insy-10q_20190331.htm

10-Q 1 insy-10q_20190331.htm 10-Q insy-10q_20190331.htm

FYI

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

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

For the transition period from __________________ to _________________

Commission file number: 001-35902

Insys Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

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)

(480) 500-3127

(Registrant’s telephone number, including area code)

N/A

(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 every Interactive Date File required to be submitted 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 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.

Large accelerated filer	☐	Accelerated filer	☑

Non-accelerated filer	☐	Smaller reporting company	☑

Emerging growth company	☐

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 ☑

Title Of Each Class		Trading Symbol	Name Of Each Exchange On Which Registered
Common Stock, $0.01 Par Value Per Share		INSY	The Nasdaq Stock Market LLC

As of May 6, 2019, the registrant had 74,569,163 shares of Common Stock ($0.01 par value) outstanding.

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INSYS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

			PAGE NO.

PART I	FINANCIAL INFORMATION		1

	Item 1.	Unaudited Financial Statements:	1

		Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	1

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018	2

		Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2019 and 2018	3

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	4

		Notes to Unaudited Condensed Consolidated Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	42

	Item 4.	Controls and Procedures	43

PART II	OTHER INFORMATION		44

	Item 1.	Legal Proceedings	44

	Item 1A.	Risk Factors	44

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

	Item 3.	Defaults Upon Senior Securities	45

	Item 4.	Mine Safety Disclosures	45

	Item 5.	Other Information	45

	Item 6.	Exhibits	46

	SIGNATURES		47

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FORM 10-Q

GLOSSARY OF TERMS

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.

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
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
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
IQVIA		IQVIA Holdings Inc. (formerly IMS Health, or “IMS”)
IRB		Institutional Review Board
MMA		Medicare Prescription Drug, Improvement, and Modernization Act of 2003
NDA		New Drug Application
NOL		Net operating loss
NRV		Net Realizable Value
NSAID		Non-steroidal anti-inflammatory drug
OIG		HHS Office of Inspector General
ODOJ		Oregon Department of Justice

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Orange Book		FDA's Approved Drug Products with Therapeutic Equivalence Evaluations
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
REMS		Risk Evaluation and Mitigation Strategy
Renaissance		Renaissance Acquisition Holdings, LLC (formerly DPT Lakewood, LLC, or “DPT”)
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

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PART I: FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	March 31,			December 31,
	2019			2018
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	36,513		$	31,552
Short-term investments		47,380			64,126
Accounts receivable, net		6,087			12,610
Inventories, net		7,246			8,608
Prepaid expenses and other current assets		8,501			9,396
Total current assets		105,727			126,292
Property and equipment, net		47,810			52,086
Operating lease right-of-use assets		11,036			—
Long-term investments		3,726			8,446
Other assets		4,301			5,703
Total assets	$	172,600		$	192,527
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable and accrued expenses (including accrued legal expenses of $56,843 and $32,625 at March 31, 2019 and December 31, 2018, respectively	$	67,095		$	50,778
Accrued compensation		2,640			6,437
Accrued sales allowances		7,157			8,162
Current portion of operating lease liabilities		1,839			—
Current portion of uncertain income tax positions		1,219			—
Accrued litigation award and settlements		115,265			41,402
Total current liabilities		195,215			106,779
Operating lease liabilities		12,163			—
Noncurrent accrued litigation awards and settlements		125,000			125,000
Uncertain income tax positions		3,861			3,767
Other noncurrent liabilities		85			81
Total liabilities		336,324			235,627
Commitments and Contingencies (Note 8)
Stockholders' Deficit:
Preferred stock (par value $0.001 per share; 10,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively)		—			—
Common stock (par value $0.01 per share; 100,000,000 shares authorized; 74,513,286 and 74,381,303 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively)		745			744
Additional paid in capital		295,634			292,508
Unrealized loss on available-for-sale securities, net of tax		(176	)		(269	)
Accumulated deficit		(459,927	)		(336,083	)
Total stockholders' deficit		(163,724	)		(43,100	)
Total liabilities and stockholders' deficit	$	172,600		$	192,527

See accompanying notes to unaudited condensed consolidated financial statements.

