary payment of $500,000 and requires us to maintain certain controls and processes around our promotional and sales activity related to Massachusetts. The Final Judgment by Consent expressly provides that we do not admit any liability or wrongdoing. The amount of the monetary payment was accrued in the unaudited condensed consolidated balance sheet as of September 30, 2017 and the payments in connection with this settlement were made ~~after September 30,~~during the three months ended December 31, 2017.

Ongoing Complaints filed in connection with State AG Investigations. Our Company has several ongoing legal proceedings related to complaints filed in connection with investigations conducted by certain states’ Office of the Attorney General (or similarly named and authorized office) as follows:

In connection with the investigation by the State of Arizona, on August 30, 2017, the Arizona Attorney General filed a complaint on behalf of the State of Arizona against us in the Maricopa County, Arizona Superior Court. The complaint asserts claims for violations of the Arizona Consumer Fraud Act in connection with the sales and marketing of SUBSYS® in Arizona and in connection with our patient services hub. The complaint seeks a permanent injunction preventing us from engaging in practices in violation of the Arizona Consumer Fraud Act, restitution to consumers and other persons, disgorgement of profits, civil penalties, and investigative costs. ~~Our response is due on~~On or about November 10, ~~2017.~~2017, we filed a motion to dismiss. On January 17, 2018, the Court dismissed, based upon preemption by the federal Sunshine Act, the State’s claim to the extent related to remedies that are based upon the payment and disclosure of speaker fees, but did not dismiss the rest of the complaint. The State filed a motion for leave to amend its complaint, which the Court granted. We ~~intend~~filed our answer to ~~vigorously defend this matter.~~

In connection with the investigation by the State of New Jersey, on October 5, 2017, the New Jersey Attorney General, on behalf of the State of New Jersey, and the Acting Director of the New Jersey Division of Consumer Affairs filed a complaint

against us in the Superior Court of New Jersey, Chancery Division, Middlesex Vicinage. The complaint asserts claims for violations of the New Jersey Consumer Fraud Act and for violations of the New Jersey False Claims Act in connection with the sales and marketing of SUBSYS® in New Jersey and in connection with our patient services hub. The complaint seeks a permanent injunction preventing us from engaging in practices in violation of the New Jersey Consumer Fraud Act, disgorgement of profits, civil penalties, treble damages for alleged violations of the New Jersey False Claims Act, and costs and attorneys’ fees. ~~Our~~On November 16, 2017, the New Jersey Attorney General filed an Amended Complaint, which we moved to dismiss on January 8, 2018. The New Jersey Attorney General opposed our motion on March 28, 2018, and we replied. The Court held oral argument on the motion on June 18, 2018.

On December 21, 2017, Attorney General of the State of North Carolina filed a complaint in Wake County, North Carolina Superior Court against us. The complaint asserts claims related to alleged violations of the North Carolina Consumer Protection Act. On or about September 25, 2018, we moved to dismiss the complaint. The motion remains pending.

On February 1, 2018, the Attorney General of the State of New York, filed a complaint against us in the Supreme Court of the State of New York, County of New York. The complaint asserts claims related to alleged deceptive acts and practices. We moved to dismiss the complaint on April 18, 2018. In response, ~~is due~~ on ~~November 9, 2017. We intend~~May 25, 2018, the New York Attorney General opposed our motion to ~~vigorously defend this matter.~~

~~Investigations of Health Care Professionals. In addition~~dismiss and filed a cross-motion for partial summary judgment related to the ~~above investigations~~State’s commercial bribery claim. On June 29, 2018, we filed a reply in support of our motion to dismiss and opposed the State’s motion for partial summary judgment. The Court conducted oral argument on the motions to dismiss and the cross-motion for summary judgement on October 4, 2018. The motion remains pending.

On February 5, 2018, the Consumer Protection Division, Office of the Attorney General of Maryland, filed a petition to enforce an administrative subpoena against us. The State voluntarily dismissed the action on September 5, 2018. On September 6, 2018, however, the Consumer Protection Division, Office of the Attorney General of Maryland, filed a Statement of Charges against us with the Consumer Protection Division. Insys filed its response to the Statement of Charges on October 17, 2018.

On May 30, 2018, the Attorney General of the State of Minnesota and the Minnesota Board of Pharmacy filed a complaint against us in the Hennepin County District Court, State of Minnesota. The complaint asserts claims related to alleged deceptive acts and practices and consumer fraud, as well as claims under the Minnesota Wholesale Drug Distribution Licensing Act (Minn. Stat. § 151.461). On August 28, 2018, Insys moved to dismiss the complaint. On the same day, the Attorney General and the Board of Pharmacy filed a motion for temporary injunction. The Court held oral argument on both the motion to dismiss and the motion for temporary injunction, and both motions remain pending. Also, on May 30, 2018, the Minnesota Board of Pharmacy filed an administrative action against us before the State of Minnesota Office of Administrative Hearings for the Board of Pharmacy, which seeks a determination regarding whether certain alleged conduct by Insys constitutes grounds for disciplinary action. The Office of Administrative Hearings has indicated that ~~are specifically directed at us, we~~it will set a hearing in this matter for March or April 2019.

Multi-District Prescription Opioid Litigation. We have ~~received governmental agency requests for information, including subpoenas, from at least~~been named along with various other opioid manufacturers, opioid distributors, prescribers, pharmacies, and others in complaints focused on the ~~following governmental bodies, the USAO and/or HHS OIG of~~national opioid epidemic filed by various cities, counties, states, Native American tribes, and third-party payers in many state and federal courts in Alabama, Arizona, Arkansas, California, ~~(Los Angeles),~~ Connecticut, ~~Eastern District of~~Florida, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, ~~Florida (Jacksonville), Kansas, Middle District of Pennsylvania,~~Minnesota, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah and West Virginia. We are involved in more than 600 of these cases, the majority of which have been consolidated into multi-district litigation (MDL No. 2804) in the Northern District of ~~California, Northern District~~Ohio. Most of ~~Texas, Rhode Island, Southern District~~the cases in the multi-district litigation are presently stayed while the Court seeks to facilitate a resolution. On April 2, 2018, the United States filed a motion to participate in settlement discussions and as a friend of ~~Alabama, Southern District~~the court. Additionally, the Court set certain cases for a litigation track, and those cases will move forward toward trial, which is scheduled to commence on March 18, 2019.

We have also been named, along with various other opioid manufacturers and distributors, in putative class action complaints that seek to assert claims allegedly related to the national opioid epidemic on behalf of ~~New York, Southern District~~(1) purchasers of ~~Ohio, Western District of New York,~~health insurance between 1996 and the ~~State~~present, and (2) children born addicted to opioids. Most of ~~Maryland regarding specific health care professionals that we~~these cases have ~~interacted with~~been consolidated into MDL No. 2804. Finally, Insys has been named in ~~those states. On or about March 22, 2017, the U.S. Attorney’s Office~~at least one lawsuit in which a personal injury plaintiff sued Insys and other opioid manufacturers for ~~the District of New Hampshire filed an indictment against~~harm allegedly caused by a ~~physician assistant~~tortfeasor who ~~served on our speaker bureau, charging him with violating the federal Anti-Kickback Statute~~was addicted to opioids.

Congressional and ~~conspiring to violate the federal Anti-Kickback Statute in connection with payments received for serving as an Insys promotional speaker. The physician assistant pled not guilty.~~

~~Opioid Litigation and Broad Investigations by Governmental Authorities~~Other Inquiries. Many federal agencies and ~~governmental agencies~~branches are focused on the abuse of opioids in the United States and agencies such as the HHS have expressed their belief that the United States is in the midst of a prescription opioid abuse epidemic. Moreover, President Trump has declared the opioid crisis to be a public health emergency and has made it a priority to address this crisis. Common prescription drugs that contain opioids are drugs such as oxycodone, hydrocodone and fentanyl. Our product, SUBSYS®, is a fentanyl-based product in the TIRF class. Certain stakeholders in the health care community, regulatory bodies and governmental agencies may associate us with, or determine that we are a part

Members of our product is part of the mandatory TIRF REMS program, which is designed “to ensure informed risk-benefit decisions before initiating treatment, and while patients are treated to ensure appropriate use of TIRF medicines” and “to mitigate the risk of misuse, abuse, addiction, overdose and serious complications due to medication errors with the use of TIRF medicines.” Nevertheless, from time to time, we may be included in litigation or investigations that are directed at the abuse of opioids in the United States.

For example, in May 2014, Santa Clara and Orange Counties in California filed a complaint in state court in Orange County, California against numerous pharmaceutical manufacturers alleging claims related to opioid marketing practices, including false advertising, unfair competition, and public nuisance. Despite the fact that we are not named specifically in the complaint and this lawsuit was stayed, we have received a preservation notice letter from the Office of the County Counsel for the County of Santa Clara.

~~Additionally, we are aware that we~~U.S. Congress have been ~~named in similar lawsuits by Multnomah County in Oregon, Upshur, Bowie,~~conducting hearings and ~~McLennan Counties in Texas, Wayne~~other inquiries into causes and ~~Oakland Counties in Michigan, Fulton County in Georgia,~~solutions to the City of Paterson in New Jersey, the City of New Haven in Connecticut, the City of Toledo in Ohio, and Nassau, Niagara, Rensselaer and Schoharie Counties in New York. Some of these cases were filed after the close of the quarter. From time to time, we may be included in these types of litigations as a result of the factnational opioid epidemic that ~~we market an opioid product.~~

~~In addition,~~have involved inquiries into our Company’s practices. For example, on March 28, 2017, the Ranking Member of the Committee on Homeland Security and Governmental Affairs of the United States Senate distributed a letter to five manufacturers of opioid products, including us, requesting documents and information intended to aid such committee in understanding the challenges industry practices pose to efforts to curb opioid addiction and stem rising prescription drug costs for the federal government. This letter ~~requests~~requested documents regarding our business, including the commercialization of SUBSYS®. This inquiry continues and has resulted in at least four reports that mention or address our Company. We continue to cooperate with this inquiry.

Similarly, on August 2, 2018, bipartisan leaders of the House of Representatives Committee on Energy and Commerce sent letters to three manufacturers of opioid products, including us, requesting documents and information intended to aid such committee in investigating potential breakdowns in the controlled substances supply chain which may have contributed to the nation’s opioid epidemic. This letter requested documents regarding our business, sales practices, and speaker programs. We continue to cooperate with this inquiry.

With the exception of the investigations by the ODOJ, the State of New Hampshire, the State of Illinois, the State of Massachusetts, and the DOJ, which we have quantified above, we believe a loss from an unfavorable outcome of these federal and state governmental proceedings is reasonably possible and an estimate of the amount or range of loss from an unfavorable outcome is not determinable at these stages. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters. However, responding to government investigations has and could continue to burden us with substantial legal costs in connection with defending any claims raised. Any potential resulting fines, restitution, damages and penalties, settlement payments, pleas or exclusion from federal health care programs or other administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material adverse effect on our financial

position, results of operations or cash flows. Additionally, these matters could also have a negative impact on our reputation and divert the attention of our management from operating our business.

Federal Securities Litigation.On or about February 2, 2016, a complaint (captioned Richard Di Donato v. Insys Therapeutics, Inc., et al., Case 2:16-cv-00302-NVW) was filed in the United States District Court for the District of Arizona against us and certain of our current and former officers. The complaint was brought as a purported class action on behalf of purchasers of our common stock between March 3, 2015 and January 25, 2016. In general, the plaintiffs allege that the defendants violated the anti-fraud provisions of the federal securities laws by making materially false and misleading statements regarding our business, operations and compliance with laws during the class period, thereby artificially inflating the price of our common stock. On June 3, 2016, the ~~court~~Court appointed Clark Miller to serve as lead plaintiff. On June 24, 2016, the plaintiff filed a first amended complaint naming a former employee of Insys Therapeutics, Inc. as an additional defendant and extending the class period. On December 22, 2016, the plaintiff filed a second amended complaint, primarily to add allegations relating to an indictment of Michael L. Babich and certain of our former employees announced on December 8, 2016, and to extend the class period from August 12, 2014 through December 8, 2016. On January 12, 2017, the defendants moved to dismiss the second amended complaint. Oral arguments were heard by the ~~court~~Court on July 28, 2017, and the Court granted the motion in part and denied it in part. The plaintiff subsequently moved for leave to further amend the complaint, which we opposed. The ~~parties await a ruling~~Court denied Plaintiff’s motion on ~~the motion to amend.~~March 31, 2018, and Insys filed its answer on April 15, 2018. The plaintiff seeks unspecified monetary damages and other relief. We continue to vigorously defend this matter.

On or about March 17, 2017, a complaint (captioned Kayd Currier v. Insys Therapeutics, Inc., et al., Case 1:17-cv-01954-PAC) was filed in the United States District Court for the Southern District of New York against us and certain of our current and former officers. The complaint was brought as a purported class action on behalf of purchasers of our securities between February 23, 2016, and March 15, 2017. In general, the plaintiffs allege that the defendants violated the anti-fraud provisions of the federal securities laws by making materially false and misleading statements regarding our business and financial results during the class period, thereby artificially inflating the price of our securities. On or about March 28, 2017, a second complaint making similar allegations (captioned Hans E. Erdmann v. Insys Therapeutics, Inc., et al., Case 1:17-cv-02225-PAC) was filed in the same Court. On May 31, 2017, the ~~court~~Court consolidated the first and second complaint and appointed lead counsel in the consolidated action. On July 31, 2017, the lead counsel filed a consolidated complaint. On October 11, 2017, the Court held a pre-motion conference, at which the Court granted leave to plaintiffs to again amend the complaint. The amendment was filed on October 27, 2017, and we moved to dismiss. The Court subsequently dismissed the complaint as to Santosh Vetticaden, our ~~response is due~~former Interim CEO and Chief Medical Officer, and otherwise denied our motion to dismiss. Insys filed its answer on ~~November 3, 2017.~~June 26, 2018. The plaintiffs in both actions seek unspecified monetary damages and other relief. We continue to vigorously defend this matter.

Derivative Litigation.On or about August 26, 2016, Gary Hirt and Precieux Art Jewelers Inc. filed a derivative complaint in the Court of Chancery of Delaware against members of our Board of Directors and Michael L. Babich. The plaintiffs allege, among other things, that the defendants breached their fiduciary duties by (a) knowingly overseeing the implementation of an

illegal sales and marketing program, (b) consciously disregarding their duty of oversight of our compliance with laws and (c) trading on the basis of material non-public information. On November 8, 2016, the plaintiffs filed an amended derivative complaint, and on January 26, 2017, the plaintiffs supplemented the amended derivative complaint, primarily to add allegations relating to the indictment of Michael L. Babich and certain of our former employees announced on December 8, 2016. On November 22, 2016, the defendants moved to dismiss the action.

On or about February 2, 2017, Michael Bourque filed a derivative complaint in the Court of Chancery against members of our Board of Directors; Michael L. Babich; Franc Del Fosse, our General Counsel; and Sanga Emmanuel, our Vice President and Chief Compliance Officer. The Bourque derivative complaint contains similar claims as the other derivative complaint. All parties stipulated to consolidate the two actions, and the consolidated action is captioned In re Insys Therapeutics, Inc. Derivative Litigation, C.A. No. 12696-VCMR. Following the submission of motions for appointment as lead counsel, the Court held a hearing on March 23, 2017, and appointed counsel for Gary Hirt and Precieux Art Jewelers Inc. as lead counsel. Lead counsel is required to designate an operative complaint or file a consolidated complaint. The plaintiffs seek unspecified monetary damages and other relief derivatively on behalf of Insys Therapeutics, Inc.

On or about April 28, 2017, lead counsel filed a consolidated and amended complaint which maintained the original defendants this lead counsel had included in its original complaint and did not include any additional defendants included in the Bourque complaint. On May 31, 2017, we subsequently moved to stay or to dismiss the complaint and, on or about July 28, 2017, lead counsel filed an answering brief in opposition to our motion to stay or dismiss. ~~The~~On November 30, 2017, the Court ~~heard oral argument on the~~granted our motion to stay but has required us to provide certain discovery to the plaintiffs. On February 8, 2018, in response to the plaintiffs’ motion to alter or clarify judgment, the Court ordered us to ~~dismiss~~provide additional discovery to the ~~complaint on September 19, 2017, and that motion remains pending.~~plaintiffs. On March 16, 2018, the Court entered the parties’ stipulated proposed order implementing the Court’s ruling of February 8, 2018. We continue to vigorously defend this matter.

On or about June ~~26, 2017, we received~~5, 2018, Jim Soltau filed a ~~Paragraph IV Notice Letter from Par Pharmaceutical related to SYNDROS®. The letter asserts that (i)~~ derivative complaint (“the FDA received an ANDA from Par Pharmaceutical, and (ii) that Par Pharmaceutical’s formulation does not infringe SYNDROS® patents and/or that our patents for SYNDROS® are invalid. On August 3, 3017, we filed suitSoltau complaint”) in the United States District Court, ~~for the~~ District of ~~Delaware, in which we claim~~Arizona (18-cv-01720-SPL), against members of our Board of Directors, former directors and officers, as applicable, John Kapoor, Michael Babich, Patrick Forteau, Brian Tambi, the ~~ANDA was not sufficiently complete~~Estate of Dr. Theodore Stanley, and ~~allege patent infringement.~~former officers Darryl Baker and Santosh Vetticaden. The plaintiff alleged, among other things, that these individuals breached their fiduciary duties as our officers and/or directors and are liable for unjust enrichment, waste of corporate assets, abuse of control, gross mismanagement, and violations of Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934. On July 20, 2018, Insys filed its answer to the complaint. On September ~~1, 2017, Par Pharmaceutical~~12, 2018, the Court granted a motion to stay the case. We continue to vigorously defend this matter.

On or about June 10, 2018, David Bennett filed ana derivative complaint in the United States District Court, District of Arizona (18-cv-02170), against members of our Board of Directors, former directors and officers, as applicable, John Kapoor, Michael Babich, Patrick Forteau, Brian Tambi, the Estate of Dr. Theodore Stanley, and former officers Darryl Baker and Santosh Vetticaden. This complaint contains similar claims as the Soltau complaint. On August 10, 2018, the Soltau and Bennett cases were consolidated, and on September 12, 2018, the Court granted a motion to stay the case. We intend to vigorously defend this matter.

On August 6, 2018, Hamid Ravansari filed a derivative complaint in the United District Court, Southern District of New York (18-CV-07026) against members of our Board of Directors, former directors and officers, as applicable, John Kapoor, Michael Babich, Patrick Fourteau, Pierre Lapalme, Steven Meyer, Brian Tambi, the Estate of Dr. Theodore Stanley, and former officers Darryl Baker and Santosh Vetticaden. The plaintiffs allege, among other things, that these individuals breached their fiduciary duties as our officers and/or directors and are liable for unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. On October 29, 2018, Insys filed its answer ~~and counterclaims,~~ to ~~which we have replied.~~the complaint. We ~~believe we have meritorious legal positions and will represent our interests~~intend to vigorously indefend this matter.

On or about August 2, 2017, we received a Paragraph IV Notice Letter from counsel for TEVA Pharmaceuticals USA (“TEVA USA”) related to SUBSYS®. 0.4mg dose. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS® patents and/or that our patents for SUBSYS® are invalid. On September 13, 2017, we filed suit in United States District Court for the District of Delaware, in which we allege patent infringement. ~~We believe~~On January 15, 2018, TEVA USA filed an answer and counterclaims, to which we have ~~meritorious legal positions and will~~replied. We intend to represent our interests vigorously in this matter.

On or about ~~August~~January 31, ~~2017,~~2018, we received a Paragraph IV Notice Letter from counsel for ~~Alkem Pharmaceuticals~~TEVA USA related to ~~SYNDROS®.~~SUBSYS® 0.1mg, 0.2mg, 0.6mg, 1.2mg and 1.6mg doses. The letter asserts that (i) the FDA received an ANDA from ~~Alkem Pharmaceuticals~~TEVA USA and (ii) ~~Alkem Pharmaceuticals’~~that TEVA USA’s formulation does not infringe ~~SYNDROS®~~SUBSYS® patents and/or that our patents for ~~SYNDROS®~~SUBSYS® are invalid. ~~On October 10, 2017, we~~We filed ~~suit in the United States District Court for the District of Delaware, in~~a patent infringement lawsuit against TEVA USA on March 16, 2018. TEVA USA filed its answer to our complaint and counterclaims, to which we ~~allege~~have replied. We intend to represent our interests vigorously in this matter.