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INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

	Three Months Ended
	March 31,
	2019			2018
Net revenue	$	7,630		$	23,911
Cost of revenue		4,575			2,204
Gross profit		3,055			21,707
Operating expenses:
Sales and marketing		4,119			9,051
Research and development		10,523			12,260
General and administrative		10,986			9,552
Legal		25,677			10,337
Charges related to litigation award and settlements		73,863			740
Total operating expenses		125,168			41,940
Operating loss		(122,113	)		(20,233	)
Other income (expense):
Interest income		423			503
Other expense, net		(908	)		(469	)
Total other income (expense)		(485	)		34
Loss before income taxes		(122,598	)		(20,199	)
Income tax expense		1,246			171
Net loss		(123,844	)		(20,370	)
Unrealized gain (loss) on available-for-sale securities, net of tax of $27 and $0		93			(112	)
Total comprehensive loss	$	(123,751	)	$	(20,482	)
Net loss per common share:
Basic	$	(1.66	)	$	(0.28	)
Diluted	$	(1.66	)	$	(0.28	)
Weighted average common shares outstanding
Basic		74,426,030			73,745,202
Diluted		74,426,030			73,745,202

See accompanying notes to unaudited condensed consolidated financial statements.

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INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(In thousands, except share data)

(unaudited)

	Common Stock				Additional Paid in			Unrealized Gain (Loss) on Available- For-Sale			Accumulated
	Shares		Amount		Capital			Securities			Deficit			Total
Balance at December 31, 2018		74,381,303	$	744	$	292,508		$	(269	)	$	(336,083	)	$	(43,100	)
Exercise of stock options		4,537		—		18			—			—			18
Stock-based compensation- stock options, awards, and restricted stock units		—		—		3,109			—			—			3,109
Unrealized gain on available-for -sale securities, net of tax		—		—		—			93			—			93
Vesting of restricted stock units		127,446		1		(1	)		—			—			—
Net loss		—		—		—			—			(123,844	)		(123,844	)
Balance at March 31, 2019		74,513,286	$	745	$	295,634		$	(176	)	$	(459,927	)	$	(163,724	)

	Common Stock				Additional Paid in		Unrealized Loss on Available- For-Sale			Notes Receivable From			Accumulated
	Shares		Amount		Capital		Securities			Shareholders			Deficit			Total
Balance at December 31, 2017		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		146,859		2		522		—						—			524
Stock-based compensation- stock options, awards, and restricted stock units		—		—		3,170		—			—			—			3,170
Unrealized loss on available-for -sale securities, net of tax		—		—		—		(112	)		—			—			(112	)
Vesting of restricted stock units		49,910		—		—		—			—			—			—
Write-off of notes receivable from stockholders		—		—		—		—			21			—			21
Net loss		—		—		—		—			—			(20,370	)		(20,370	)
Balance at March 31, 2018		73,808,821	$	738	$	282,048	$	(550	)	$	—		$	(231,946	)	$	50,290

See accompanying notes to unaudited condensed consolidated financial statements.

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INSYS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(123,844	)	$	(20,370	)
Adjustments to reconcile net loss to net cash used in operating activities:
Inventory obsolescence reserve		2,831			528
Depreciation and amortization		1,961			1,938
Stock-based compensation		3,109			3,170
Loss on disposal of property and equipment		851			108
Impairment on property and equipment		129			—
Write-off of notes receivable and other assets due from stockholders		—			26
Non-cash operating lease expense		(34	)		—
Amortization of investment discount		(58	)		93
Changes in operating assets and liabilities:
Accounts receivable, net		6,523			6,002
Inventories		195			1,035
Prepaid expenses and other current assets		1,633			(361	)
Accounts payable, accrued expenses and other current and noncurrent liabilities		15,968			(6,535	)
Accrued sales allowances		(1,005	)		(3,777	)
Accrued litigation award and settlements		75,082			740
Net cash used in operating activities		(16,659	)		(17,403	)
Cash flows from investing activities:
Purchases of investments		(6,005	)		(25,394	)
Proceeds from sales of investments		—			6,880
Proceeds from maturities of investments		27,622			22,703
Purchases of property and equipment		(15	)		(760	)
Net cash provided by investing activities		21,602			3,429
Cash flows from financing activities:
Proceeds from exercise of stock options		18			524
Net cash provided by financing activities		18			524
Change in cash and cash equivalents		4,961			(13,450	)
Cash and cash equivalents, beginning of period		31,552			31,999
Cash and cash equivalents, end of period	$	36,513		$	18,549
Supplemental cash flow disclosures:
Cash paid (refunded) for income taxes, net	$	(66	)	$	43
Non-cash capital expenditures	$	9		$	889

See accompanying notes to unaudited condensed consolidated financial statements.