On or about July 10, 2018, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SUBSYS® 0.8mg dose. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS® patents and/or that our patents for SUBSYS® are invalid. We filed a patent ~~infringement.~~infringement lawsuit against TEVA USA on August 23, 2018. We ~~believe~~intend to represent our interests vigorously in this matter.

On September 26, 2018, we ~~have meritorious legal positions~~received two Paragraph IV Notice Letters from counsel for TEVA USA related to SUBSYS® 0.1mg, 0.2mg, 0.4mg, 0.6mg, 0.8mg, 1.2mg and ~~will~~1.6mg doses. The letter asserts that (i) the FDA received an ANDA from TEVA USA and (ii) that TEVA USA’s formulation does not infringe SUBSYS® patents and/or that our patents for SUBSYS® are invalid. We intend to represent our interests vigorously in this matter.

Kottayil vs. Insys Pharma, Inc. On September 29, 2009, Insys Pharma, Inc., our wholly owned subsidiary, and certain of our officers and the five directors who comprised the Insys Pharma board of directors as of June 2009, as well as their spouses, were named as defendants in a lawsuit in the Superior Court of the State of Arizona, Maricopa County, or the Arizona Superior Court, brought by Santosh Kottayil, Ph.D., certain of his family members and a trust of which Dr. Kottayil is the trustee. Dr. Kottayil formerly served as President, Chief Scientific Officer and a director of Insys Pharma, among other positions. The complaint brought a cause of action for statutory and common law appraisal of Dr. Kottayil’s Insys Pharma common stock. The cause of action for appraisal relates to a reverse stock split that Insys Pharma effected in June 2009, which resulted in Dr. Kottayil’s ownership position becoming a fractional share of Insys Pharma common stock. Following the reverse stock split, Insys Pharma cancelled all resulting fractional shares, including the fractional share held by Dr. Kottayil, and offered a cash payment in lieu of the fractional shares. The complaint also brought causes of action for breach of fiduciary duty, fraud and negligent misrepresentation in the defendants’ dealings with Dr. Kottayil on the subject of his compensation and stock ownership in Insys Pharma. In January 2010, the plaintiffs added claims seeking to rescind Dr. Kottayil’s assignment to Insys Pharma of his interest in all of the fentanyl and dronabinol patent applications previously assigned to Insys Pharma and to recover the benefits of those interests. Dr. Kottayil was seeking, among other relief, the fair value of his Insys Pharma common stock as of June 2, 2009, compensatory and punitive damages, and rescission of all assignments to Insys Pharma of his interest in the patent applications, as well as attorneys’ fees, costs and interest.

In February 2010, Insys Pharma and the other defendants answered and filed counter-claims to Dr. Kottayil’s amended complaint. The counter-claims include actions for breach of fiduciary duty, fraud and negligent misrepresentations and omissions with respect to the time during which Dr. Kottayil was employed at Insys Pharma. The counter-claims, among other relief, sought compensatory and punitive damages.

On January 29, 2014, the plaintiffs filed a second amended complaint in the Arizona Superior Court in which Insys Therapeutics, Inc. was also named as defendant in this lawsuit. This amended complaint filed by plaintiffs re-alleged substantially the same claims set forth in the prior complaint, except that plaintiffs also alleged that they were entitled to rescissory damages, added our majority stockholder, a private trust, as a defendant to the breach of fiduciary duty claim and revised their fraud claim against the Insys Pharma director defendants.

The trial commenced on December 1, 2014, with the evidence phase of the trial completed on January 29, 2015.

On June 8, 2015, the ~~court~~Court issued findings of fact and conclusions of law in its final trial ~~ruling. Specifically, the court found (i) in favor of Insys Pharma, our majority stockholder,~~ruling, which included a private trust and four of the Insys Pharma directors who were on the board in July 2008 on plaintiffs’ claim for breach of fiduciary duty arising out of transactions the board approved in July 2008, (ii) found in favor of plaintiffs and against Insys Pharma, Inc., our majority stockholder, a private trust and three of the Insys Pharma directors who were on the board in June 2009 on plaintiffs’ claims under Delaware law and for breach of fiduciary duties arising out of the reverse stock split the board approved in June 2009 in the amount of $7,317,450, along with

pre-judgment and post-judgment interest and court costs, (iii) found in favor of two of the Insys Pharma directors who were on the Insys Pharma board as of June 2009 and against plaintiffs on plaintiffs’ breach of fiduciary duty claims, (iv) found in favor of Insys Pharma and against plaintiff (Kottayil) on his claim for rescission of the patent application assignments that he entered in favor of Insys Pharma before and after his employment terminated, (v) found in favor of Insys Therapeutics, Inc. and against plaintiff on plaintiffs' claims of successor liability and fraudulent transfer, and (vi) foundfinding in favor of Kottayil and against Insys Pharma on Insys Pharma’s counterclaims of breach of fiduciary duty, fraud, and negligent misrepresentation.

On October 2, 2015, the court entered a final judgment, awarding plaintiffs the amount of $7,317,450, along with pre-judgment interest from June 2, 2009, and post-judgment interest, from October 2, 2015, at the rate of 4.25% per annum, compounded quarterly and taxable costs in the amount of $93,163. On the same date, the courtCourt denied Kottayil’s request to submit an application for attorneys’ fees for his defense of the Insys Pharma counterclaims, finding that the request was premature.

~~As a result of the final ruling, we accrued $9,567,000, including $2,249,000 of estimated pre-judgement interest.~~

~~On October 20, 2015, plaintiffs appealed the foregoing judgment and on November 4, 2015, Insys Pharma and the other defendants against whom judgment was entered filed a notice of cross-appeal.~~

On or around November 1, 2015, we received a notice from ~~the plaintiff’s~~Dr. Kottayil’s attorneys demanding indemnification for legal and other defense costs alleged to have been incurred in connection with Dr. Kottayil’s defense of the Insys Pharma counterclaims in the amount of $3,630,000. We responded to these demands by, among other things, requesting supporting documents and information from the plaintiffs’ counsel, which we have not ~~received yet. Accordingly, we are still~~received. On June 1, 2018, Dr. Kottayil filed a complaint in Superior Court in the ~~process~~State of ~~assessing the merit of such claims as well as evaluating the basis~~Arizona in and for the ~~costs claimed.~~County of Maricopa against Insys Pharma, Inc., our wholly owned subsidiary. The complaint seeks indemnification in the amount of $3,630,000, plus interest. On July 26, 2018, Insys moved to dismiss the complaint, which the Court granted. Dr. Kottayil subsequently moved for reconsideration of the Court’s dismissal ruling. The motion for reconsideration remains pending. Because of the uncertainty surrounding the ultimate outcome, we have not accrued for this claim at this time; however, we believe that that it is reasonably possible that there may be a material loss associated with this claim and we currently estimate the range of the reasonably possible loss to be between $0 and the $3,630,000 claimed.

~~On or about August 1, 2016, plaintiffs filed opening and reply and cross response briefs and we filed our answering and cross-appeal brief and our reply in support of our cross-appeal.~~

On Wednesday, April 5, 2017, the Arizona Court of Appeals conducted oral argument on the plaintiffs’ appeal and on our cross-appeal. On August 29, 2017, the Arizona Court of Appeals affirmed the trial court’s ruling. The parties subsequently agreed to settle the case, which resulted in an additional liability of $850,000, and the payments in connection with this settlement were made prior to September 30, 2017.

Insurance Litigation. On June 23, 2017, Aetna, Inc. and a subsidiary filed an action against us and a number of former employees in the Pennsylvania Court of Common Pleas, Philadelphia County (captioned Aetna Inc. v. Insys Therapeutics, Inc., Case No. 170602779). Plaintiffs bring claims against us for: (1) insurance fraud; (2) civil conspiracy; (3) common law fraud; (4) unjust enrichment; (5) negligent misrepresentation; and (6) negligence. Through all of the claims, Aetna seeks recovery of millions of dollars paid for SUBSYS® prescriptions that, allegedly, were not properly covered. It also seeks punitive damages, investigative expenses and costs of suit, reasonable attorneys’ fees and expenses, and prejudgment and post-judgment interest. Plaintiffs served their complaint on September 25, 2017. On October 25, 2017, we removed this matter to federal court. Aetna subsequently moved to remand the case to state court. On January 6, 2018, the district court denied Aetna’s motion to remand. We moved to dismiss Aetna’s claims. On August 24, 2018, the Court dismissed Aetna’s negligent misrepresentation and negligence claims and otherwise denied the motion to dismiss. We intend to vigorously defend this matter.

On July 12, 2017, numerous subsidiaries of Anthem, Inc. filed a complaint in the U.S. District Court for the District Court for the District Court for the District of Arizona against us (captioned Blue Cross of California, Inc. d/b/a Anthem Blue Cross of California v. Insys Therapeutics, Inc., Case No. 2:17-cv-02286-DLR). Plaintiffs ~~bring~~brought claims against us for: (1) violation of various state laws prohibiting deceptive, unfair, and unlawful business practices (i.e., consumer fraud); (2) fraud; (3) negligent misrepresentation; (4) unjust enrichment; and (5) civil conspiracy to commit fraud and unfair business practices. Through all of the claims, Anthem seeks recovery of more than $19,000,000 paid for SUBSYS® prescriptions that, allegedly, were not properly covered. It also seeks punitive damages and an injunction to prevent Insys from continuing to engage in the conduct underlying its claims. Plaintiffs served their complaint on July 14, 2017. On August 4, 2017, we filed an answer to such complaint. On February 2, 2018, Plaintiffs filed a motion for leave to file a second amended complaint and on February 16, 2018, we filed (i) an opposition to Plaintiff’s motion to file a second amended complaint and (ii) a motion to stay the case. On or about July 23, 2018, the Court granted Plaintiff’s motion to file a second amended complaint. On August 8, 2018, the Court denied our motion to stay. On September 14, 2018, we moved to dismiss Anthem’s second amended complaint and Anthem’s response is due on October 29, 2018. Discovery in this case is ongoing. We intend to vigorously defend this matter.

On August 30, 2017, Humana Inc. filed an action against us and a number of former employees in Pike County, Kentucky Circuit Court (captioned Aetna Inc. v. Insys Therapeutics, Inc., Case No. 17-CI-971). Plaintiff brings claims against us for (1) insurance fraud, (2) conspiracy to commit insurance fraud, (3) common law fraud, and (4) unjust enrichment. Through all of the claims, Humana seeks recovery of millions of dollars paid for SUBSYS® prescriptions that, allegedly, were not properly

covered. It also seeks punitive damages, disgorgement, prejudgment and post-judgment interest, costs and expenses of suit, and reasonable attorneys’ fees and expert fees and expenses. We intend to vigorously defend this matter.

On October 31, 2017, we received correspondence from Horizon Blue Cross Blue Shield of New Jersey requesting reimbursement for allegedly fraudulently induced off-label purchases of SUBSYS® in connection with alleged claim value of approximately ~~$4,000,000.~~$4,400,000. In further correspondence, Horizon Blue Cross Blue Shield of New Jersey has identified in excess of $2,000,000 at issue. We intend to vigorously defend this matter.

On May 21, 2018, MSPA Claims I, LLC, MAO-MSO Recovery II, LLC, and MSP Recovery Claims, Series LLC filed a complaint in the United States District Court, Northern District of Ohio, against Insys Therapeutics, Inc. Plaintiffs bring claims for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), common law fraud, and unjust enrichment. Plaintiffs subsequently amended their complaint on August 22, 2018, and we moved to dismiss the complaint on September 25, 2018. We intend to vigorously defend this matter.

Markland. On July 1, 2016, Robert N. Markland, as the Personal Representative of the Estate of Carolyn S. Markland filed a complaint in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida, against Insys Therapeutics, Inc. The complaint states that it is a wrongful death products liability action brought pursuant to Section 768.16, et seq. under Florida law in connection with a death occurring in July 2014 and includes a claim of negligent marketing. The lawsuit seeks unspecified damages for past expenses and costs, pain and suffering and loss of consortium and earnings. On August 4, 2016, we removed this case to U.S. District Court in the Middle District of Florida. On September 2, 2016, we filed a motion to dismiss. The Court granted our motion on September 15, 2017. The plaintiff subsequently filed a notice of appeal, and the opening brief on appeal ~~is due November 27, 2017.~~was filed on March 9, 2018. We filed our answering brief on May 24, 2018, and the reply brief was filed on July 9, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Buchalter.On September 9, 2016, Jeffrey Buchalter filed a complaint in the Circuit Court for Anne Arundel County, Maryland, Case No. C-02-cv-16-002718, against Dr. William Tham, Physical Medicine & Pain Management Associates, Maryland Neurological Institute, various physician assistants, and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Insys related to negligent misrepresentation, failure to warn and fraud under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We ~~have~~ filed a motion to dismiss and on or about May 6, 2017, the ~~court~~Court denied the motion to dismiss. On March 22, 2018, Plaintiff filed a motion to file a second amended complaint, which, among other things, sought to add as defendants certain former Insys officers and employees. The motion to file a second amended complaint was subsequently granted. Insys filed its answer to the second amended complaint on June 20, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, ~~will have a material adverse effect on our business, financial position, or future results of operations.~~

~~Colby~~. On or about January 25, 2017, Mackenzie Colby filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00040, against Christopher Clough, PA, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeat superior claims, and against Insys Therapeutics, Inc. for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion to dismiss/strike on April 5, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the court dismissed the complaint with leave to refile. The complaint was refiled on June 21, 2017, and we again moved to dismiss. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.

~~Perusse~~. On or about February 21, 2017, John Perusse filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00067, against Christopher Clough, PA, Dr. John J. Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeat superior claims, and against Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion to dismiss/strike on April 20, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the court dismissed the complaint with leave to refile, and we again moved to dismiss. The complaint was refiled on June 21, 2017. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matterwhen taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

~~Cassell~~. On or about March 8, 2017, Jerome Cassell filed a complaint in the State of New Hampshire Strafford County Superior Court, Case No. 219-2017-CV-00085, against Christopher Clough, PA, Dr. John J. Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiff’s complaint states it is a personal injury action against Mr. Clough related to medical negligence, against O’Connell’s Pain Care Centers, Inc. for respondeat superior claims, and against Insys Therapeutics, Inc. and Dr. Schermerhorn for negligence, all under state laws. The lawsuit seeks unspecified compensatory and punitive damages. We filed a motion to dismiss/strike on April 18, 2017 and plaintiff filed a motion to amend the complaint on April 25, 2017. On June 16, 2017, the court dismissed the complaint with leave to refile. The complaint was refiled on June 21, 2017, and we again moved to dismiss. We continue to vigorously defend this matter and

~~based on currently available information, we do not believe any resolution of this matter will have a material adverse effect on our business, financial position, or future results of operations.~~

Fuller. On or about March 23, 2017, Deborah Fuller & David Fuller, as Administrators Ad Prosequendum for the Estate of Sarah A. Fuller, deceased, and Deborah Fuller and David Fuller, individually, filed a complaint in the Superior Court of New Jersey Law Division, Middlesex County, Case No. L1859-17, against Vivienne Matalon, M.D., TLC Healthcare 2, LLC, Linden Care and Insys Therapeutics, Inc. The plaintiff’s complaint alleges negligence violations under the Wrongful Death Act pursuant to N.J.S.A 2A:31, et seq. and also brings claims for fraud and negligent misrepresentation. We filed a motion to dismiss the complaint on May 19, 2017, and the ~~court~~Court held oral argument on the motion on June 29, 2017. On July 27, 2017, the ~~court~~Court issued a ruling on the multi-party motion to dismiss. The ~~court~~Court dismissed some claims but denied the motion to dismiss on certain of plaintiffs’ claims. We answered the complaint, and, after plaintiffs dismissed the treating physician, on October 4, 2017, we removed the case to U.S. District Court for the District of New Jersey. ~~Plaintiff~~Plaintiffs subsequently filed a motion to remand the case to state court on October 11, 2017. On January 19, 2018, the Magistrate Judge issued a Report and Recommendation, recommending that the District Court deny plaintiffs’ motion to remand. On February 5, 2018, the District Court adopted the Report and Recommendation. On February 6, 2018, plaintiffs filed a motion for leave to amend, seeking to add as defendants certain former Insys officers and a former employee. Insys filed its opposition to the motion for leave to

amend on February 21, 2018. Consistent with our opposition, the Court denied plaintiffs’ motion as to the former employee and granted the motion as to the former officers. Plaintiffs filed their first amended complaint on June 12, 2018. On June 26, 2018, Insys moved to ~~remand,~~dismiss, in part, plaintiffs’ first amended complaint. Plaintiffs filed a response in opposition to the motion on July 18, 2018, and ~~that~~the Court set a return date of August 6, 2018. Plaintiffs subsequently stipulated to dismiss certain allegations and claims against Insys, and the motion ~~remains pending.~~to dismiss was withdrawn. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Cantone. On or about June 15, 2017, we received service of a complaint filed by Angela Mistrulli Cantone and Philip L. Cantone in the State Court of South Carolina, County of Greenville, C.A. No.: 2017-CP-23 against Insys Therapeutics, Inc., Linden Care, LLC, Aathirayen Thiyagarajah, M.D. and Spine and Pain, LLC. The plaintiffs’ complaint alleges medical negligence, negligence, negligent misrepresentation, unjust enrichment, common law fraud, unfair and deceptive trade practices, aiding and abetting and loss of consortium. We filed a motion to dismiss, which the Court denied. We filed our answer on November 14, 2017. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Ballou.On or about September 1, 2017, Carey Ballou filed a complaint in the circuit Court of Johnson County, Kansas, Case No. 17CV05004, against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon M.D., Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. The plaintiffs bring claims against Insys for negligence, common law fraud, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, conspiracy, and aiding and abetting. ~~Our response is due November 20, 2017.~~On December 26, 2017, Plaintiff filed a second amended complaint, which added as defendants certain former officers and employees. Insys moved to dismiss the second amended complaint on February 26, 2018. On August 22, 2018, the Court held oral argument on the motion to dismiss. The motion remains pending. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Whitham.On or about September 1, 2017, James “Mike” Whitham and Ashley Whitham filed a complaint in the Circuit Court of Johnson County, Kansas, Case No. 17CV05005, against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon M.D., Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. The plaintiff brings claims against Insys for negligence, common law fraud, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, loss of consortium, conspiracy, and aiding and abetting. ~~Our response is due November 20, 2017.~~On December 26, 2017, Plaintiff filed a second amended complaint, which added as defendants certain former officers and employees. Insys moved to dismiss the second amended complaint on February 26, 2018. On August 22, 2018, the Court held oral argument on the motion to dismiss. The motion remains pending. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Hartsfield.On or about October 4, 2017, Cheryl Hartsfield filed a complaint in the Circuit Court of Pulaski County, Arkansas, Case No. 60CV-17-5581, against Insys Therapeutics, Inc., Linden Care, LLC, Mahmood Ahmad, and United Pain Care, Ltd. The plaintiff brings claims against Insys for common law fraud and deceit, breach of fiduciary duty, violations of the Arkansas deceptive trade practices act, civil conspiracy, acting in concert, and negligence. ~~Our response is due~~Insys filed its answer to the complaint on November ~~13,~~27, 2017. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

~~Matalon~~Jordan. .On ~~September 15, 2017, Vivienne Matalon, M.D.~~January 5, 2018, Bobby Ray Jordan, individually and as Special Administrator of the Estate of Doris L. Jordan, deceased, filed a complaint in the ~~Superior~~District Court of ~~New Jersey, Law Division, Camden~~Leavensworth County, ~~Case No. L-3224-17,~~Kansas against Insys Therapeutics, Inc., ~~Linden Care,~~Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon, M.D., Donna Ruck, Pharma Consultants KC, LLC, John N. Kapoor, Michael L. Babich, and ~~Melina Ebu-Isaac. The action was subsequently transferred to Middlesex County Superior Court, Law Division.~~Alec Burlakoff. The plaintiff brings claims against Insys for ~~fraudulent~~negligence, conspiracy to commit fraud and breach of fiduciary duty, negligent misrepresentation, unfair and ~~negligent misrepresentation. Our response is due~~deceptive trade practices, unjust enrichment, survival action, and wrongful death action. On January 31, 2018, Insys moved to consolidate this case with the Ballou and Witham actions, which the Court denied. On April 16, 2018, we moved to transfer venue to Johnson County, Kansas, and on ~~December 19, 2017.~~May 14, 2018, we moved to dismiss the case. The Court denied both motions. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Mencucci. On February 23, 2018, Lisa Mencucci and Angelo Mencucci filed a complaint in the Superior Court of Providence, Rhode Island against Insys Therapeutics, Inc. and Jerrold Rosenberg, M.D. Plaintiffs bring claims against Insys for common law fraud, common law fraud and misrepresentation – punitive damages, conscious misrepresentation involving risk of physical harm, conscious misrepresentation involving risk of physical harm – punitive damages, Rhode Island General Law 9-1-2, Rhode Island General Law 9-1-2 – punitive damages, negligent misrepresentation, negligent misrepresentation

involving risk of physical harm, negligence, and violation of the Rhode Island Deceptive trade practices act. Our answer to the Complaint was filed on April 26, 2018. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Hemmings. On March 21, 2018, William Hemmings filed a complaint in the United States District Court for the Northern District of Illinois against Insys Therapeutics, Inc. Plaintiff brings claims against Insys for negligence, fraud, and consumer fraud. On May 16, 2018, we filed an answer and a motion to dismiss. The motion to dismiss is fully briefed and remains pending. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Hampton. On March 8, 2018, Scott Hampton, as Heir, Executor and Personal Representative of the Estate of Diana Hampton, individually and on behalf of his minor children I.S. and S.M., filed a complaint in Clark County, Nevada District Court against Steven A. Holper and Insys Therapeutics, Inc. Plaintiffs bring claims against Insys for wrongful death: negligence, survivor action: negligence, wrongful death: intentional/reckless conduct, survivor’s action: intentional/reckless conduct, negligence, strict liability – defect in design – product liability, strict liability – failure to warn, and punitive damages. On April 16, 2018, Insys removed this case to the United States District Court for the District of Nevada. On April 17, 2018, the District Judge entered an Order to Show Cause why the case should not be remanded to state court, and subsequently remanded the case to state court. On June 26, 2018, Insys moved to dismiss the case. On June 29, 2018, plaintiffs sought leave to amend the complaint, which the court granted. Oral argument on the motion occurred on July 30, 2018, and the Court denied the motion. Plaintiffs filed a second amended complaint on September 7, 2018 and Insys subsequently moved to dismiss the second amended complaint. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Munson. On April 4, 2018, Morgan Michelle Munson and Christopher Edward Munson filed a complaint in Duval County, Florida Circuit Court against Insys Therapeutics, Inc. and Linden Care, LLC. Plaintiffs bring claims against Insys for civil conspiracy, negligence, and aiding and abetting. On May 21, 2018, Insys removed the case to the United States District Court for the Middle District of Florida. On June 12, 2018, plaintiffs filed a motion for leave to file amended complaint and to remand. We filed our response in opposition on July 10, 2018. On November 6, 2018, the Court denied plaintiffs’ motion for leave to file amended complaint and to remand. It also dismissed plaintiffs’ complaint without prejudice as a “shotgun” pleading. The Court ordered plaintiffs to file an amended complaint by November 28, 2018 and ordered defendants to respond to the amended complaint by December 20, 2018. We intend to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Tisher/Starling. On May 4, 2018, Herbert Tisher and Jane Tisher filed a complaint in the Superior Court of the State of Delaware against Insys Therapeutics, Inc., Compassionate Pain Management, LLC, Compassionate Diagnostics, LLC d/b/a Cutting Edge Treatment Center, and Eva C. Dickinson, M.D. On July 3, 2018, the Complaint was amended to add as Plaintiffs James Starling, Jr. and Pamela Starling, and to remove as a Plaintiff Jane Tisher. The Amended Complaint also added as defendants Michael J. Babich, Alec Burlakoff, Michael J. Gurry, Richard Simon, Sunrise Lee, Joseph A. Rowan, John N. Kapoor, Rodney Village Pharmacy LLC, Hometown Drug LLC, and Sanjana Company, LLC. Plaintiffs bring claims against Insys for general negligence, negligent misrepresentation, common law fraud, aiding and abetting, unjust enrichment, and civil conspiracy. We filed an answer to the amended complaint on August 31, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Kyle. On May 10, 2018, Jeffrey A. Kyle and Polly Kyle filed a complaint in the State of New Hampshire Superior Court, Stratford, SS, against Christopher Clough, PA, Dr. John J. Schermerhorn, Dr. O’Connell’s Pain Care Centers, Inc., and Insys Therapeutics, Inc. Plaintiffs bring claims against Insys for negligence and loss of consortium. Insys filed its answer to the complaint on July 13, 2018. On September 20, 2018, the Court dismissed the complaint against all the defendants.

Gruenspecht. On June 14, 2018, Mark Gruenspecht filed a complaint in the Supreme Court of the State of New York, County of New York, against Upper East Side Pain Medicine, P.C., Gordon Freedman, M.D., and Insys Therapeutics, Inc. Plaintiff brings a single untitled claim against Insys, asserting, among other things, that Insys’s conduct constituted fraud, deception, misrepresentation, wantonness, negligence, and gross negligence. The complaint was served on June 27, 2018. We filed a motion to dismiss the complaint on October 5, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Hanson. On July 10, 2018, Cynthia L. Hanson filed a complaint in the Circuit Court of Johnson County, Kansas against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrist, P.A., Steven Simon, M.D., Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Corporation, and Morris & Dickson Co., LLC. Plaintiff brings bring claims against Insys for negligence, conspiracy to commit fraud and breach of fiduciary duty, negligent misrepresentation, unfair and deceptive trade practices, unjust enrichment, survival action, and wrongful death action. On July 23, 2018, we accepted service and we filed a motion to dismiss the complaint on September 21, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Kelly. On July 18, 2018, Michael and Julie Kelly filed a complaint in the Common Pleas Court of Erie County, Ohio against Insys Therapeutics, Inc., Insys Pharma, Inc., and Insys Manufacturing, LLC. Plaintiffs bring claims against Insys for negligence, negligent misrepresentation, strict products liability due to inadequate warning, strict products liability defective due to inadequate warning pursuant to Ohio Revised Code Section 2307.76, strict products liability defect due to design defect, strict products liability defective pursuant to Ohio Revised Code Section 2307.75, fraud, Ohio Consume Sales Practices Act pursuant to Ohio Revised Code Chapter 1345, false advertising, unjust enrichment, loss of consortium, negligent infliction of emotional distress, and punitive damages. We were served with the complaint on July 30, 2018. On July 31, 2018, we removed the case to the Northern District of Ohio. On September 21, 2018, we moved to dismiss the complaint. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Mascio. On July 31, 2018, Robin Mascio filed a complaint in the Supreme Court of the State of New York, County of New York, against Todd R. Schlifstein D.O., Jeffrey Goldstein M.D., Kathryn E. Moran P.A., Aja Snow P.A., Fountain Medical Group Holdings Inc., Fountain Medical Holdings Inc., EGA medical Management LLC, NACSIP Inc., NACSIP Inc. d/b/a Lake Mahopac Pharmacy & Surgical, Nagi Wissa, Dorvit Pharmacy Inc. d/b/a The Cure Pharmacy, Third Avenue Lerman Pharmaceutics, Inc., Vishi Pharmacy Corp. d/b/a The Cure Pharmacy, David Lerman, and Insys Therapeutics, Inc. Plaintiff brings claims against Insys for fraud, negligent representation, lack of informed consent, and an unspecified claim that may be a claim for negligence and/or gross negligence. Insys was served with the complaint on October 12, 2018. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Wagner. On August 21, 2018, Dorrie Wagner filed a complaint in the County of Greenville, South Carolina Court of Common Pleas against Insys Therapeutics, Inc., John N. Kapoor, Michael L. Babich, Alec Burlakoff, Linden Care, LLLC, Aathirayen Thiyagarajah, M.D., Pain and Spine Consultants, PA and Spine and Pain, LLC. Plaintiff brings claims against Insys for general negligence, aiding and abetting, unjust enrichment, and for violations of the unfair and deceptive trade practices act. On September 10, 2018, plaintiffs filed a second complaint against the same defendants, which includes the same claims. Insys filed its answer to the complaint on October 17, 2018. We continue to vigorously defend this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Haddock. On September 27, 2018, Insys received a demand letter from counsel for Iliana Haddock, asserting that Ms. Haddock has claims against Insys for negligence and alleged off-label promotion of SUBSYS®. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Crownover. On October 8, 2018, Michelle Crownover, Brandon Crownover, and Bailee, Makena, and Payton Crownover filed a complaint in the Franklin County, Ohio, Court of Common Pleas against Jimmy M. Henry, M.D., Midwest Pain Spine and Pain Consultants, LLC, Thomas Tadsen, Shaffer Pharmacy, Inc., Christopher Dinoffria, Avella of Columbus, Inc., and Insys Therapeutics, Inc. Plaintiffs also included Aetna, Inc. and Anthem Blue Cross/Blue Shield as involuntary plaintiffs. Plaintiffs bring claims against Insys for civil conspiracy, fraud, civil liability for criminal conduct, negligence, and loss of consortium. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Tudhope. On October 17, 2018, Carole Tudhope and John Tudhope filed a complaint in the Circuit Court of Jackson County, Missouri at Independence, against Insys Therapeutics, Inc., Insys Pharma, Inc., John N. Kapoor, Michael L. Babich, Alec Burlakoff, , Mid-America Physiatrist, P.A., Steven Simon, M.D., Gregory Buhler, D.O., Kathryn McConnaughey, Pharma Consultants KC, LLC, University of Kansas Hospital Authority d/b/a Cancer Center Pharmacy East, Amerisourcebergen Drug Corporation, and Morris & Dickson Co., LLC. Plaintiffs bring claims against Insys for negligence, conspiracy to commit fraud and breach of fiduciary duty, negligent misrepresentation, unfair and deceptive trade practices,

unjust enrichment, and loss of consortium. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Perry. On October 25, 2018, Colleen Perry filed a complaint in the State of New Hampshire Superior Court, Strafford, against Insys Therapeutics, Inc. Plaintiff brings a claim for fraud, consumer protection, and negligence. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Cordes. On or about November 2, 2018, Insys received a demand letter from counsel for Eleanor Cordes asserting that Ms. Cordes has claims against Insys for negligence, fraud, and consumer fraud. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Farquhar. On November 5, 2018, Timothy and Kelley Farquhar filed a complaint in the Circuit Court of Johnson County, Kansas against Insys Therapeutics, Inc., Insys Pharma, Inc., Torgny Andersson, Mid-America Physiatrists, P.A., Steven Simon, M.D., Donna Ruck, Pharma Consultants KC, LLC, AmerisourceBergen Drug Corp., Morris & Dickson Co., LLC, John N. Kapoor, Michael L. Babich, and Alex Burlakoff. Plaintiff brings bring claims against Insys for negligence, conspiracy to commit fraud and breach a fiduciary duty, negligent misrepresentation, unfair and deceptive trade practices (Kansas Consumer Protection Act), unjust enrichment, and loss of consortium. We anticipate vigorously defending this matter and based on currently available information, we do not believe any resolution of this matter, when taken individually, will have a material adverse effect on our business, financial position, or future results of operations.

Except as it pertains to (i) the final settlements addressed above, (ii) the accrual of $150,000,000 related to the DOJ Investigation, and (iii) the potential for damages in the federal securities litigation and derivative action that we believe ~~should~~could be ~~sufficiently~~ covered by in whole or part our director and officers insurance policies (once we have met any applicable retainage requirement

under the applicable policy), we believe that the probability of unfavorable outcome or loss related to all of the above litigation matters and an estimate of the amount or range of loss, if any, from an unfavorable outcome are not determinable at this time. We believe we have meritorious legal positions and will continue to represent our interests vigorously in these matters but the range of possible outcomes on these matters is very broad and, unless otherwise provided above, we are not able to provide a reasonable estimate of our potential liability, if any, nor are we able to predict the outcome of each litigation matter.

The expense and time required to respond to each of these litigation matters and legal proceedings and related actions, defending any claims raised, and any resulting fines, restitution, damages and penalties, or settlement payments, as well as any related actions brought by shareholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business.

In April 2015, we entered into an amendment to our Renaissance manufacturing and supply agreement dated May 24, 2011, as amended, which extends our existing manufacturing and supply agreement to produce SUBSYS® until the end of 2020. In addition to extending the term, this amendment added certain minimum purchase commitments.Aptar

In October 2015, we entered into an amended and restated supply, development and exclusive licensing agreement with ~~Aptar,~~Aptargroup, Inc. (“Aptar”), which, among other things, extended our exclusive supply rights to the current sublingual spray device currently utilized by SUBSYS®, as well any new device(s) jointly developed by the two companies for a period of seven years. In addition to extending the term, this amendment added certain minimum purchase commitments and requires certain tiered royalties as a percentage of net revenue to be paid by us ranging from less than one percent to the low single digits, commencing in March 2016 through the term of this agreement, from our sales of SUBSYS® and future products that use the Aptar spray device technology.

In January 2016, we assigned our rights, title, duties and obligations ~~under our manufacturing and supply agreement with Renaissance and our~~of supply, development and exclusive licensing agreement with Aptar from our parent to our manufacturing subsidiary as part of a corporate restructuring.

In July 2016, we, through our manufacturing subsidiary, entered into a further amendment to our Renaissance manufacturing and supply agreement. This amendment effectively eliminates any prior minimum purchase (and batch) obligations that had been set forth in the amendment dated April 30, 2015, and replaces them with a new annual purchase commitment of $4,000,000 per calendar year commencing January 1, 2017 through December 31, 2020. As a result, the cumulative effect related to this amendment reduces our aggregated minimum purchase commitments with Renaissance from $49,740,000 to $16,000,000 through December 31, 2020. During the three months ended September 30, 2017, we recorded a loss of $1,035,000 in cost of revenue in these condensed consolidated statements of operations and comprehensive income (loss) for a portion of this commitment which represented firm, non-cancellable and unconditional purchase commitments for quantities in excess of our current forecasts for future demand.

In April 2017, we, through our manufacturing subsidiary, entered into a further amendment to our Aptar supply, development and exclusive licensing agreement. This amendment effectively eliminates any prior minimum purchase obligations that had been set forth in the amendment dated October 30, 2015, and beginning in 2019, replaces them with a new annual flat fee of up to $500,000 if the quantity of devices purchased in a calendar year is less than one million devices. As a result, the cumulative effect related to this amendment reduces our aggregated purchase commitment with Aptar from $20,790,000 to $9,000,000 through December 21, 2022.

As of September 30, 2018, our remaining estimated annual contractual obligation under our agreement with Aptar was $7,500,000.

In January 2016, we assigned our rights, title, duties and obligations under our manufacturing and supply agreement with Renaissance from our parent to our manufacturing subsidiary as part of a corporate restructuring.

In April 2018, we, through our manufacturing subsidiary, entered into a further amendment to our Renaissance manufacturing and supply agreement. This amendment effectively eliminates any prior minimum purchase (and batch) obligations that had been set forth in the amendment dated July 2016 and replaces them with a new annual purchase commitment of $3,000,000 for the calendar year ended December 31, 2018, and $2,000,000 for the calendar years ending December 31, 2019 and 2020. As a result, the cumulative effect related to this amendment reduces our aggregated purchase commitment with Renaissance from $12,000,000 to $7,000,000 through December 31, 2020. During the three months ended September 30, 2018, we reversed $77,000 of a previously recorded loss in cost of revenue in these unaudited condensed consolidated statements of operations and comprehensive loss for a portion of this commitment which represented firm, non-cancellable and unconditional purchase commitments for quantities in excess of our current forecasts for future demand. During the three and nine months ended September 30, 2018, we recorded a loss of $0 and $1,195,000, respectively, in cost of revenue in these unaudited condensed consolidated statements of operations and comprehensive loss for a portion of this commitment which represented firm, non-cancellable and unconditional purchase commitments for quantities in excess of our current forecasts for future demand.

As of September 30, 2018, our remaining estimated annual contractual obligation under our agreement with Renaissance was $4,125,000.

The following table sets forth our aggregate minimum purchase commitments and exclusive supply rights with Renaissance and Aptar under these agreements (in thousands):

7.8.	Stock-based Compensation

Amounts recognized in the unaudited condensed consolidated statements of operations and comprehensive ~~income (loss)~~loss with respect to our stock-based compensation plans were as follows (in thousands):

Included in stock-based compensation for the three and nine months ended September 30, 2017 and 2016 was approximately $1,450,000 and $3,878,000, respectively, of expense associated with the accelerated vesting of option awards related to terminated employees.

The following table summarizes stock option activity during the nine months ended September 30, ~~2017:~~2018:

As of September 30, ~~2017,~~2018, we expected to recognize ~~$24,654,000~~$17,554,000 of stock-based compensation for outstanding options over a weighted-average period of ~~2.7~~2.4 years.

From time to time we grant restricted stock units to certain employees and directors. Restricted stock units are valued at the closing market price of our common stock on the day of grant and the total value of the units is recognized as expense ratably over the vesting period of the grants. The following table summarizes restricted stock unit activity during the nine months ended September 30, ~~2017:~~2018:

As of September 30, ~~2017,~~2018, we expected to recognize ~~$2,932,000~~$3,780,000 of stock-based compensation for outstanding restricted stock units over a weighted-average period of ~~2.3~~1.8 years.

Cash received from option exercises under all stock-based payment arrangements for the nine months ended September 30, ~~2017~~2018 and ~~2016 was $3,550,000 and $3,475,000, respectively. Cash used to fund tax withholdings on stock-based compensation for the nine months ended September 30,~~ 2017 was ~~$42,000.~~$1,032,000 and $3,550,000, respectively. For the nine months ended September 30, ~~2016,~~2018 and 2017, we recorded net reductions of ~~$675,000~~$920,000 and $466,000, respectively, of our federal and state income tax liability, with an offsetting credit to additional paid-in capital, resulting from the excess tax benefits of stock options. Effective January 1, 2017, the adoption of ASU 2016-09 eliminated the recognition of excess tax benefits of stock options in additional paid-in capital. All excess tax benefits and tax deficiencies on stock-based payment awards are recognized as income tax expense or benefit in the condensed consolidated statements of operations and comprehensive income (loss). The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. For additional information, see Note 1, Nature of Business and Basis of Presentation. For the nine months ended September 30, 2017, we recorded net reductions of $466,000 of our federal and state income tax liability, with an offsetting credit recorded within income tax expense, resulting from the excess tax benefits of stock options. A full valuation allowance was recorded against these reductions during the nine months ended September 30, 2018.

8.9.	Net ~~Income (Loss)~~Loss per Share

Basic net ~~income (loss)~~loss per common share is computed by dividing the net ~~income (loss)~~loss allocable to the common stockholders by the weighted average number of common shares outstanding during the period. The diluted income per share further includes any common shares available to be issued upon exercise of outstanding stock options if such inclusion would be dilutive.

The following table sets forth the computation of basic and diluted net ~~income (loss)~~loss per common share (dollars in thousands, except per share amounts):

As we have incurred a net loss for the ~~three and~~ nine months ended September 30, 2018 and 2017, basic and diluted per share amounts are the same, since the effect of potential common share equivalents is anti-dilutive.Anti-dilutive share equivalents included 5,778,022 and 5,578,530 outstanding restricted stock units and ~~5,575,979 outstanding~~ stock options as of September 30, 2018 and 2017, ~~and 2016,~~ respectively.

9.10.

Product Lines, Concentration of Credit Risk and Significant Customers

We are engaged in the business of developing and selling pharmaceutical products. During the three and nine months ended September 30, ~~2017 and 2016~~2018, we had two product lines, SUBSYS® and SYNDROS®. Our ~~chief operating decision-maker~~CODM evaluates revenues based on product lines.