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INSYS THERAPEUTICS, INC.

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 specialty pharmaceutical company that develops and commercializes innovative drugs and novel drug delivery systems of therapeutic molecules that improve patients’ quality of life. As of March 31, 2019, we have two marketed products: SUBSYS®, a proprietary sublingual fentanyl spray indicated for the management of BTCP patients 18 years of age and older who are already receiving and are tolerant to around-the-clock opioid therapy for their underlying persistent cancer pain; and SYNDROS®, a proprietary, orally administered liquid formulation of dronabinol for the treatment of 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 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. Certain recurring seasonal factors relating to the commencement of a new calendar year may have an adverse effect on net revenue in the first quarter. 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, 2018, included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2019, 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition (which are affected by prescriptions dispensed, wholesaler discounts, patient discount programs, rebates, returns, and chargebacks), inventories, legal liabilities and settlements, stock-based compensation expense, income taxes, 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 could materially differ from these estimates.

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

Going Concern Uncertainty

ASC Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40), requires management to assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. Under ASC 205-40, management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued.

As of March 31, 2019, the Company had an accumulated deficit of $459.9 million, negative cash flows of $16.7 million from operating activities for the three months ended March 31, 2019, and significant ongoing legal expenses.

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reasonable estimated loss. Furthermore, we are uncertain if we will be able to complete a final settlement with the DOJ because of the Company’s inability to fulfill demands made by the DOJ, including the execution of a security agreement relating to the assets of the Company to collateralize payments under the settlement. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of these unaudited condensed consolidated financial statements.

Management’s plans, in order to meet our operating cash flow requirements, include the pursuit of strategic alternatives related to the sale or licensing of the Company’s assets. On November 5, 2018, we announced that we 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. The Company has engaged Lazard Freres & Co. LLC to advise the Company on capital planning and the evaluation of strategic alternatives.

There are no assurances that the Company will be successful in implementing a strategic plan for the sale or licensing of its assets in order to address its impending liquidity constraints. If the Company cannot successfully implement its strategic plan for the sale or licensing of its assets, and/or reach an agreement with the DOJ, its liquidity, financial condition and business prospects will be materially and adversely affected. Accordingly, it may be necessary for the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring. Our Board of Directors has not made any decisions related to any strategic alternatives at this time.

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, we adopted the requirements of ASU No. 2016-02, “Leases: (Topic 842),” and all related amendments (“new lease standard”). The core principle of the new lease standard 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. We initially applied the new lease standard at the adoption date of January 1, 2019, with no cumulative effect adjustment to retained earnings, and elected all of the practical expedients, with the exception of hindsight to determine the lease term, and combining lease and non-lease components. We have elected not to apply the recognition and measurement requirements of the new lease standard to short-term leases, which are those with terms of twelve months or less with no option or intent to purchase the underlying asset at the term of the lease. We recognize lease payments associated with short-term leases on a straight-line basis over the term of the lease. We have presented additional qualitative and quantitative disclosures regarding the Company’s lease obligations as required upon implementation of ASC 842 in Note 7, Leases, and have identified and implemented changes to our business processes and internal controls relating to implementation of the new standard. The comparative information in these condensed consolidated financial statements has not been restated and continues to be reported under ASC Topic 840, “Leases”. The new lease standard requires a lessee to measure its operating lease liabilities at the present value of the remaining minimum lease payments with a discounted cash flow model using the interest rate implicit in the lease. If the implicit interest rate cannot be readily determined, the lessee must use its incremental borrowing rate (“IBR”). If the lessee does not have an IBR, the lessee must use a rate that approximates the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The implicit interest rate was not readily determinable for our operating leases; therefore, we used an IBR to measure our adoption date operating lease liabilities. As we do not have any outstanding debt, we obtained an IBR from a reputable financial institution that took into consideration our financial position, credit quality rating, the underlying asset, and the terms of our lease agreements. The rate represents our estimated borrowing rate on a secured loan collateralized by similar assets for a similar term. We measured our adoption date right-of-use (“ROU”) assets at the amount of the lease liability, adjusted for accrued lease payments and unamortized initial direct costs. On January 1, 2019, we recorded total operating lease liabilities of $14.4 million and ROU assets of $11.4 million, which included adjustments from the operating lease liabilities of $3.0 million for deferred rent. Included in the deferred rent balance of $3.0 million was tenant improvement allowances of $1.4 million. See Note 7, Leases, of the notes to our unaudited condensed consolidated financial statements for additional discussion of our leases and the amounts recognized in these unaudited condensed consolidated financial statements.