The following tables ~~summarizes~~summarize our net revenue by product line, as well as the percentage of revenue by route to market (in thousands):

Product shipments to our three largest pharmaceutical wholesalers accounted for 32%, 16% and 11% of total shipments and product shipments to our two largest specialty pharmaceutical retailers accounted for 21% and 18 % of total shipments for the nine months ended September 30, 2018. Product shipments to our three largest pharmaceutical wholesalers accounted for 25%, 18%, and 11% of total shipments and product shipments to our two largest specialty pharmaceutical retailers accounted for 25% and 13% of total shipments for the nine months ended September 30, 2017. Product shipments to our four largest pharmaceutical wholesalers accounted for 17%, 16%, 15% and 15% of total shipments and product shipments to one specialty pharmaceutical retailer accounted for 30% of total shipments for the nine months ended September 30, 2016. Our three largest pharmaceutical wholesalers’ accounts receivable balances accounted for ~~35%~~45%, 19%, and 13% of ~~gross~~ accounts receivable and our two largest specialty pharmaceutical retailers’ accounts receivable balances accounted for ~~17%~~14% and ~~13%~~14% of ~~gross~~ accounts receivable balance as of September 30, ~~2017. Our four largest~~2018. Three pharmaceutical wholesalers’ accounts receivable balances accounted for ~~36%~~44%, ~~23%~~18%, ~~21%~~ and ~~13%~~10% of ~~gross~~ accounts receivable balance as of December 31, ~~2016.~~2017, and two specialty pharmaceutical retailers’ accounts receivable balances accounted for 13% and 12% of accounts receivable as of December 31, 2017.

11.	Subsequent Events

On November 5, 2018, we announced that we have commenced a process to review strategic alternatives for our portfolio of opioid-related assets, including SUBSYS®, as well as formulations of buprenorphine and the combination of buprenorphine/naloxone. Our decision to pursue this process is consistent with our objective to become a leader in pharmaceutical cannabinoids and novel drug delivery systems and to continue shifting our focus away from opioids in our product pipeline. We anticipate that our company has a number of clinical and regulatory milestones to achieve over the next few quarters, including the completion of the CBD and epinephrine studies and filing the naloxone NDA, that are consistent with our objectives.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto as of and for the year ended December 31, ~~2016,~~2017, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management; PBM formulary changes relative to SUBSYS® or SYNDROS® that may have a material impact on future net revenue; our intent to file an IND application for the treatment of epilepsy with cannabidiol; the sufficiency of our manufacturing capacity; the beneficial attributes of our dronabinol product candidates and delivery mechanisms; that our suppliers are equipped to supply us with our current and future chemical needs; that pending dronabinol candidates will default to Schedule II classification; that changes in health care laws will result in reduced Medicaid and Medicare payments for prescription drugs; that sales and marketing and research and development costs will be our largest categories of expenses; that sales and marketing expenses will fluctuate based on changes in SUBSYS® or SYNDROS® net revenue; our development of different dronabinol delivery systems; that we can maintain or even grow market share and net revenue for SUBSYS® and SYNDROS® and our strategies relating thereto; that we may pursue strategies relating to synthetic cannabidiol; our sales and marketing strategy for future products and delivery systems; that we may pursue strategic transactions such as acquisitions of other companies, asset purchase, out- or in-licensing of products, strategic partnerships, joint ventures, divestitures, business combinations and investments; our ability to obtain foundation materials and manufacture dronabinol in light of government quotas; our strategy of using Marinol as a reference drug in future drug approval applications; the expected pathway of drug applications we expect to file in the future; that physicians and payers will continue to gain familiarity about and accept the features of SUBSYS® and SYNDROS®; our plans and strategies for obtaining future international approvals; our plans and strategies to protect our intellectual property; our intention of not paying dividends; possible capital raising transactions we may pursue; that we may avail ourselves of certain Nasdaq governance provisions because of our status as a controlled company; that research and development and operating costs will fluctuate; that our investments in our sales and research and development infrastructure will result in increased sales; accounting estimates and the impact of new or recently issued accounting pronouncements; that cash flows from operations will fluctuate as a result of sales of SUBSYS® and SYNDROS®; the source and sufficiency of our liquidity and capital resources to fund our operations; trends in restrictions and impediments relating to reimbursement policies imposed by PBMs; the impact of pending litigation and our strategy relating thereto; that we will not recognize revenue in the near term from current research and development initiatives; our exposure to interest rate changes and market risks related to our investments; and the potential impact of Section 382 limitations on our NOLs. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations as described from time to time in our SEC reports, including those risks outlined under “Risk Factors” in Part I, Item 1A of our Form 10-K for the year ended December 31, ~~2016.~~2017, and in Part II, Item 1A in this Form 10-Q. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider these risks and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. These forward-looking statements include, but are not limited to statements concerning:

our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management;

PBM formulary changes relative to SUBSYS® or SYNDROS® that may have a material impact on future net revenue;

our intent to file an NDA for the treatment of epilepsy with cannabidiol;

our belief regarding the sufficiency of our manufacturing capacity;

our beliefs regarding the beneficial attributes of our product candidates and delivery mechanisms;

our expectation that our suppliers are equipped to supply us with our current and future chemical needs;

our expectation that changes in health care laws will result in reduced Medicaid and Medicare payments for prescription drugs;

our expectation that legal expenses and research and development costs will be our largest categories of expenses;

our expectation that sales and marketing expenses will fluctuate based on changes in SUBSYS® or SYNDROS® net revenue;

our plans for the development of different delivery systems for our product candidates;

our beliefs regarding net revenue for SUBSYS® and SYNDROS® and our strategies relating thereto;

our sales and marketing strategy for future products and delivery systems;

that we may pursue strategic transactions such as the divestiture of existing or candidate product lines, acquisitions of other companies or asset purchases, out- or in-licensing of products, strategic partnerships, joint ventures, business combinations and investments;

our ability to obtain foundation materials and manufacture dronabinol and CBD in light of government quotas;

the expected pathway of drug applications we expect to file in the future;

•

that physicians and payers will continue to gain familiarity about and accept the features of SUBSYS® and SYNDROS®;

our plans and strategies for obtaining future international approvals;

our plans and strategies to protect our intellectual property;

our intention of not paying dividends;

possible capital raising transactions we may pursue;

factors that relate to our status as a controlled company;

our projections that research and development and operating costs will fluctuate;

our belief that any investments in our sales and research and development infrastructure could result in increased sales;

our belief that reductions in our sales and marketing force could result in decreased sales;

accounting estimates and the impact of new or recently issued accounting pronouncements;

our projections that cash flows from operations will fluctuate as a result of the fluctuation of sales of SUBSYS® and SYNDROS®;

the source and sufficiency of our liquidity and capital resources to fund our operations;

trends in restrictions and impediments relating to reimbursement policies imposed by PBMs;

the impact of pending litigation and our strategy relating thereto;

our projections that we will not recognize revenue in the near term from current research and development initiatives;

our exposure to interest rate changes and market risks related to our investments; and

the potential impact of Section 382 limitations on our NOLs.

Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following:

the impact of ongoing regulatory review of our commercial products, SUBSYS®, and SYNDROS®, and ~~other~~ product candidates ~~that receive~~for which we will seek regulatory ~~approval;~~approval in the future;

our dependence on sales of SUBSYS® and SYNDROS®;

~~Table~~market acceptance, including by third-party payers, of ~~Contents~~our products;

•

~~market acceptance, including by third-party payers, of our products;~~

the unpredictability and regulation surrounding the reimbursement of SUBSYS® and SYNDROS® by third-party payers;

the success of our sales and marketing strategies;

the success of our cost savings initiatives;

our ability to manage ~~growth~~change in our business;

manufacturing failures;

challenges relating to the operations of our ~~operation of a second dronabinol~~ manufacturing ~~facility;~~facilities;

our limited manufacturing capabilities and our reliance on third parties in our product supply chain;

delays in manufacturing of, or interruption ofin the supply chain to, our sublingual spray delivery system;

~~competition;~~competition on both our existing commercial products and on our pipeline candidate products;

our ability to achieve and maintain adequate levels of third-party payer and reimbursement coverage for sales of our products;

our reliance on wholesale pharmaceutical distributors for sales of our products through to the retail distribution channel;

~~our reliance on third parties for the performance~~36

Table of ~~services relating to SUBSYS® and SYNDROS~~®~~, including invoicing, storage and transportation;~~Contents

•

our reliance on third parties for the performance of services relating to SUBSYS® and SYNDROS®, including invoicing, storage and transportation;

our ability to develop a pipeline of product candidates;

any failure of our clinical trials to demonstrate acceptable levels of safety and efficacy;

expenses, delays, changes and terminations that could adversely affect the design and implementation of our clinical trials;

reliance on third parties to conduct and oversee our clinical trials;

acceptance by the FDA of our data from our clinical trials conducted outside the United States;

risks and uncertainties associated with starting materials sourced from ~~India;~~foreign countries;

our ability to meet Section 505(b)(2) regulatory approval pathways or requirements for our product candidates;

annual DEA quotas on the amount of dronabinol and CBD allowed to be produced in the United ~~States;~~States and our specific allocation of dronabinol and CBD;

our failure to successfully acquire, develop or market additional product candidates;

our ability to retain key management and other personnel;

misconduct and improper activities by our former and current employees, prescribing physicians and other persons involved in the marketing and distribution of our products;

our ability to utilize our net operating loss and research and development tax credit carryforwards;

the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance;

the adverse impacts of strategic transactions;

our exposure to product and other liability claims;

our ability to comply with environmental laws relating to our use of hazardous materials;

system failures, accidents, or security breaches;

natural disasters;

our significant operating expenses and need for potential additional funding;

our failure to comply with federal and state health care laws, including fraud and abuse and health information privacy and security laws;

undesirable side effects of our products and the potential for post-approval regulatory action relating to such side effects;

~~Table~~the impact of ~~Contents~~changes in policies and funding resulting from health care reform measures, including the impact on the funding, staffing and leadership of the FDA and other agencies;

•

~~the impact of changes in policies and funding resulting from health care reform measures, including the impact on the funding, staffing and leadership of the FDA and other agencies;~~

heightened attention on the use of opioids, including government litigation, changes in policies, and legislation at the federal and local level;

our ability to obtain and enforce patent rights or other intellectual property rights that cover our products and product candidates;

•

costs of litigation and our ability to protect our intellectual property rights;

costs of litigation related to the defense of former employees;

our exposure to litigation relating to infringement suits against us;

our exposure to claims that our employees or independent contractors have wrongfully used or disclosed to us trade secrets of their other clients or former employers;

our compliance with the procedural, document submission, fee payment and other requirements needed to apply for patents;

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•

our ability to obtain adequate insurance coverage;

~~ownership control over~~our failure to finalize an agreement in principle with the ~~Company~~DOJ and OIG and our ability to comply with the terms of such agreement;

our stockholders’ perception of the decisions made by ~~its founder and~~the voting committee associated with the independent trust that controls the shares owned by our principal ~~stockholder and~~ stockholder;

challenges related to ~~his indictment;~~the indictment of our principal stockholder, including the forfeiture or compelled divestiture of shares held in a voting trust;

fluctuation in the price of our common stock;

substantial future sales of shares by existing shareholders, or the perception that such sales may occur, could cause our stock price to decline;

our ability to maintain and improve our financial controls and related compliance with SEC and stock exchange listing standards;

lack of, or inaccurate, published research about us;

the impact of future sales of our common stock or securities convertible into our common stock;

the effect of anti-takeover provisions in our charter documents and under Delaware law;

the impact of, and risks related to, our ~~exemptions from certain Nasdaq independence rules because of our~~potential status as a “controlled company”;

our ability to obtain additional financing, or that, if obtained, that terms would be favorable to us or our stockholders; and

our intention to not pay dividends in the foreseeable future.

Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the SEC. Any forward-looking statements in this report should be considered in light of various important factors, including the risks and uncertainties listed above, as well as others.

Overview

SUBSYS® — a proprietary, single-use product that delivers fentanyl, an opioid analgesic, for transmucosal absorption underneath the tongue, offered in 100, 200, 400, 600, 800, 1,200 and 1,600 mcg dosages. SUBSYS® is approved for the treatment of BTCP in opioid-tolerant patients. We received FDA approval for SUBSYS® in January 2012 and commercially launched SUBSYS® in March 2012.

SYNDROS® — a dronabinol oral solution that is equivalent to Marinol, an approved second-line treatment for ~~CINV~~nausea and vomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetic treatments and anorexia associated with weight loss in patients with ~~AIDS.~~AIDS, offered in multi-dose 30-mL bottles. We received FDA approval for SYNDROS® in July 2016. In March 2017, the DEA issued an interim final ruling that ~~would result~~resulted in SYNDROS® being placed in Schedule II of the CSA. We received final labeling approval by the FDA in May 2017 and commercially launched SYNDROS® in July 2017.

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We market SUBSYS® and SYNDROS® through our U.S.-based field sales force focused on oncologists and supportive care physicians. Consistent with most pharmaceutical manufacturing companies, we sell SUBSYS® and SYNDROS® primarily to pharmaceutical wholesalers and collect sales proceeds from those wholesalers. For the nine months ended September 30, ~~2017, sales to~~2018, three of our ~~three~~ largest wholesale customers accounted for ~~54%~~59% of ~~gross revenue.~~product shipments. We also sell SUBSYS® and SYNDROS®

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directly to certain specialty pharmaceutical retailers who distribute our product. For the nine months ended September 30, ~~2017, direct sales to~~2018, two of our ~~two~~ largest specialty pharmaceutical retailers accounted for ~~38%~~39% of ~~gross revenue.~~product shipments.

All wholesaler and specialty pharmacies that fulfill SUBSYS® and SYNDROS® prescriptions are fully independent from us. For instance, we do not own or have any ownership stake in any pharmaceutical wholesaler or specialty pharmacy, nor do we have an option to acquire any wholesaler or specialty pharmacy. ~~All pharmacies that fulfill SUBSYS® and SYNDROS® prescriptions are fully independent. Our~~In addition, our relationships with every pharmacy that fulfills SUBSYS® and SYNDROS® prescriptions are non-exclusive in that each of these pharmacies may also fulfill prescriptions for other pharmaceutical manufacturers, including our competitors. For the nine months ended September 30, ~~2017,~~2018, over ~~455~~269 independent pharmacies have fulfilled at least one SUBSYS® prescription.

Our sales of, and revenue from, SUBSYS® and SYNDROS® depend in significant part on the coverage and reimbursement policies of third-party payers, including government payers, such as Medicare and Medicaid, and private health insurers. All third-party payers are sensitive to the cost of drugs, including our products, and consistently implement efforts to control these costs, which efforts include, but are not limited to, establishing excluded or preferred drug lists. SUBSYS® ~~has~~and SYNDROS® have been, and will ~~likely~~ continue to be, subject to these restrictions and impediments from third-party payers, particularly PBMs and private health insurers. ~~SYNDROS® will likely be subject~~We have in the past, either directly or through the use of qualified third-party entities such as large service providers or specialty pharmacies, facilitated assistance to ~~these restrictions and impediments from third-party payers, particularly PBMs and private health insurers, as well. We provide administrative reimbursement support assistance,~~patients in ~~large part through~~connection with obtaining insurance coverage for our ~~patient services hub, to help patients coordinate with their insurance companies.~~products.

We focus a significant portion of our resources on our research and development efforts. In particular, we are ~~also~~ developing ~~other~~ product candidates ~~such as cannabinoid line extensions~~in both cannabinoids and sublingual ~~spray product candidates.~~and intranasal sprays. Our most advanced product candidate is a buprenorphine sublingual spray. ~~This~~We believe this product candidate possesses unique pharmacological properties that may make it a safe and efficacious alternative to traditional opioids, especially outside of a hospital setting. On September 29, 2017, we filed an NDA with the FDA for this product ~~candidate.~~candidate, and on December 6, 2017, the FDA accepted the filing. On July 27, 2018, we received a Complete Response Letter from the FDA, indicating that, although the clinical development program demonstrated all three proposed doses of the product candidate were statistically significantly different than placebo in providing pain relief, some of the data suggested potential safety concerns. Given the attributes of our proprietary buprenorphine formulation for sublingual delivery, we continue to believe that this drug-device combination could bring value to the management of pain and will assess the next steps for this product. Additionally, we continue to progress with our Cannabidiol Oral Solution, a CBD, and currently have four clinical development programs underway, including two Phase 2 and one Phase 3 clinical trials.

We produce the dronabinol API for SYNDROS® at our U.S.-based, state-of-the-art dronabinol manufacturing facility. WeWhile we believe that this facility has the capacity to supply sufficient commercial quantities of dronabinol API for ~~our initial launch quantities of~~ SYNDROS® and support the continued development of our other dronabinol product candidates in the ~~near-term. However,~~near-term, we have opened and expanded a second dronabinol manufacturing facility, which we anticipate will enable us to supply sufficient commercial quantities of dronabinol API for the anticipated commercialization of our proprietary dronabinol product candidates, if approved.

We have the capability to manufacture pharmaceutical CBD, an over 99.5% pure form of cannabidiol, in our Round Rock, Texas manufacturing facility. On April 23, 2015, we announced that we had commenced dosing of epilepsy patients in a Phase I PK study in pediatric subjects. We intend to file an IND application with the FDA for the treatment of epilepsy.

Factors Affecting Our Performance

We believe that our performance and future success are dependent upon a number of factors, including our approved product sales, investments in our infrastructure and growth, ~~and~~ our ability to successfully develop product candidates, and complete related regulatory processes. In addition, our ability to ensure that our products, policies and practices adhere to the extensive national, state, and local regulations applicable to our industry is critical to our success, particularly as our operations and product opportunities continue to grow at a rapid pace. Finally, we believe that as our ongoing federal and state investigations and litigation proceedings have continually accumulated, these challenges in the aggregate have led to pressure on our business with respect to factors like reputational damage in the healthcare community and industry and significant legal costs and expenses. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must successfully address. In addition, our ability to ensure that our products, policies

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and practices adhere to the extensive national, state, and local regulations applicable to our industry is critical to our success. Finally, we believe that as our ongoing federal and state investigations and litigation proceedings have continued to accumulate, these challenges in the aggregate have led to significant legal costs and pressure on our business with respect to factors like reputational damage in the healthcare community and industry.

As management seeks to continue to provide insight into known material trends and uncertainties related to our net revenue and other factors affecting our performance, we note that the macro trend of the continuing and heightened publicity surrounding the national opioid epidemic continues to result in sensitivity by many health care professionals to prescribe opioids, pharmacies to dispense opioids, distributors to distribute opioids and third-party payors to cover opioid prescriptions, particularly those that are off-label. Third-party payers, such as insurance companies and regulatory and government agencies continue to scrutinize the indications and uses for which opioid prescriptions are being written and dispensed. In addition, we believe other high-profile initiatives, such as (i) President Trump’s declaration of the opioid crisis as a public health emergency, (ii) Congressional efforts to examine the causes of the opioid epidemic in public and (iii) states, cities and counties initiating multi-district litigation against manufacturers and distributors of opioids, have likely added to this sensitivity around opioid prescribing. Consequently, these current and potential future trends and events have affected and will likely continue to affect, the manner in which, and the situations when, opioids, including SUBSYS®, are being prescribed, dispensed and approved for coverage.

Our product, and the TIRF class in which it is classified, has experienced a significant downward trend for the past several years. Based upon industry data available to us, since 2015, TIRF class prescriptions have declined approximately 75% and it is difficult to predict if this trend will continue or whether the prescriptions for this class of product will stabilize. Our product, SUBSYS®, is declining at faster rate than the overall market and we have not been able to stabilize the trajectory of our revenue. We believe that the nature of the pricing on our branded products such as SUBSYS® (as well as SYNDROS®) has adversely affected our overall market share decline, and accordingly, our revenue generated from such products, especially since pharmaceutical product pricing has received significant governmental and media attention and we believe that migration to lower-cost generics has resulted from this focus.

In addition to the macro trends discussed above, our Company continues to have issues more specific to our business that have affected, and will likely continue to adversely affect, our net revenue and may be causing the decrease in overall market share for SUBSYS®. For instance, our Company has significant reputational issues primarily driven by ongoing state and federal investigations into our sales, marketing and other commercial practices, as well as criminal developments related thereto, and media reports covering such activity. We have had numerous former employees that have either been charged with or have pled guilty to criminal activity in connection with our sales, marketing, and other commercial practices. In addition, we had various health care professionals that previously interacted with our Company, either through our speaker bureau, as a prescriber, or both, that have either been charged with, or have pled guilty to or been convicted of, criminal activity in connection with our sales, marketing and other commercial practices. These developments, which may continue to worsen, have significantly and adversely affected our reputation within the healthcare industry and with some potential prescribers of our products.

As discussed above, we announced, on November 5, 2018, that we have commenced a process to review strategic alternatives for our portfolio of opioid-related assets, including SUBSYS®, as well as formulations of buprenorphine and the combination of buprenorphine/naloxone. Our decision to pursue this process is consistent with our objective to become a leader in pharmaceutical cannabinoids and novel drug delivery systems and to continue shifting our focus away from opioids in our product pipeline. We anticipate that our company has a number of clinical and regulatory milestones to achieve over the next few quarters, including the completion of the CBD and epinephrine studies and filing the naloxone NDA, that are consistent with our objectives.

In response to the continuing decline in revenue, our management team has continued to examine potential cost reduction initiatives that could more closely align operating expenses with our reduced revenue. On July 12, 2018, we eliminated 45 positions through headcount reduction and role consolidation. The headcount reduction included 30 employees, the majority of which were sales and marketing employees, and represented approximately 9% of our workforce at the time. On and around November 1, 2018, we eliminated an additional 48 positions through further headcount reduction and role consolidation. The headcount reduction included 36 employees, the majority of which were sales and marketing employees, and represented approximately 13% of our workforce at the time. These reductions in our sales and marketing force may adversely affect the sales performance of our products.

Management may in the future need to take additional cost reduction measures to the extent that our revenue does not stabilize or decisions that management makes in connection with this strategic alternative process materially affect our liquidity and our primary revenue generating asset, SUBSYS®. In addition, our company may need to seek liquidity from outside sources including debt and equity in order to continue to meet management’s operating plans and objectives and there can be no assurances that we will be able to do so at all or on terms that we believe are favorable to us.

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Approved Product Sales. Our operating results will depend significantly upon ~~our, and any of our third-party distributors’,~~ sales of approved products. During the nine months ended September 30, ~~2017,~~2018, substantially all of our net revenues were generated from the sale of our approved product, SUBSYS®. We generated minimal revenues from the sale of SYNDROS® during the nine months ended September 30, ~~2017.~~2018. Our results depend on prescription volume generally, which we believe is driven primarily by achievement of broad market acceptance and coverage by third-party payers, and ~~effectiveness~~effectiveness of the marketing and selling efforts with respect to SUBSYS® and SYNDROS®. Moreover, our gross margins improve on a unit-by-unit basis as we sell higher dosage strengths of our products. Importantly, the proportion of prescriptions written for repeat SUBSYS® patients was approximately ~~92%~~91% of prescriptions as of September 30, ~~2017.~~2018. Generally, repeat SUBSYS® patients receive significantly higher doses of SUBSYS® on average than first-time patients, as patients are titrated from a starter dose of SUBSYS® to their effective dose in accordance with the TIRF REMS protocol.

According to ~~QuintilesIMS,~~IQVIA, a worldwide integrated information and technology health care service provider, the total market for TIRF products for the three months ended September 30, ~~2017~~2018, was approximately ~~10,000~~6,000 prescriptions and we

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estimate SUBSYS® prescriptions were approximately ~~31%~~27% of the TIRF market in this period, compared to a total market for TIRF products of approximately ~~19,500~~10,000 prescriptions and approximately ~~43%~~31% SUBSYS® market share for the three months ended September 30, ~~2016.~~2017.

The continuing and heightened publicity surrounding the national opioid epidemic continues to result in sensitivity by some health care professionals to prescribe, and pharmacies to dispense, opioids. In part, this sensitivity by health care professionals and pharmacies is the result of third-party payers, such as insurance companies, and regulatory and government agencies increasingly scrutinizing the indications and uses for which health care professionals are prescribing, and pharmacies are dispensing, opioids. President Trump’s declaration of the opioid crisis as a public health emergency may add to this sensitivity. Moreover, ongoing state and federal investigations into our sales, marketing and other commercial practices and developments and media reports that may arise in connection with such investigations may negatively affect our relationships with health care professionals and pharmacies and their prescribing or dispensing habits. Consequently, these current and potential future events have affected and will likely continue to affect, the manner in which, and the situations when, SUBSYS® is being prescribed, dispensed and approved for coverage. While we continue to sell directly into wholesalers and retail pharmacies for our revenue, the direct pressures discussed above related to the retail demand-side components of our business will likely result in our inability to grow full-year ~~2017~~2018 SUBSYS® ~~revenue at similar levels when compared to 2016.~~revenue. In addition, for the same reasons, we anticipate that we will likely continue to experience future declines in SUBSYS® revenue for the remainder of ~~2017~~2018 when compared to prior quarters in ~~2016.~~2017.

~~Third Party~~Third-Party Payer Interactions and Government Programs Associated with Reimbursement. ~~Our interaction with~~Acceptance of our products by third-party payers is critical to the success of our business and financial condition. Our relationships with these third-party payers evolves on a regular basis and is often difficult to ~~predict.~~predict, but may be affected by the reputational issues discussed above. By way of example, from time to time, third-party payers modify which drugs they choose to reimburse. For instance, on or around August 1, 2014, ESI officially released its exclusion list of drugs which included SUBSYS®, effective January 1, 2015, in connection with its national preferred formulary. While SUBSYS® was removed from this list in 2017, other PBMs may take similar actions as a result of a number of factors, including migration to lower-cost generics, and these actions may have a material impact on our net revenue in the future. As we have in the past, we will continue working with PBMs to evaluate price increases and to communicate with managed care and health-system decision-makers to ensure a balanced approach, which takes into account the clinical performance and efficacy of our products.

In addition, from time to time, our business may be affected by evolving or new governmental programs in the reimbursement landscape. For instance, CMS, which is part of the HHS, has instituted The Recovery Audit Program. The program’s mission is to identify and correct improper Medicare payments through the efficient detection and collection of overpayments made on claims of health care services provided to Medicare beneficiaries, and the identification of underpayments to providers so that CMS can implement actions that will prevent future improper payments in all 50 states. We are aware that in January 2016, certain specialty pharmacies received written correspondence from Humana indicating that as a result of a CMS audit, Humana was initiating a deletion of certain PDEs related to SUBSYS®, which will result in a reversal and recovery of identified claims paid to certain pharmacies. This audit by CMS may have been part of The Recovery Audit Program or a similar initiative of CMS. Based upon information available to us, all of these claims involve Medicare Part D patients whose prescriptions were in connection with off-label indications and related to approximately $5.6 million in SUBSYS® claims in the aggregate. Upon our inquiry for more information about these matters, Humana notified us that these deletions of certain PDEs resulting from the CMS audit also involve TIRF medications other than SUBSYS® and Humana intends to resolve these matters with the pharmacies. We believe that some affected pharmacies may alter their processes and or protocols related to dispensing off-label TIRF prescriptions to Medicare patients as a result of these and similar events.

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Investments in Our Infrastructure and Growth. Our ability to increase our sales and to further penetrate our target market segments is dependent in part on our ability to invest in our infrastructure and in our sales and marketing efforts. In order to drive further growth, we may hire additional sales and marketing personnel and invest in marketing our products to our target physician prescriber base. ~~For example, as of September 30, 2017,~~While we ~~had 197 full-time~~would anticipate that any increase in sales force would result in increased product sales and ~~marketing personnel. This~~net revenue, this would also lead to corresponding increases in our operating ~~expenses, although we anticipate that these investments will result~~expenses. Conversely, a decrease in ~~increased~~sales force may lead to decreased product sales, net revenue, and ~~net revenue. In addition,~~operating expenses. As of September 30, 2018, we had 112 full-time sales and marketing personnel, as compared to 197 full-time sales and marketing personnel at September 30, 2017. We have constructed and expanded a second dronabinol manufacturing facility, which we anticipate will supply us with sufficient commercial quantities of dronabinol API for the commercialization of our proprietary dronabinol product candidates, if approved. This second facility has, and will ~~also~~continue to, increase our operating expenses.

Product Development and Related Regulatory Processes. Our operating results will also depend significantly on our research and development activities and related regulatory developments. Our research and development expenses were ~~$46.6~~$43.2 million and ~~$58.4~~ $46.6million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. As of September 30, ~~2017,~~2018, we had 53 full-time research and development personnel, as compared to 60 full-time research and development ~~personnel.~~personnel at September 30, 2017. We expect research and development expenses to ~~increase as we continue~~fluctuate with the timing of our planned preclinical studies and clinical trials for our product candidates, particularly our proprietary cannabinoid product candidates and sublingual spray product candidates. We do not expect to realize net revenues from all of these research and development initiatives in the near term and may never realize net revenues from these investments. Due to the risks

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inherent in conducting preclinical studies and clinical trials, the regulatory approval process and the costs of preparing, filing and prosecuting patent applications, our development completion dates and costs will vary significantly for each product candidate and are very difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial additional resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals or acceptable DEA classifications for our product candidates could cause our research and development expenditures to increase significantly and in turn, have a material adverse effect on our results of operations.

In addition, dronabinol and CBD are subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregate quota for the amount of dronabinol and CBD that may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of dronabinol and CBD that the DEA allows to be produced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. We are required to obtain an annual quota from the DEA in order to manufacture and produce dronabinol and CBD. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year and has substantial discretion in deciding whether or not to make such adjustments. For 2018, we were originally allocated what we believe is a sufficient quantity of dronabinol and CBD to meet our currently anticipated production and testing needs through 2018; however, due to a discrepancy in the interpretations of how to account for in-process CBD materials in connection with our quota limitations, we will likely need additional amounts of CBD for both 2018 (and future years) to implement our business plan and there is no certainty we will receive what we believe is the appropriate adjustments to our CBD quota. We are actively working with the DEA to resolve this matter; however, if we fail to resolve this matter and it is determined that we failed to stay within DEA quota guidelines, this could affect our clinical timelines and/or subject us to potential remedial actions by DEA including but not limited to fines, future restrictions and/or loss of registration.

Legal Expenses. As our ongoing federal and state investigations and litigation proceedings have continued to accumulate, these challenges have led to significant legal costs and expenses, which have had, and will continue to have, a material adverse effect on our financial condition and results of operations. It is difficult to predict such legal costs, and in many ways these costs are not within our control. For instance, consistent with the practice of many publicly-traded companies, we have entered into, and continue to enter into, indemnity agreements with our executive officers and certain members of our board of directors. These indemnity agreements broadly provide for us to advance expenses (including attorneys’ fees) incurred in connection with any legal proceeding, as well as indemnification for any and all expenses, actually and reasonably incurred, in connection with the investigation, defense, settlement or appeal of such a proceeding, in connection with matters related to their position. As has been previously disclosed, two of our former executive officers, who have indemnity agreements with us based upon their prior employment and membership on our board of directors, have been criminally charged. Our satisfaction of our obligations pursuant to these executives’ indemnity agreements, as well as the payment of legal fees for other former employees in connection with these legal proceedings, has resulted in significant expense. Moreover, our board of directors has been subject to securities class action and derivative cases which has resulted, and may in the future result, in significant and continuing legal costs and expenses related to separate legal counsel for individuals. The Company continues to analyze, and in some instances dispute the reasonableness of a portion of, the costs and expenses associated with the defense and representation of Dr. Kapoor. If such disputed amounts are subsequently determined not to be due and payable, we would recognize a reversal of these expenses in a future period. The reversal of these expenses could have a material impact on our unaudited condensed consolidated statements of operations and comprehensive loss. If it is subsequently

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determined that all of these costs are reasonable, and the company is forced to pay the remaining balance, this could have a material adverse impact on our cash position and liquidity.

Cost Savings Initiatives. As a result of the declining TIRF market, combined with the DOJ Investigation and other legal matters, we have implemented a number of cost savings initiatives. Some of these initiatives include prioritizing research and development projects, reducing discretionary spending, and renegotiating long-term commitment contracts. On July 12, 2018, we eliminated 45 positions through headcount reduction and role consolidation. The headcount reduction included 30 employees, the majority of which were sales and marketing employees, and represented approximately 9% of our workforce at the time. The affected employees received certain severance benefits, for which we incurred a one-time severance-related charge totaling approximately $0.3 million recorded within sales and marketing expenses during the nine months ended September 30, 2018. On and around November 1, 2018, we eliminated an additional 48 positions through further headcount reduction and role consolidation. The headcount reduction included 36 employees, the majority of which were sales and marketing employees, and represented approximately 13% of our workforce at the time. We may also incur other charges or cash expenditures not currently contemplated due to events that may occur as a result of, or associated with, the headcount reduction. We expect to continue to incur losses from operations, and we may take additional actions to reduce our immediate cash expenditures. Although management has been successful in renegotiating long-term contracts and reducing expenses, there can be no assurance that we will be successful or that any needed financing will be available in the future at terms acceptable to the Company.

Basis of Presentation

Net Revenue

We sell SUBSYS® and SYNDROS® in ~~packages of~~ various ~~sized single-dose units in dosage strengths of 100, 200, 400, 600, 800, 1,200 and 1,600 mcg~~dosing packages to wholesale pharmaceutical distributors and ~~speciality~~specialty retail pharmacies ~~collectively,~~(collectively, our ~~customers,~~customers), on a wholesale basis. Sales to our customers are subject to specified rights of return. We ~~record~~recognize revenue ~~for SUBSYS® at the time the customer receives the shipment. We sell SYNDROS® in multi-dose 30-mL bottles to wholesale pharmaceutical distributors and speciality retail pharmacies, collectively,~~when we transfer control of our ~~customers, on a wholesale basis. Sales~~products to our customers, ~~are subject~~as our contracts have a single performance obligation (delivery of our product to ~~specified rights~~their preferred location). Net revenue is measured as the amount of ~~return. We currently defer recognition of revenue on product shipments of SYNDROS®~~consideration we expect to our customers until the right of return no longer exists, which occurs at the earlier of the time SYNDROS® units are sold to healthcare facilities or dispensed through patient prescriptions, or expiration of the right of return. We estimate patient prescriptions dispensed using an analysis of third-party market research data. If this third-party data underestimates or overestimates actual patient prescriptions dispensedreceive in exchange for ~~a given period, adjustments to revenue may be necessary in future periods.~~transferring goods.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue consists primarily of materials, third-party manufacturing costs, freight in, direct and indirect personnel costs, and other overhead costs based on units dispensed through patient prescriptions. Also, included in cost of revenue are charges for reserves for excess, dated, or obsolete commercial inventories and production manufacturing variances.

Gross profit is net revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of net revenue.

Sales and Marketing Expenses

Our sales and marketing expenses consist primarily of salaries, commissions, benefits, travel, consulting fees, costs of obtaining prescription and market data, and market research studies related to SUBSYS® and SYNDROS®. ~~We also incurred expenses directly related to the launch of SYNDROS®.~~ As of September 30, ~~2017,~~2018, we had 112 full-time sales and marketing personnel as compared to 197 full-time sales and marketing ~~personnel.~~personnel at September 30, 2017. Because we use an incentive-based compensation model for our sales professionals, we expect our sales and marketing expenses to fluctuate from period to period based on changes in net revenue.

Research and Development Expenses

Research and development expenses consist of costs associated with our preclinical studies and clinical trials, and other expenses related to our drug development efforts. Our research and development expenses consist primarily of:

external research and development expenses incurred under agreements with third-party CROs, ~~and~~ investigative sites, ~~third-party~~ manufacturers and consultants;

employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our ~~preclinical and clinical~~ drug development activities; and

materials, facilities, equipment and laboratory supplies, depreciation, impairment and other allocated ~~expenses, equipment and laboratory supplies.~~expenses.

~~To date, our~~Our recent research and development efforts have been focused primarily on our ~~fentanyl,~~cannabidiol, naloxone, dronabinol, buprenorphine, and ~~cannabidiol~~epinephrine programs. As of September 30, ~~2017,~~2018, we had 53 full-time research and development personnel

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as compared to 60 full-time research and development ~~personnel.~~personnel at September 30, 2017. We expect research and development expenses to fluctuate ~~based on~~with the timing of our planned preclinical studies and clinical trials for our product candidates. We determine which research and development projects to pursue, as well as the level of funding available for each project, based on the scientific, ~~and~~ preclinical and clinical results of each product candidate, ~~and~~as well as the related regulatory ~~action.~~action and the risk adjusted economic benefit to the Company.

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The following table provides a breakdown of our research and development expenses during the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 (in millions):

	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2018		2017
Cannabidiol	$	10.4	$	12.5	$	15.8	$	10.4
Buprenorphine		6.8		8.9		0.5		6.8
Fentanyl		2.6		3.4		0.2		2.6
LEP-ETU and IL-13		0.2		2.3
Epinephrine						0.8		0.6
Naloxone		0.9		2.4		3.6		0.9
Dronabinol		2.2		3.7		3.8		2.2
Ondansetron		0.3		1.1
Buprenorphine/Naloxone		0.8		0.7		0.9		0.8
Sildenafil		0.2		0.5
Internal research and development costs		20.1		21.0		16.8		20.1
Other		2.1		1.9		0.8		2.2
Total research and development expenses	$	46.6	$	58.4	$	43.2	$	46.6

General and Administrative Expenses

Our general and administrative expenses consist primarily of of:

salaries and related costs for personnel in executive, finance, accounting, ~~legal,~~human resources, information technology and business ~~development~~development;

regulatory fees for commercialized products;

insurance premiums;

fees for investor relations service and internal support ~~functions. In addition, general and administrative expenses include~~ functions;

facility costs not otherwise included in research and development ~~expenses~~expenses; and

professional fees for ~~legal,~~ consulting and accounting services.

As of September 30, 2018 and 2017, we had 53 full-time general and administrative personnel. We expect general and administrative expense to ~~modestly increase as a result~~fluctuate with market changes.

Legal Expenses

Our legal expenses consist primarily of ~~expanding our operating activities and the costs we will incur operating as a public company. We expect these increases to include~~ salaries and related ~~expenses,~~costs for legal personnel and ~~consultant fees, regulatory fees as new products are commercialized, accounting fees, director fees, increased directors’ and officers’ insurance premiums,~~professional fees for ~~investor relations services,~~legal services. We expect legal expense to fluctuate due to timing of litigation and ~~enhanced business and accounting systems.~~legal defense activities. See “Factors Affecting Our Performance – Legal Expenses” for additional information.

Income Tax Expense (Benefit)

We account for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted. We also account for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation, and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on an income tax return.

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During the three months ended September 30, 2018, we identified an error related to the accounting for the uncertain income tax positions in 2017. We assessed the materiality of these errors on our prior annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108 and concluded that the errors were not material to our audited financial statements for the year ended December 31, 2017, the unaudited condensed consolidated financial statements for any of the quarterly periods within the year ended December 31, 2017, nor to the quarterly periods ended March 31, 2018 and June 30, 2018. However, the impact of these errors was material to the accompanying unaudited condensed consolidated financial statements. To correctly present uncertain income tax position liabilities, income tax expense (benefit), and net loss per share in the appropriate periods, management revised its previously issued consolidated balance sheet and statement of stockholders’ equity as of December 31, 2017, the consolidated statement of operations and comprehensive loss for the year ended December 31, 2017, the unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2017, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2017. See Note 1, Nature of Business and Basis of Presentation, of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

Significant Accounting ~~Polices~~Policies and Estimates

Significant changes to our accounting policies as a result of adopting ASC Topic 606 are discussed in Note 1 and Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements. Significant changes to our accounting policies as a result of adopting ASU 2018-07 are discussed in Note 1. There were no other changes in our significant accounting policies and estimates during the nine months ended September 30, ~~2017~~2018, from those set forth in ~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations -~~“Note 2, Significant Accounting ~~Policies and Estimates”~~Policies” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~ 2017.

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Results of Operations

Comparison of Three Months Ended September 30, ~~2017~~2018 to Three Months Ended September 30, ~~2016~~2017

The following table presents certain selected consolidated financial data for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, expressed as a percentage of net revenue:

							Three Months Ended
	Three Months Ended						September 30,
	September 30,						2018			2017
	2017			2016						(As Revised)
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		24.4			8.1			13.0			24.4
Gross profit		75.6			91.9			87.0			75.6
Operating expenses:
Sales and marketing		41.8			28.8			40.1			41.8
Research and development		63.7			28.6			78.8			63.7
General and administrative		51.2			30.6			48.5			36.9
Legal								87.3			14.4
Charges related to litigation award and settlements		491.9			—			0.2			491.9
Total operating expenses		648.6			88.0			254.9			648.7
Operating income (loss)		(573.0	)		3.9
Operating loss								(167.9	)		(573.1	)
Other income:
Interest income		1.7			0.5			2.6			1.7
Other income (expense), net		(0.3	)		—			—			(0.3	)
Total other income		1.4			0.5			2.6			1.4
Income (loss) before income taxes		(571.6	)		4.4
Loss before income taxes								(165.3	)		(571.7	)
Income tax expense (benefit)		(29.3	)		(0.7	)		0.9			(29.5	)
Net income (loss)		(542.3	)%		5.1	%
Net loss								(166.2	)%		(542.2	)%

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Net ~~Revenue.~~Revenue. Net revenue decreased ~~$27.1~~$12.4 million, or ~~46.9%~~40.4%, to $18.3 million for the three months ended September 30, 2018, compared to $30.7 million for the three months ended September 30, ~~2017, compared~~2017. The decrease in net revenue was primarily attributable to ~~$57.8 million~~a 49.4% decrease in SUBSYS® shipments to our customers for the three months ended September 30, 2016. The decrease in net revenue was attributable to a decrease in net revenue of SUBSYS®, which was the result of a 49.8% decrease in SUBSYS® shipments to pharmaceutical wholesalers and specialty pharmaceutical retailers for the three months ended September 30, 20172018 primarily due ~~primarily~~ to reduced demand for SUBSYS®, as compared to the three months ended September 30, ~~2016, combined~~2017, partially offset

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by a 7.3% increase in net sales price due to changes in mix of prescribed dosages and changes in provisions for wholesaler discounts, patient discounts, rebates, and returns, as well as price increases in August 2017 and January 2018. Provisions for patient discounts, wholesaler discounts, rebates, and returns were $1.1 million, $2.1 million, $4.2 million, and $1.8 million, respectively, for the three months ended September 30, 2018, compared to $1.9 million, $3.5 million, $7.2 million, and $5.6 million, respectively, for the three months ended September 30, 2017. The decrease in product sales allowances was primarily attributable to lower sales of SUBSYS® and a decrease in product returns during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. As described in “Factors Affecting Our Performance”, the continuing sensitivity by some health care professionals to prescribe, and pharmacies to dispense, opioids, scrutiny by third-party payers and governmental agencies, ongoing state and federal investigations, and media reports related thereto, will likely result in our inability to grow full-year SUBSYS® revenue for the remainder of 2018 when compared to 2017. In addition, for the same reasons, we anticipate that we will experience future declines in SUBSYS® revenue for the remainder of 2018 when compared to prior quarters in 2017.

Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue decreased $5.1 million to $2.4 million for the three months ended September 30, 2018, compared to $7.5 million for the three months ended September 30, 2017. The decrease in cost of revenue was primarily attributable tothe decrease in sales of SUBSYS® during the three months ended September 30, 2018.Gross profit decreased $7.2 million to $16.0 million for the three months ended September 30, 2018, compared to $23.2 million for the three months ended September 30, 2017, due primarily to the decrease in sales of SUBSYS®. Gross margin for the three months ended September 30, 2018 was approximately 87% compared to approximately 76% for the three months ended September 30, 2017. The increase in gross margin was primarily due to a decrease in product returns and excess and obsolete inventory reserves.

Sales and Marketing Expense. Sales and marketing expense decreased $5.4 million to $7.4 million for the three months ended September 30, 2018, compared to $12.8 million for the three months ended September 30, 2017. The decrease in sales and marketing expense was primarily due to lower sales of SUBSYS® and decreases in personnel costs resulting from the headcount reductions and role consolidations in July 2018 as a part of our cost savings initiatives.

Research and Development Expense. Research and development expense decreased $5.1million to $14.5million for the three months ended September 30, 2018, compared to $19.6 million for the three months ended September 30, 2017. The decrease in research and development expense was primarily due to timing of clinical and development expenses and decreases in personnel costs.

General and Administrative Expense. General and administrative expense decreased $2.4 million to $8.9 million for the three months ended September 30, 2018, compared to $11.3 million for three months ended September 30, 2017. The decrease in general and administrative expense was primarily due to a decrease in stock-based compensation costs.

Legal Expense. Legal expense increased $11.6 million to $16.0 million for the three months ended September 30, 2018, compared to $4.4 million for the three months ended September 30, 2017. The increase was due to increases in legal expense incurred in connection with various ongoing government investigations and prosecutions of our former employees, and other legal proceedings. See “Factors Affecting our Performance – Legal Expenses” for additional information.

Charges Related to Litigation Award and Settlements. There were no material charges related to litigation award and settlements for the three months ended September 30, 2018. Charges related to litigation award and settlements for the three months ended September 30, 2017 represent an accrual of $150.0 million in connection with the DOJ Investigation and interest expense of $0.8 million in connection with the settlement with Dr. Kottayil. See Note 7, Commitments and Contingencies, of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

Income Tax Expense (Benefit). Income tax expense was $0.2 million for the three months ended September 30, 2018, representing an effective tax rate of (0.5)%, as compared to a ~~2.5%~~benefit of $(9.0) million for the three months ended September 30, 2017, representing an effective tax rate of 5.2%. The change in the effective rate for the period ended September 30, 2018, compared with the same period in the previous year, was primarily due to the full valuation allowance in the three months ended September 30, 2018. As of September 30, 2018, we had approximately $76.0 million of federal NOLs, and $272.9 million of state NOLs.

We record valuation allowances to reduce the book value of our deferred tax assets to amounts that are estimated on a more likely than not basis to be realized. We established a full valuation allowance for deferred taxes during the period ended December 31, 2017, and maintain a full valuation allowance as of the current quarter. The establishment of a valuation

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allowance does not impact cash, nor does it preclude us from using our tax credits, loss carryforwards and other deferred tax assets in the future.

We had unrecognized tax benefits of approximately $8.0 million as of September 30, 2018, primarily associated with tax positions taken in prior years. No significant penalties and approximately $1.0 million of interest are included in income taxes and accounted for on the balance sheet related to unrecognized tax positions.

Comparison of Nine Months Ended September 30, 2018 to Nine Months Ended September 30, 2017

The following table presents certain selected consolidated financial data for the nine months ended September 30, 2018 and 2017, expressed as a percentage of net revenue:

	Nine Months Ended
	September 30,
	2018			2017
				(As Revised)
Net revenue		100.0	%		100.0	%
Cost of revenue		12.4			14.7
Gross profit		87.6			85.3
Operating expenses:
Sales and marketing		38.8			38.3
Research and development		65.8			42.7
General and administrative		44.6			29.1
Legal		57.0			14.7
Charges related to litigation award and settlements		1.2			142.2
Total operating expenses		207.4			267.0
Operating loss		(119.8	)		(181.7	)
Other income:
Interest income		2.2			1.3
Other income (expense), net		(0.7	)		—
Total other income		1.5			1.3
Loss before income taxes		(118.3	)		(180.4	)
Income tax expense (benefit)		0.7			(14.7	)
Net loss		(119.0	)%		(165.7	)%

Net Revenue. Net revenue decreased $43.5 million, or 39.8%, to $65.7 million for the nine months ended September 30, 2018, compared to $109.2 million for the nine months ended September 30, 2017. The decrease in net revenue was primarily attributable to a 43.0% decrease in SUBSYS® shipments to our customers for the nine months ended September 30, 2018 primarily due to reduced demand for SUBSYS®, as compared to the nine months ended September 30, 2017, and a 1.1% decrease in net sales price due to changes in mix of prescribed dosages and changes in provisions for wholesaler discounts, patient discounts, rebates, and returns, partially offset by price increases in ~~July 2016, January~~August 2017 and ~~August 2017.~~January 2018. Provisions for patient discounts, wholesaler discounts, rebates, and returns were ~~$1.9~~$3.9 million, ~~$3.5~~$7.7 million, ~~$7.2~~$16.6 million, and ~~$5.6~~$10.0 million, respectively, or ~~37.3% on a combined basis of gross revenue~~ for the ~~three~~nine months ended September 30, ~~2017,~~2018, compared to ~~$33.6~~$8.9 million, ~~$6.9~~$11.2 million, ~~$11.9~~$23.1 million, and ~~less than $0.1~~$6.6 million, respectively, ~~or 47.5% on a combined basis of gross revenue from the sale of SUBSYS®~~ for the ~~three~~nine months ended September 30, ~~2016.~~2017. The decrease in product sales allowances (other than for product returns) was primarily attributable to lower ~~volumes~~sales of ~~patient assistance~~SUBSYS® during the ~~three~~nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, ~~as compared to the three months ended September 30, 2016.~~partially offset by a $3.4 million increase in product returns. As described in “Factors Affecting Our ~~Performance – Approved Product Sales”~~Performance”, the continuing sensitivity by some health care professionals to prescribe, and pharmacies to dispense, opioids, scrutiny by ~~third party~~third-party payers and governmental agencies, ~~and~~ ongoing state and federal investigations, and media reports related thereto, will likely result in our inability to grow full-year SUBSYS® revenue for the remainder of ~~2017~~2018 when compared to ~~2016.~~2017. In addition, for the same reasons, we anticipate that we will experience future declines in SUBSYS® revenue for the remainder of ~~2017~~2018 when compared to prior quarters in ~~2016.~~

~~Cost of Revenue, Gross Profit and Gross Margin.~~ Cost of revenue increased $2.8 million to $7.5 million for the three months ended September 30, 2017 compared to $4.7 million for the three months ended September 30, 2016. The increase in cost of revenue was primarily attributable to an increase in the inventory obsolescence reserve of $3.3 million for the three months ended September 30, 2017 compared to $1.9 million for the three months ended September 30, 2016, partially offset by a decrease in sales of SUBSYS® during the three months ended September 30, 2017. Gross profit decreased $29.9 million to $23.2 million for the three months ended September 30, 2017 compared to $53.1 million for the three months ended September 30, 2016 due primarily to the decrease in sales of SUBSYS® and the increase in the inventory obsolescence reserve. ~~Gross margin for the three months ended September 30, 2017 was approximately 76% compared to approximately 92% for the three months ended September 30, 2016.~~

~~Sales and Marketing Expense.~~ Sales and marketing expense decreased $3.9 million to $12.8 million for the three months ended September 30, 2017 compared to $16.7 million for the three months ended September 30, 2016. The decrease in sales and marketing expense was due primarily to the decrease in sales of SUBSYS® and a decrease in sales and marketing personnel costs.

~~Research and Development Expense.~~ Research and development expense increased $3.1 million to $19.6 million for the three months ended September 30, 2017 compared to $16.5 million for the three months ended September 30, 2016. The increase in research and development expense was primarily due to increases in research and development personnel and clinical and development expenses.

~~General and Administrative Expense.~~ General and administrative expense decreased $2.0 million to $15.7 million for the three months ended September 30, 2017 compared to $17.7 million for the three months ended September 30, 2016. The decrease in general and administrative expense was due primarily to a $3.3 million decrease in stock-based compensation costs, partially offset by $0.5 million in penalties resulting from an employment tax audit and an increase in general and administrative personnel costs.

~~Charges Related to Litigation Award and Settlements.~~ Charges related to litigation award and settlements for the three months ended September 30, 2017 represent a $150.0 million accrual in connection with the DOJ Investigation and interest expense of $0.8 million in connection with the settlement with Dr. Kottayil. See Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information. There was no similar charge for the three months ended September 30, 2016.

~~Income Tax Expense (Benefit).~~ Provision for income taxes was $(9.0) million for the three months ended September 30, 2017, representing an effective tax benefit of 5.1%, as compared to $(0.4) million for the three months ended September 30, 2016, representing an effective tax benefit of 14.9%. The change in the effective rate for the period ended September 30, 2017, compared with the same period in the previous year was due principally to the current period loss and the favorable rate impact of the income tax credits. As discussed in Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements, the $150.0 million accrual related to the DOJ Investigation does not currently meet the more likely than not standard for tax deductibility; therefore, we have recognized no tax benefit for it in the financial statements. Due to the uncertainty around the

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ultimate outcome of this matter, it is possible that some or all of this accrual may meet the more likely than not standard in the future, at which time the benefit would be recognized. The impact of this accrual on our effective tax rate for the three months ended September 30, 2017 is 30.4%.

We had unrecognized tax benefits of approximately $10.1 million as of September 30, 2017, primarily associated with tax positions taken in prior years. No significant penalties and approximately $1.1 million of interest are included in income taxes and accounted for on the balance sheet related to unrecognized tax positions.

~~Comparison of Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016~~

~~The following table presents certain selected consolidated financial data for the nine months ended September 30, 2017 and 2016, expressed as a percentage of net revenue:~~

Nine Months Ended

September 30,

2017

2016

Net revenue

100.0
%

100.0
%
Cost of revenue

14.7

8.3

Gross profit

85.3

91.7

Operating expenses:

Sales and marketing

38.3

30.0

Research and development

42.7

31.1

General and administrative

43.8

24.7

Charges related to litigation award and settlements

142.2

—

Total operating expenses

267.0

85.8

Operating income (loss)

(181.7
)

5.9

Other income:

Interest income

1.3

0.4

Other income (expense), net

-

—

Total other income

1.3

0.4

Income (loss) before income taxes

(180.4
)

6.3

Income tax expense (benefit)

(14.6
)

0.3

Net income (loss)

(165.8
)%

6.0
%

~~Net Revenue~~. Net revenue decreased $78.2 million, or 41.7%, to $109.2 million for the nine months ended September 30, 2017, compared to $187.4 million for the nine months ended September 30, 2016. The decrease in net revenue was attributable to a decrease in net revenue of SUBSYS®, which was the result of a 40.2% decrease in SUBSYS® shipments to pharmaceutical wholesalers and specialty pharmaceutical retailers for the nine months ended September 30, 2017 due primarily to reduced demand for SUBSYS®, as compared to the nine months ended September 30, 2016, combined with a 1.7% decrease in net sales price due to changes in mix of prescribed dosages and changes in provisions for wholesaler discounts, patient discounts, rebates, and returns, partially offset by price increases in January 2017 and August 2017. Provisions for patient discounts, wholesaler discounts, rebates, and returns were $8.9 million, $11.2 million, $23.1 million, and $6.6 million, respectively, or 31.3% on a combined basis of gross revenue for the nine months ended September 30, 2017, compared to $73.7 million, $22.8 million, $29.5 million, and less than $0.1 million, respectively, or 40.2% on a combined basis of gross revenue from the sale of SUBSYS® for the nine months ended September 30, 2016. The decrease in product sales allowances was primarily attributable to lower volumes of patient assistance during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. As described in “Factors Affecting Our Performance – Approved Product Sales”, the continuing sensitivity by some health care professionals to prescribe, and pharmacies to dispense, opioids, scrutiny by third party payers and governmental agencies, and ongoing state and federal investigations, and media reports related thereto, will likely result in our inability to grow full-year SUBSYS® revenue for the remainder of 2017 when compared to 2016. In addition, for the same reasons, we anticipate that we will experience future declines in SUBSYS® revenue for the remainder of 2017 when compared to prior quarters in 2016.

Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue ~~increased $0.4~~decreased $7.8 million to $8.2 million for the nine months ended September 30, 2018, compared to $16.0 million for the nine months ended September 30, ~~2017 compared to $15.6 million for the nine months ended September 30, 2016.~~2017. The ~~increase~~decrease in cost of revenue was primarily attributable to an increase in the inventory obsolescence reserve of $6.3 million for the nine months ended September 30, 2017 compared to $3.2 million for the nine months ended September 30, 2016, partially offset by

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the decrease in sales of SUBSYS® during the nine months ended September 30, ~~2016.~~ 2018.Gross profit decreased ~~$78.6~~$35.7 million to $57.5 million for the nine months ended September 30, 2018, compared to $93.2 million for the nine months ended September 30, 2017, ~~compared to $171.8 million for the nine months ended September 30, 2016~~ due primarily to the decrease in sales of SUBSYS® ~~and an increase in the inventory obsolescence reserve~~. Gross margin for

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the nine months ended September 30, 2018 was 88%, compared to approximately 85% for the nine months ended September 30, ~~2017 was approximately 85% compared to approximately 92% for the nine months ended September 30, 2016.~~2017.

Sales and Marketing Expense. Sales and marketing expense decreased ~~$14.4~~$16.3 million to $25.5 million for the nine months ended September 30, 2018, compared to $41.8 million for the nine months ended September 30, ~~2017 compared to $56.2 million for the nine months ended September 30, 2016.~~2017. The decrease in sales and marketing expense was primarily due ~~primarily~~ to ~~the decrease in~~lower sales of SUBSYS® and decreases in personnel costs resulting from the headcount reductions and role consolidations in July 2018 as a ~~decrease in sales and marketing personnel costs.~~part of our cost savings initiatives.

Research and Development Expense. Research and development expense decreased ~~$11.8~~ $3.4million to $43.2million for the nine months ended September 30, 2018, compared to $46.6 million for the nine months ended September 30, ~~2017, compared to $58.4 million for the nine months ended September 30, 2016.~~2017. The decrease in research and development expense was primarily due to ~~decreases in research and development personnel and~~timing of clinical and development ~~expenses.~~expenses and decreases in personnel costs.

General and Administrative Expense. General and administrative expense ~~increased $1.6~~decreased $2.6 million to ~~$47.9~~$29.3 million for the nine months ended September 30, ~~2017~~2018, compared to ~~$46.3~~$31.9 million for the nine months ended September 30, ~~2016.~~2017. The ~~increase~~decrease in general and administrative expense was primarily due ~~primarily~~to a decrease in stock-based compensation costs.

Legal Expense. Legal expense increased $21.5 million to $37.5 million for the nine months ended September 30, 2018, compared to $16.0 million for the nine months ended September 30, 2017. The increase was due to increases in legal expense incurred in connection with various ongoing government ~~investigation~~investigations and ~~subpoena related matters, penalties resulting from an employment tax audit,~~prosecutions of our former employees, and ~~general and administrative personnel costs. The increase in~~other legal ~~and personnel costs were offset by a decrease in stock-based compensation costs.~~proceedings. See “Factors Affecting our Performance – Legal Expenses” for additional information.

Charges Related to Litigation Award and Settlements. Charges related to litigation award and settlements for the nine months ended September 30, 2018 were $0.8 million. Charges related to litigation award and settlements for the nine months ended September 30, 2017 represent aan accrual of $150.0 million ~~accrual~~ in connection with the DOJ Investigation, $4.5 million in connection with the investigation by the State of Illinois, and interest expense of $0.8 million in connection with the settlement with Dr. Kottayil. See Note 67, Commitments and Contingencies, of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information. ~~There~~

Income Tax Expense (Benefit). Income tax expense was ~~no similar charge~~$0.5 million for the nine months ended September 30, ~~2016.~~

~~Income Tax Expense (Benefit).~~ ~~Provision for income taxes was $(16.0)~~2018, representing an effective tax rate of (0.6)%, as compared to a benefit of $(16.1) million for the nine months ended September 30, 2017, representing an effective tax ~~benefit of 8.1%, as compared to $0.5 million for the nine months ended September 30, 2016, representing an effective tax expense~~ rate of ~~4.4%~~8.2%. The change in the effective rate for the period ended September 30, ~~2017,~~2018, compared with the same period in the previous year was primarily due ~~principally~~ to the ~~current period loss and favorable rate impact of the income tax credits. As discussed~~full valuation allowance in Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements, the $150.0 million accrual related to the DOJ Investigation does not currently meet the more likely than not standard for tax deductibility; therefore, we have recognized no tax benefit for it in the financial statements. Due to the uncertainty around the ultimate outcome of this matter, it is possible that some or all of this accrual may meet the more likely than not standard in the future, at which time the benefit would be recognized. The impact of this accrual on our effective tax rate for the nine months ended September 30, ~~2017 is 25.9~~%.2018. As of September 30, ~~2017,~~2018, we had approximately ~~$1.1~~$76.0 million of federal NOLs, and ~~$229.7~~$272.9 million of state ~~NOLs which~~NOLs.

We record valuation allowances to reduce the book value of our deferred tax assets to amounts that are ~~net of state NOLs that expire~~estimated on a more likely than not basis to be realized. We established a full valuation allowance for deferred taxes during the period ended December 31, 2017, and ~~are~~maintain a full valuation allowance as of the current quarter. The establishment of a valuation allowance does not ~~expected to be utilized.~~impact cash, nor does it preclude us from using our tax credits, loss carryforwards and other deferred tax assets in the future.

We had unrecognized tax benefits of approximately ~~$10.1~~$8.0 million as of September 30, ~~2017,~~2018, primarily associated with tax positions taken in prior years. No significant penalties and approximately ~~$1.1~~$1.0 million of interest are included in income taxes and accounted for on the balance sheet related to unrecognized tax positions.

Liquidity and Capital Resources

Sources of Liquidity

Current operations are financed principally with existing cash on hand, investments in marketable securities and cash flows from operations.

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Cash Flows

The following table shows a summary of our cash flows for the periods indicated (in millions):

	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2018			2017
Net cash provided by (used in) operating activities	$	(49.4	)	$	34.1
Net cash used in investing activities		(23.8	)		(9.7	)
Net cash provided by (used in) financing activities		4.4			(10.4	)
										(As Revised)
Net cash used in operating activities							$	(48.7	)	$	(49.4	)
Net cash provided by (used in) investing activities								35.7			(23.8	)
Net cash provided by financing activities								1.8			4.4
Net decrease in cash and cash equivalents		(68.8	)		14.0			(11.2	)		(68.8	)
Cash and cash equivalents, beginning of period		104.6			79.5			32.0			104.6
Cash and cash equivalents, end of period	$	35.8		$	93.5		$	20.8		$	35.8

Cash Flows ~~From~~from Operating Activities. Net cash used in operating activities was $48.7 million and $49.4 million for the nine months ended September 30, 2018 and 2017, ~~as compared to~~respectively. The net cash ~~provided by operating activities of $34.1 million for~~used during the nine months ended September 30, ~~2016.~~2018 primarily reflects the net loss for the period driven by a reduction in SUBSYS® net sales, adjusted in part by depreciation and amortization, stock-based compensation expense, and an impairment loss on property and equipment. The net cash used during the nine months ended September 30, 2017 primarily reflects the net loss for the period driven by a reduction in SUBSYS® net sales, adjusted in part by depreciation and amortization and stock-based compensation expense, and is also impacted by changes in working capital and payments in connection with the settlement of the investigations by the States of New Hampshire and Illinois, and the settlement with Dr. Kottayil.

Cash Flows ~~From~~from Investing Activities. Net cash ~~used in~~provided by investing activities was ~~$23.8 million and $9.7~~$35.7 million for the nine months ended September 30, ~~2017~~2018, and ~~2016, respectively,~~consists primarily of the net sale and maturity of investments, partially offset by purchases of property and equipment. Net cash used in investing activities of $23.8 million for the nine months ended September 30, 2017 consists primarily of the purchase of investments and property and equipment.

Cash Flows ~~From~~from Financing Activities. Net cash provided by financing activities was $1.8 million and $4.4 million for the nine months ended September 30, ~~2017, as compared to net cash used in financing activities of $10.4 million for~~2018 and 2017. During the nine months ended September 30, ~~2016.~~2018, we received proceeds from the exercise of stock options of $1.1 million and proceeds from shares issued under our employee stock purchase plan of $0.7 million. During the nine months ended September 30, 2017, we ~~recorded~~received proceeds from the exercise of stock options of $3.6 million and proceeds from shares issued under our employee stock purchase plan of $0.8 million. During the nine months ended September 30, 2016, we expended approximately $16.1 million to repurchase shares of our common stock, partially offset by excess tax benefits on stock options and awards of $0.7 million, proceeds from the exercise of stock options of $3.5 million and proceeds from shares issued under our employee stock purchase plan of $1.6 million.

We invoice pharmaceutical wholesalers and specialty pharmaceutical retailers upon ~~shipment~~delivery of SUBSYS® and SYNDROS®. To date, our customers have typically paid us 30 to 60 days from their applicable invoice dates.

Our cash flows for ~~2017~~2018 and beyond will depend on a variety of factors, including sales of SUBSYS® and SYNDROS®, regulatory approvals, investments in manufacturing and production, capital equipment, research and development, ~~and litigation settlements, and~~ general and administrative ~~expenses.~~expenses, strategic alternatives related to our opioid-related assets, and legal costs and expenses associated with litigation proceedings and settlements.

Funding Requirements

We ~~had cash, cash equivalents and marketable securities of $177.2 million and $236.7 million at September 30, 2017 and December 31, 2016, respectively, available to fund operations. We~~ believe that our ~~pre-existing~~ cash and cash equivalents and investments, together with interest thereon, will be sufficient to fund our ~~projected operating requirements~~operations for at least the next 12 months ~~based~~from the issuance date of these unaudited condensed consolidated financial statements. As our research and development activities mature and develop over the next several years, the Company will likely require substantial additional funds to continue such activities, depending upon events that are difficult to predict at this time. In addition, as the Company continues to contend with existing litigation (and resolve such proceedings as appropriate) and fund other legal expenses related to our ~~current operational plan, budget~~former employees, we may require additional funding. In this regard, management’s plans, in order to meet any additional operating cash flow requirements, include the pursuit of potential strategic alternatives related to our opioid-related assets, as well as financing activities such as public offerings and ~~spending assumptions.~~private placements of our common stock, preferred stock offerings, and issuances of debt and convertible debt instruments.

In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges and proceedings. Refer to Note 7, Commitments and Contingencies, to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The legal fees and expenses required to

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successfully defend ourselves and our former executives against pending and future litigation, criminal trials and investigations has, and will likely continue to, materially impact cash flows. In addition, the uncertainty of the timing of a final settlement with the DOJ (and the payments associated therewith), will likely impact our liquidity and may require us to sell investments before the recovery of their amortized cost basis or raise capital at potentially unfavorable terms or rates, particularly when aggregated with other potential state and multi-district litigation investigation settlements that may occur in the future, as well as potential future settlements related to ongoing litigation with insurance payers or other third parties.

Because of the numerous risks and uncertainties associated with the commercialization of SUBSYS®, SYNDROS® and the development of our other product candidates, outcomes of litigation or liabilities for indemnification, and the pursuit of strategic alternatives related to our opioid-related assets discussed elsewhere in this quarterly report, we are unable to predict the amounts of increased capital outlays and operating expenditures associated with our current anticipated product introduction, clinical trials and preclinical studies. The timing and amounts of our funding requirements will depend on numerous factors, including but not limited to:

the levels and mix of our product sales;

the rates of progress, costs and outcomes of our clinical trials and other product development programs, including product candidates that we may develop, in-license or acquire;

regulatory approvals, DEA classifications and other regulatory related events;

personnel, facilities, equipment and other similar requirements;

~~Table~~costs of ~~Contents~~operating as a public company;

•

~~costs of operating as a public company;~~

indemnification obligations for former executives;

the effects of competing technological and market developments;

costs associated with litigation and government ~~investigations;~~investigations, including any settlement amounts;

costs and judgements of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates;

our ability to divest, acquire, or in-license products and product candidates, technologies or businesses; and

terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish.

In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges and proceedings. Refer to Note 6 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our ability to successfully defend ourselves against pending and future litigation may impact cash flows. The uncertainty of the timing of a settlement with the DOJ, if any, could impact our liquidity and require us to sell investments before the recovery of their amortized cost basis, particularly when aggregated with other potential state investigation settlements that may occur in the future, as well as potential future settlements related to ongoing litigation with insurance payors or other third parties.

We cannot be sure that our existing cash and cash equivalents or investments will continue to be adequate to fund our operations, or that additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. If we raise additional funds by issuing equity or convertible securities, substantial dilution to existing stockholders will likely result. If we raise additional funds by incurring new debt obligations, the terms of the debt will likely require significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Contractual Obligations

In April ~~2017,~~2018, we, through our manufacturing subsidiary, entered into a further amendment to our ~~Aptar~~Renaissance manufacturing and supply ~~development and exclusive licensing~~ agreement. This amendment effectively eliminates any prior minimum purchase (and batch) obligations that had been set forth in the amendment dated ~~October 30, 2015,~~July 2016, and ~~beginning in 2019,~~ replaces them with a new annual ~~flat fee~~purchase commitment of ~~up to $500,000 if~~$3,000,000 for the ~~quantity of devices purchased in a~~ calendar year ~~is less than one million devices.~~ended December 31, 2018, and $2,000,000 for the calendar years ending December 31, 2019 and 2020. As a result, the cumulative effect related to this amendment reduces our aggregated purchase commitment with ~~Aptar~~Renaissance from ~~$20.8 million~~$12,000,000 to ~~$9.0 million~~$7,000,000 through December ~~21, 2022.~~31, 2020.

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Off-Balance Sheet Arrangements

During the nine months ended September 30, ~~2017,~~2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.

Recently Adopted Accounting Pronouncements

Refer to Note 1 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, ~~2017, $22.5~~2018, $13.6 million of our cash equivalent investments was in money market securities that are reflected as cash equivalents because all original maturities are within 90 days. Money market securities may consist of commercial paper, Federal agency discount notes and money market funds. We believe our interest rate risk with respect to these investments is limited due to the short-term duration of these arrangements and the yields earned, which approximate current interest rates.

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Our policy for our short-term and long-term investments is to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions. Our investment portfolio, consisting of fixed income securities that we hold on an available-for-sale basis, was approximately ~~$144.1~~$94.0 million as of September 30, ~~2017,~~2018, and ~~$133.1~~$136.4 million as of December 31, ~~2016.~~2017. These securities, like all fixed income instruments, are subject to interest rate risk and would likely decline in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize any material adverse impact in income or cash flows if market interest rates increase.

The following table provides information about our available-for-sale securities that are sensitive to changes in interest rates. We have aggregated our available-for-sale securities for presentation purposes since they are all very similar in nature (dollar amounts in millions):

Interest Rate Sensitivity

Principal Amount by Expected Maturity as of September 30, ~~2017~~2018

Remainder of

2017

2018

2019

2020

2021

Thereafter

Remainder of

2018

2019

2020

2021

2022

Thereafter

CD's and Available-for-sale securities

28.6

74.0

33.5

7.0

—

1.0

30.2

55.5

8.0

—

0.3

Weighted-average yield rate

21.84

71.65

35.95

9.08

—

0.62

0.73

1.39

0.22

—

0.01

We have not entered into derivative financial instruments. We do not have operations outside of the U.S. and accordingly, we have not been susceptible to significant risk from changes in foreign currencies.

During the normal course of business, we could be subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements and foreign currency fluctuations, as we discussed above, and collectability of accounts receivable. We continuously assess these risks and have established policies and procedures to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.

Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. ~~As disclosed in our Annual Report~~Based on Form 10-K for the year ended December 31, 2016, we did not have effective policies and procedures, or timely and effective reviews by personnel at an appropriate level, for accounting for the rebates component of our product sales allowances and the allowance for excess and obsolete inventory in accordance with U.S. GAAP. We did not have controls designed to validate the completeness and accuracy of underlying data used in the determination of these significant estimates. Overall the management in the finance and accounting group did not display adequate tone at the top with respect to judgment and rigor required to resolve the accounting for the rebates component of our product sales allowances. As a result,such evaluation, our Chief Executive Officer and Chief Financial Officer ~~identified material weaknesses in our internal control over financial reporting as of December 31, 2016, and~~ have concluded that, as of ~~the end of the period covered by this Quarterly Report on Form 10-Q,~~such date, our disclosure controls and procedures were ~~not~~ effective. ~~To address these material weaknesses, we have taken steps to address the underlying causes~~

Changes in Internal Control over Financial Reporting.” We believe that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q do fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented as a result of the following highly substantive validation steps taken: undertook a comprehensive review of all information available, assessed the completeness and accuracy of information utilized in the models and ensured the most current information was utilized in our analyses.

There was no change in our internal control over financial reporting ~~other than that disclosed below~~(as defined in Rules 13a-15(f) and 15d-15(f) under ~~“Remediation Efforts to Address Material Weaknesses in Internal Control over Financial Reporting,”~~the Exchange Act) that occurred during the quarterly period ended September 30, ~~2017,~~2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

~~Remediation Efforts to Address Material Weaknesses in Internal Control over Financial Reporting~~

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have, and continue to, identify and implement actions to improve our internal control over financial reporting and disclosure controls and procedures. With the oversight of our audit committee, we have begun taking steps and plan to take additional measures to remediate the underlying causes of identified the material weaknesses as set forth below:

The material costs associated with the above remedial actions and planned actions include ongoing compensation expenses for newly hired personnel and engagement fees for third party consultants to assist with the design and implementation of the new processes and controls. We do not anticipate that we will incur any additional material costs, other than ongoing compensation and consultant fees, to implement these remediation efforts.

While we believe we will remediate the material weaknesses prior to filing our Form 10-K for the period ending December 31, 2017, we can provide no assurance at this time that management will be able to report that our internal control over financial reporting is effective as of December 31, 2017. Prior to the complete remediation of these material weaknesses, there remains risk that the processes and procedures on which we currently rely, even as improved or adjusted, will fail to be sufficiently effective, which could result in material misstatement of our financial position or results of operations and require a restatement. Moreover, because of the inherent limitations in all control systems, no evaluation of controls—even where we conclude the controls operate effectively—can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our control systems, as we develop them, may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected and could be material to our financial statements.

The information contained in Note 67 to the Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference.

You should carefully consider the risks described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as well as other factors discussed herein under “Forward-Looking Statements” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described therein. ~~There~~Below we have ~~been no~~ provided material updates and changes ~~from the~~to our risk factors disclosed in Part I, Item 1A, in our Annual Report on Form 10-K.

Our principal stockholder has placed his shares in an independently controlled trust and depending upon the results of his criminal trial in 2019, his ownership stake may be subject to forfeiture or compelled divestiture.

Effective as of February 27, 2018, our company entered into a voting trust agreement with Dr. John N. Kapoor (“Kapoor”) (and certain of his beneficiaries) and an independent trustee. During the term of this voting trust, Kapoor (and certain of his beneficiaries) will not have control over voting decisions (except under limited circumstances) over the shares of the Company’s common stock beneficially owned by Kapoor and the beneficiaries. As of the effective date of the voting trust agreement, the shares subject to the trust represented approximately 59% of the outstanding shares of common stock of the Company. Until the voting trust agreement is terminated, the shares subject to the trust shall generally be voted on any matter by the trustee as directed by an independent voting committee (the “Voting Committee”) whose members meet certain independence standards with respect to Kapoor. If at any time the shares subject to the trust represent less than 40% of the outstanding shares of common stock of the Company, such shares shall be voted on any matter by the trustee in the same proportion that the shares of the Company’s common stock that are not subject to the trust are voted on such matter, which is commonly referred to as “mirror voting.”

By virtue of this trust, the Voting Committee can and will be able to effectively control the election of the members of our Board of Directors, our management and our affairs and prevent corporate transactions, such as mergers, consolidations or the sale of all or substantially all of our assets, that may be favorable from our standpoint or that of our other stockholders or cause a transaction that we or our other stockholders may view as unfavorable. In addition, pursuant to an exception included in the voting trust agreement, Kapoor retains a veto right which permits him to veto change of control transactions. Accordingly, this concentration of ownership may harm the market price of our common stock by:

delaying, deferring or preventing a change in control;

impeding a merger, consolidation, takeover or other business combination involving us;

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us; or

otherwise effectively limiting the rights of other stockholders because the voting committee of the trust has the ability to approve matters submitted to stockholders, including the election of directors, approval of significant transactions and the amendment of our certificate of incorporation.

The existence and nature of this voting trust could be viewed negatively by third parties and have a negative impact on our stock price. Moreover, if Kapoor’s ownership falls below 40% of the outstanding shares and the shares subject to the trust are now subject to “mirror voting,” it is possible that a group of shareholders representing a relatively small percentage of ownership in the company could work together to effectively control key decisions. Finally, in the event of Kapoor’s passing, we cannot assure you as to how these shares will be distributed and subsequently voted.

In addition, Kapoor is currently in the midst of a criminal trial as result of his indictment on or about October 26, 2017 by the U.S. Attorney’s Office for the District of Massachusetts, as superseded on September 11, 2018 by a second superseding indictment. This indictment provides that upon conviction, the government could seek forfeiture of Kapoor’s ownership interest in the Company. Furthermore, depending upon the outcome of the trial, mandatory or permissive exclusion under OIG rules and regulations may prevent Kapoor from participating in government programs which would result in a requirement by OIG for Kapoor to divest his ownership in the Company. Finally, depending upon the outcome of the trial, NASDAQ could require Kapoor to divest his ownership in order for the Company to continue to be listed on the exchange.

If we fail to finalize our agreement in principle with the DOJ or comply with the final terms contained in the final written agreements with the DOJ and OIG, our results of operations and financial condition will be materially and adversely affected. In addition, even if we finalize such documentation with the federal government, the additional costs and burden to comply with the terms of such documents and the risks that exist if we fail to comply with such documents, such as exclusion from federal health care programs, are significant and present significant risk to our company. Finally, we will also have additional financial payments and requirements associated with settlements with state authorities and offices of attorneys general which will result in significant costs and burdens for our company.

On August 8, 2018, we announced that we reached an agreement in principle with the DOJ to settle the DOJ’s civil and criminal investigation into inappropriate sales and commercial practices by some former company employees. This agreement in principle is subject to the negotiation of final settlement documents with the government which will include other material non-financial terms and conditions which will also be subject to negotiation including criminal pleas by our subsidiary related to the actions of our former employees.

Once executed, these agreements will require cooperation with the federal government’s prosecutions, enhancements to our compliance program, fulfillment of reporting and monitoring obligations, and management certifications, among other requirements. In addition, compliance with the terms of these agreements will impose additional costs and burdens on us, including in the form of employee training, third party reviews, compliance monitoring, reporting obligations and management attention. More importantly, if we fail to comply with the final agreement with DOJ and OIG, the DOJ or OIG may impose substantial monetary penalties or exclude us from federal healthcare programs, including Medicare, Medicaid or the VA, which would have a material adverse effect on our business, financial condition and results of operations. Furthermore, we will also have additional financial payments and requirements associated with settlements with state authorities and offices of state attorneys general which will result in significant costs and burdens for our company and we may be subject to new and unanticipated third-party claims and shareholder lawsuits in connection with all of these settlements with governmental authorities.

Annual DEA quotas on the amount of dronabinol and CBD allowed to be produced in the United States and our specific allocation of dronabinol and CBD by the DEA could significantly limit the production of SYNDROS® and our CBD product candidates for which we seek to obtain regulatory approval as well as significantly delay the clinical development of our CBD product candidates.

Dronabinol and CBD are subject to the DEA’s production and procurement quota scheme. The DEA establishes annually an aggregate quota for the amount of dronabinol and CBD that may be produced in the United States based on the DEA’s estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of dronabinol and CBD that the DEA allows to be produced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. We are required to obtain an annual quota from the DEA in order to manufacture and produce dronabinol and CBD. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year and has substantial discretion in deciding whether or not to make such adjustments. In the future, we may need additional amounts of dronabinol and CBD to implement our business plan and there is no certainty we will receive what we believe is the appropriate adjustments to our quotas. In addition, compliance with DEA quota requirements and restrictions can be complicated and, like any regulation, are subject to interpretations of the DEA’s rules and regulations that may not always be clear. Ultimately, if we fail to stay with DEA quota guidelines we could be subject to potential actions by DEA including but not limited to fines, future restrictions and/or loss of registration. See “Factors Affecting Our Performance - Product Development and Related Regulatory Processes” for additional information.

We face potential exposure on various fronts, including securities class actions and derivative cases, as well as product and other liability exposure, and our existing and future insurance coverage may be inadequate to cover any successful claims brought against us, or settlements which we choose to resolve, which could result in substantial liability that could materially and adversely affect our financial condition and results of operations.

All of the activities of our organization, including our board of directors’ oversight of management, the commercial use of our products, including any prior misdeeds of our former employees, and the clinical use of our product candidates expose us to the risk of liability claims and government sanctions and penalties. These risks are often varied and difficult to predict even in situations where we have continuing and protracted litigation since such litigation inherently unpredictable. For instance, our company and board of directors currently face several securities class action and derivative cases and our directors and officers (“D&O”) insurance carrier has disputed the policy period into which certain matters should be placed or, in some instances, whether their policy applies.

In addition, because SUBSYS® is an opioid, we face significant risk of product liability for this product even though this product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Our products and product candidates are designed to affect important bodily functions and processes, but side effects, manufacturing defects, misuse or abuse associated with SUBSYS®,SYNDROS®, or our product candidates could result in injury to a patient or even death. For example, because our sublingual spray technology is designed to be self-administered by patients, it is possible that a patient could fail to follow instructions and as a result apply a dose in a manner that results in injury or death. In addition, SUBSYS® is an opioid pain reliever that contains fentanyl, and SYNDROS® is a synthetic cannabinoid, which are both regulated “controlled substances” under the CSA and could result in harm to patients relating to its potential for abuse. In addition, a liability claim may be brought against us even if our products or product candidates merely appear to have caused an injury or because our commercial activities are alleged to have impaired a prescriber’s ability to independently act in the best interest of the patient. Product liability claims may be brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:

the inability to commercialize our products or, if approved, our product candidates;

decreased demand for our products or, if approved, product candidates;

impairment of our business reputation;

product recall or withdrawal from the market;

withdrawal of clinical trial participants;

costs of related litigation;

distraction of management’s attention from our primary business;

substantial monetary awards to patients or other claimants; or

Finally, we face other legal challenges for which we may not have any insurance coverage at all and which may entail settlement payments or litigation judgments that could individually, or in the aggregate, have a materially adverse effect on our financial condition and results of operations. For instance, we have disputes with insurance carriers regarding claims of insurance fraud by our former employees and we have investigations by federal and state governmental authorities for the alleged prior misconduct of our former employees.

With the assistance of a reputable and prominent insurance broker, we have attempted to maintain insurance coverage for our organization, which we believed to have appropriate aggregate coverage limits consistent with market practice at the time we obtained coverage. We also carry excess product liability insurance coverage that was determined to be appropriate. However, identifying appropriate coverage is difficult to manage and to predict and it is likely our historic and future insurance coverage will not be sufficient to cover all of our expenses or losses related to existing claims and cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and has provisions that limit that coverage under certain circumstances that may apply to our company. For instance, as a result of the risks associated with marketing opioids, particularly as a result of the opioid epidemic, many insurance companies are limiting or eliminating certain policy coverage of opioids. In addition, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to, among other things, the challenges we have had with respect to the commercial activities of former employees and the past legal actions that our company has endured or may endure in the future. If we determine that it is prudent to increase our product liability coverage, we may be unable to obtain this increased product liability insurance on commercially reasonable terms or at all and insurance providers are increasingly putting limitations around coverage of opioid products and may not be willing to issue coverage at all. Large judgments have been awarded in class action, multi-district, and individual lawsuits related to opioids and we anticipate that significant judgements or settlements will occur in the future. A large successful product liability claim, or a series of smaller successful claims, brought against us could cause our stock price to decline and, if judgments or settlements exceed our insurance coverage or result in significant dollar amounts, could decrease our cash and have a material adverse effect our business, results of operations and financial condition.

~~On November 5, 2015, we announced a stock repurchase program which authorizes up to $50 million in repurchases~~55

(1)	Previously filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, and incorporated herein by reference.

(2)	Previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 9, 2016, and incorporated herein by reference.

(3)	Previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 18, 2014, and incorporated herein by reference.

(4)	Previously filed as Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, and incorporated herein by reference.

(5)	Previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 18, 2014, and incorporated herein by reference.

(6)	Previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on October 11, 2018.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Delaware	51-0327886
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1333 S. Spectrum Blvd, Suite 100, Chandler, Arizona	85286
(Address of principal executive offices)	(Zip Code)

Large accelerated filer	☐		Accelerated filer	☑

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

Emerging growth company	☐

			PAGE NO.

PART I	FINANCIAL INFORMATION

	Item 1.	Unaudited Financial Statements:

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

		Condensed Consolidated Statements of Operations and Comprehensive ~~Income (Loss)~~Loss for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	2

		Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, ~~2017~~2018	3

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	4

		Notes to Unaudited Condensed Consolidated Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2735

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	3951

	Item 4.	Controls and Procedures	4051

PART II	OTHER INFORMATION		53

	Item 1.	Legal Proceedings	4353

	Item 1A.	Risk Factors	4353

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4355

	Item 3.	Defaults Upon Senior Securities	4356

	Item 4.	Mine Safety Disclosures	4356

	Item 5.	Other Information	4356

	Item 6.	Exhibits	4457

	SIGNATURES		45

			58

Abbreviated Term		Defined Term
AIDS		Acquired Immune Deficiency Syndrome
ANDA		Abbreviated New Drug Application
API		Active pharmaceutical ingredient
Aptar		AptarGroup, Inc.
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
ATRA		American Taxpayer Relief Act of 2012
AUC		Area under the curve
AVC		Assurance of Voluntary Compliance
BTCP		Breakthrough cancer pain
Catalent		Catalent Pharma Solutions, LLC
CBD		Synthetic cannabidiol
cGMP		Current Good Manufacturing Practices
CID		Civil Investigative Demand
CINV		Chemotherapy-induced nausea and vomiting
CMS		Centers for Medicare & Medicaid Services
CODM		Chief Operating Decision Maker
CRO		Contract Research Organization
CSA		Federal Controlled Substances Act of 1970
DEA		U.S. Drug Enforcement Administration
DOJ		U.S. Department of Justice
DOJ Investigations		HHS and HIPAA investigations, collectively
ERP		Enterprise Resource Planning
ESI		Express Scripts, Inc.
FASB		Financial Accounting Standards Board
FDA		U.S. Food and Drug Administration
FDCA		Federal Food, Drug, and Cosmetic Act
FSS		Federal Supply Schedule
GAO		Government Accountability Office
GCP		Good Clinical Practices
GI		Gastrointestinal
GLP		Good Laboratory Practices
HHS		U.S. Department of Health and Human Services
HIPAA		Health Insurance Portability and Accountability Act of 1996
HITECH		Health Information Technology for Economic and Clinical Health Act of 2009
IND		Investigational New Drug Application
Insys Pharma		Insys Pharma, Inc.
Insys Therapeutics		Insys Therapeutics, Inc.
IPO		Initial public offering
IPR		Inter Partes Review
IQVIA		IQVIA Holdings Inc. (formerly IMS Health, or “IMS”)
IRB		Institutional Review Board
MMA		Medicare Prescription Drug, Improvement, and Modernization Act of 2003
Mylan		Mylan Pharmaceuticals, Inc.
NDA		New Drug Application
NeoPharm		NeoPharm, Inc.

NSAID		Non-steroidal anti-inflammatory drug
OIG		HHS Office of Inspector General
ODOJ		Oregon Department of Justice
Orange Book		FDA's Approved Drug Products with Therapeutic Equivalence Evaluations
~~ODOJ~~		~~Oregon Department of Justice~~
PBM		Pharmacy Benefit Managers
PDEs		Prescription Drug Events
PDMA		Prescription Drug Marketing Act
PDUFA		Prescription Drug User Fee Act
PK		Pharmacokinetics
PPACA		Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010
QSR		FDA's Quality System Regulation
~~QuintilesIMS~~REMS		~~QuintilesIMS Holdings, Inc.~~Risk Evaluation and Mitigation Strategy
Renaissance		Renaissance Acquisition Holdings, LLC (formerly DPT Lakewood, LLC, or “DPT”)
~~REMS~~		~~Risk Evaluation and Mitigation Strategy~~
RLD		Reference listed drug
SEC		U.S. Securities and Exchange Commission
THC		Delta-9-tetrahydrocannabinol
TIRF		Transmucosal immediate-release fentanyl
TIRF REMS		Transmucosal immediate release fentanyl risk evaluation and mitigation strategy
USAO		United States Attorney Office
U.S. GAAP		Accounting Principles Generally Accepted in the United States of America
USPTO		United States Patent and Trademark Office
VC		Vomiting center

	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
	(unaudited)						(unaudited)			(As Revised)
Assets
Current Assets:
Cash and cash equivalents	$	35,755		$	104,642		$	20,845		$	31,999
Short-term investments		85,891			78,238			79,719			85,189
Accounts receivable, net of allowances of $3,485 and $6,144 at September 30, 2017 and December 31, 2016, respectively		23,249			20,654
Accounts receivable, net of allowances of $3,832 at December 31, 2017								12,717			21,513
Inventories, net		18,424			20,414			10,754			17,408
Prepaid expenses and other current assets		16,544			5,695			21,442			19,833
Total current assets		179,863			229,643			145,477			175,942
Property and equipment, net		53,931			43,172			53,180			55,174
Long-term investments		55,514			53,796			12,451			46,733
Deferred income tax assets, net		31,748			23,243
Other assets		2,030			6,282			6,383			1,231
Total assets	$	323,086		$	356,136		$	217,491		$	279,080
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses	$	31,226		$	27,359		$	46,047		$	30,438
Accrued compensation		5,376			8,833			5,941			8,808
Accrued sales allowances		20,855			28,955			9,301			16,290
Deferred revenue		940			-			—			1,109
Accrued litigation award and settlements		150,500			13,467			150,065			150,534
Total current liabilities		208,897			78,614			211,354			207,179
Uncertain income tax positions		8,172			7,933
Uncertain income tax positions (See Note 1)								5,999			5,692
Total liabilities		217,069			86,547			217,353			212,871
Commitments and contingencies (Note 6)
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Preferred stock (par value $0.01 per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively)		—			—
Common stock (par value $0.01 per share; 100,000,000 shares authorized; 73,090,955 and 71,923,550 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively)		731			719
Preferred stock (par value $0.001 per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively)								—			—
Common stock (par value $0.01 per share; 100,000,000 shares authorized; 74,265,661 and 73,612,052 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively)								743			736
Additional paid in capital		273,909			256,529			289,534			278,356
Unrealized loss on available-for-sale securities, net of tax		(238	)		(302	)		(349	)		(438	)
Notes receivable from stockholders		(21	)		(21	)		—			(21	)
Retained earnings (accumulated deficit)		(168,364	)		12,664
Accumulated deficit (See Note 1)								(289,790	)		(212,424	)
Total stockholders' equity		106,017			269,589			138			66,209
Total liabilities and stockholders' equity	$	323,086		$	356,136		$	217,491		$	279,080

	Common Stock					Additional Paid in			Unrealized Loss on Available- For-Sale			Notes Receivable From			Retained Earnings (Accumulated						Common Stock				Additional Paid in		Unrealized Loss on Available- For-Sale			Notes Receivable From			Accumulated
	Shares			Amount		Capital			Securities			Stockholders			Deficit)			Total			Shares		Amount		Capital		Securities			Stockholders			Deficit			Total
Balance at December 31, 2016		71,923,550		$	719	$	256,529		$	(302	)	$	(21	)	$	12,664		$	269,589
Balance at December 31, 2017 (As Revised)																						73,612,052	$	736	$	278,356	$	(438	)	$	(21	)	$	(212,424	)	$	66,209
Adoption of new accounting standard ASC 606																						—		—		—		—			—			848			848
Exercise of stock options		1,050,146			11		3,539			—			—			—			3,550			430,000		5		1,027		—			—			—			1,032
Issuance of common stock- employee stock purchase plan		107,802			1		835			—			—			—			836			149,282		2		734		—			—			—			736
Stock-based compensation- stock options and awards		—			—		13,048			—			—			—			13,048
Stock-based compensation- stock options, awards, and restricted stock units																						—		—		9,417		—			—			—			9,417
Unrealized gain on available-for -sale securities, net of tax		—			—		—			64			—			—			64			—		—		—		89			—			—			89
Vesting of restricted stock units		14,000			—		—			—			—			—			—			74,327		—		—		—			—			—			—
Shares withheld for future payment of employees' withholding tax liability		(4,543	)		—		(42	)		—			—			—			(42	)
Write-off of notes receivable from stockholders																						—		—		—		—			21			—			21
Net loss		—			—		—			—			—			(181,028	)		(181,028	)		—		—		—		—			—			(78,214	)		(78,214	)
Balance at September 30, 2017		73,090,955		$	731	$	273,909		$	(238	)	$	(21	)	$	(168,364	)	$	106,017
Balance at September 30, 2018																						74,265,661	$	743	$	289,534	$	(349	)	$	—		$	(289,790	)	$	138

	As of December 31, 2017
	As previously reported			Adjustments			As Revised
Consolidated Balance Sheet:
Uncertain income tax positions	$	8,619		$	(2,927	)	$	5,692
Total liabilities		215,798			(2,927	)		212,871
Accumulated deficit		(215,351	)		2,927			(212,424	)
Total stockholders' equity		63,282			2,927			66,209

	Year Ended
	December 31, 2017
	As previously reported			Adjustments			As Revised
Consolidated Statement of Operations and Comprehensive Loss:
Income tax expense	$	10,820		$	(1,180	)	$	9,640
Net loss		(228,015	)		1,180			(226,835	)
Total comprehensive loss		(228,151	)		1,180			(226,971	)
Net loss per common share:
Basic	$	(3.16	)	$	0.04		$	(3.12	)
Diluted	$	(3.16	)	$	0.04		$	(3.12	)
Weighted average common shares outstanding
Basic		72,259,063			377,717			72,636,780
Diluted		72,259,063			377,717			72,636,780

	Three Months Ended									Nine Months Ended
	September 30, 2017									September 30, 2017
	As previously reported			Adjustments			As Revised			As previously reported			Adjustments			As Revised
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited):
Income tax benefit	$	(8,996	)	$	(40	)	$	(9,036	)	$	(15,976	)	$	(120	)	$	(16,096	)
Net loss		(166,320	)		40			(166,280	)		(181,028	)		120			(180,908	)
Total comprehensive loss		(166,307	)		40			(166,267	)		(180,964	)		120			(180,844	)
Net loss per common share:
Basic	$	(2.30	)	$	0.02		$	(2.28	)	$	(2.51	)	$	0.01		$	(2.50	)
Diluted	$	(2.30	)	$	0.02		$	(2.28	)	$	(2.51	)	$	0.01		$	(2.50	)
Weighted average common shares outstanding
Basic		72,285,146			525,681			72,810,827			72,133,417			233,201			72,366,618
Diluted		72,285,146			525,681			72,810,827			72,133,417			233,201			72,366,618

	Balance at December 31, 2017			Adjustments due to adoption of ASC Topic 606			Balance at January 1, 2018
	(As Revised)
Condensed Consolidated Balance Sheet:
Inventories, net		17,408			(59	)		17,349
Accrued sales allowances		16,290			320			16,610
Deferred revenue		1,109			(1,109	)		—
Accumulated deficit		(212,424	)		848			(211,576	)

	Three Months Ended								Nine Months Ended
	September 30, 2018								September 30, 2018
	Balances without Adopting ASC Topic 606			Impact of Adopting ASC Topic 606		As Reported			Balances without Adopting ASC Topic 606			Impact of Adopting ASC Topic 606	As Reported
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited):
Net revenue	$	18,198		$	148	$	18,346		$	65,376		347	$	65,723
Cost of revenue		2,339			40		2,379			8,125		54		8,179
Gross profit		15,859			108		15,967			57,251		293		57,544
Operating loss		(30,927	)		108		(30,819	)		(79,050	)	293		(78,757	)
Loss before income taxes		(30,444	)		108		(30,336	)		(78,052	)	293		(77,759	)
Net loss		(30,602	)		108		(30,494	)		(78,507	)	293		(78,214	)

	As of September 30, 2018
	Balances without Adopting ASC Topic 606			Impact of Adopting ASC Topic 606			As Reported
Condensed Consolidated Balance Sheet (Unaudited):
Inventories, net	$	10,642			112		$	10,754
Total current assets		145,365			112			145,477
Total assets		217,379			112			217,491
Accrued sales allowances		9,017			284			9,301
Deferred revenue		1,740			(1,740	)		—
Total liabilities		218,809			(1,456	)		217,353
Accumulated deficit		(290,083	)		293			(289,790	)
Total stockholders' (deficit) equity		(155	)		293			138

	September 30, 2017				December 31, 2016				As of September 30, 2018				As of December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Marketable securities:
Due in one year or less	$	89,221	$	89,166	$	80,092	$	80,027	$	81,615	$	81,417	$	90,071	$	89,937
Due after one year through 5 years		54,448		54,265		53,540		53,303		12,602		12,451		46,788		46,484
Due after 5 years through 10 years		—		—		—		—		—		—		—		—
Due after 10 years		970		970		—		—		300		300		—		—
	$	144,639	$	144,401	$	133,632	$	133,330	$	94,517	$	94,168	$	136,859	$	136,421

	Fair Value Measurement at Reporting Date
	Total		Quoted Prices in active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Recurring fair value measurements
Marketable securities:
Certificates of deposit	$	11,823	$	—	$	11,823	$	—
Commercial paper		12,936		—		12,936		—
Corporate securities		41,723		—		41,205		518
Federal agency securities		26,019		—		26,019		—
Municipal securities		1,667		—		1,667		—
Total recurring fair value measurements	$	94,168	$	—	$	93,650	$	518

Nonrecurring fair value measurements
Property and equipment (see Note 6)		—		—		—		—	$	(1,487	)
Total nonrecurring fair value measurements	$	—	$	—	$	—	$	—	$	(1,487	)

	Fair Value Measurement at Reporting Date
	Total		Quoted Prices in active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities:
Certificates of deposit	$	26,114	$	—	$	26,114	$	—
Commercial paper		1,485		—		1,485		—
Corporate securities		39,427		—		38,927		500
Federal agency securities		30,572		—		30,572		—
Municipal securities		35,732		—		35,732		—
Total assets measured at fair value	$	133,330	$	—	$	132,830	$	500

	September 30,		December 31,		As of		As of
	2017		2016		September 30, 2018		December 31, 2017
Finished goods	$	3,585	$	8,408	$	2,407	$	4,709
Work-in-process		7,610		6,183		5,416		5,752
Raw materials and supplies		7,229		5,823		2,931		6,947
Total inventories		18,424		20,414		10,754		17,408
Plus: non-current raw materials and supplies and finished goods		1,999		6,257
Plus: non-current raw materials and finished goods						5,287		826
	$	20,423	$	26,671	$	16,041	$	18,234

Years ending December 31,
Remainder of 2017	$	5,500
2018		5,500
Remainder of 2018			$	1,625
2019		6,000		4,000
2020		6,000		4,000
2021		2,000		2,000
2022				—
Thereafter		—		—
Total	$	25,000	$	11,625

						Weighted									Weighted
				Weighted		Average		Aggregate					Weighted		Average	Aggregate
				Average		Remaining		Intrinsic					Average		Remaining	Intrinsic
	Number of			Exercise		Contractual		Value		Number of			Exercise		Contractual	Value
	Shares			Price		Term (in years)		(in millions)		Shares			Price		Term (in years)	(in millions)
Vested and exercisable as of December 31, 2016		4,474,906		$	9.05
Outstanding as of December 31, 2016		7,300,873		$	12.36
Vested and exercisable as of December 31, 2017											3,499,957		$	11.43
Outstanding as of December 31, 2017											6,332,415		$	12.10
Granted		2,145,150		$	11.84						1,353,700		$	7.83
Cancelled		(1,254,346	)	$	17.90						(832,097	)	$	13.76
Exercised											(430,000	)	$	2.46
Expired		(9,834	)	$	20.13						(4,912	)	$	8.54
Exercised		(1,050,146	)	$	3.38
Outstanding as of September 30, 2017		7,131,697		$	12.55		7.3	$	11.9
Vested and exercisable as of September 30, 2017		4,284,780		$	11.29		6.3	$	11.9
Outstanding as of September 30, 2018											6,419,106		$	11.63	7.3	11.7
Vested and exercisable as of September 30, 2018											3,588,358		$	12.39	6.2		8.0

	Net Revenue by Product Line								Net Revenue by Product Line
	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
SUBSYS®	$	29,986	$	57,773	$	108,524	$	187,415	$	17,370	$	29,986	$	63,114	$	108,524
SYNDROS®		684		—		684		—		976		684		2,609		684
Total net revenue	$	30,670	$	57,773	$	109,208	$	187,415	$	18,346	$	30,670	$	65,723	$	109,208

	Percent of Revenue by Route to Market												Percent of Revenue by Route to Market
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Pharmaceutical wholesalers		63	%		66	%		62	%		69	%		64	%		63	%		61	%		62	%
Specialty pharmaceutical retailers		37	%		34	%		38	%		31	%		36	%		37	%		39	%		38	%
		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%

Exhibit Number		Description of Document

3.1		Amended and Restated Certificate of Incorporation of Insys Therapeutics, Inc. (1)

3.2		Amended and Restated Bylaws of Insys Therapeutics, Inc. (2)

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock (3)

4.1		Form of Common Stock Certificate of Registrant (4)

4.2		Rights Agreement, dated August 15, 2014 between Insys Therapeutics, Inc. and Computershare Trust Company, N.A. (5)

~~10.1~~10.1+		~~Executive~~ Employment Agreement dated ~~as of April 17, 2017, by~~October 10, 2018 for Mark E. Nance, Chief Legal Officer and ~~between the Registrant and Saeed Motahari (filed herewith)~~General Counsel (6)

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)

32		Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	INSYS THERAPEUTICS, INC.

Dated: November ~~3, 2017~~9, 2018	By:	/s/ Saeed Motahari
		Saeed Motahari
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Andrew G. Long
		Andrew G. Long
		Chief Financial Officer
		(Principal Financial and Accounting Officer)