Effective January 1, 2019, we adopted ASU No. 2017-08, “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 adoption of this guidance had no impact on our unaudited condensed consolidated financial statements.

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Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures. The amendments remove, modify, and add certain disclosure requirements in Topic 820, “Fair Value Measurement.” The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. Furthermore, an entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date. We do not expect this amendment to have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “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 do not expect this amendment to have a material impact on our consolidated financial statements.

2.	Revenue Recognition

SUBSYS® was commercially launched in March 2012 and is monitored by an FDA-mandated REMS program known as the TIRF REMS. SYNDROS® was commercially launched in July 2017. We sell all of our products in the United States to our customers. See Note 11, 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 distributors and 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 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. The extended payment terms are not greater than 12 months and therefore do not include a financing component.

As is customary in the pharmaceutical industry, it is common for our contracts to include product sales allowances that can decrease the 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. 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

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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, 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 revenue in the period of adjustment. During the three months ended March 31, 2019, we recognized revenue of $0.5 million related to changes in the estimated transaction price allocated to performance obligations satisfied in prior periods. 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 products. Accordingly, we may have to adjust these estimates, which could have a material effect on net revenue and earnings in the period of adjustment. The allowance for product returns is included in accrued sales allowances.

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. 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 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 chargebacks based on estimated wholesaler inventory levels, current contract and estimated future prices and historical chargeback activity.

We do not have any significant extended payment terms as payment is received shortly after the point of sale. As of March 31, 2019, the majority of our accounts receivables were related to product sales. For the three months ended March 31, 2019, the Company had no material bad-debt write-offs in the unaudited condensed consolidated statement of operations and comprehensive income (loss) and there were no contract assets, contract liabilities or deferred contract costs recorded on the unaudited condensed consolidated balance sheets as of March 31, 2019.

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 Topic 320, “Investments — Debt and Equity Securities.” 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

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securities during the three months ended March 31, 2019. 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 losses and declines in value judged to be other than temporary, we would have been required to include those changes in other income (expense) in the unaudited condensed consolidated statements of operations and comprehensive 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 March 31, 2019, our certificates of deposit and commercial paper as well as our marketable securities have been recorded at an estimated fair value of $3,537,000, $47,380,000, and $3,208,000 in cash and cash equivalents, short-term and long-term investments, respectively.

Cash, cash equivalents and investments consisted of the following at March 31, 2019 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Other- Than- Temporary Impairment Losses		Fair Value		Cash and Cash Equivalents		Short-term Investments		Long-term Investments
Cash and cash equivalents	$	8,716	$	—	$	—		$	—	$	8,716	$	8,716	$	—	$	—
Money market securities		24,260		—		—			—		24,260		24,260		—		—
Marketable securities:
Certificates of deposit		9,044		—		—			—		9,044		—		8,064		980
Commercial paper		7,068		—		—			—		7,068		3,537		3,531		—
Corporate securities		20,279		1		(30	)		—		20,250		—		20,250		—
Federal agency securities		16,481		1		(69	)		—		16,413		—		14,185		2,228
Municipal securities		1,352		—		(2	)		—		1,350		—		1,350		—
Total marketable securities		54,224		2		(101	)		—		54,125		3,537		47,380		3,208

Preferred stock		518		—		—			—		518		—		—		518
	$	87,718	$	2	$	(101	)	$	—	$	87,619	$	36,513	$	47,380	$	3,726

Cash, cash equivalents and investments consisted of the following at December 31, 2018 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Other- Than- Temporary Impairment Losses		Fair Value		Cash and Cash Equivalents		Short-term Investments		Long-term Investments
Cash and cash equivalents	$	18,773	$	—	$	—		$	—	$	18,773	$	18,773	$	—	$	—
Money market securities		6,389		—		—			—		6,389		6,389		—		—
Marketable securities:
Certificates of deposit		10,967		—		—			—		10,967		—		8,437		2,530
Commercial paper		11,468		—		—			—		11,468		5,890		5,578		—
Corporate securities		35,393		—		(89	)		—		35,304		500		33,356		1,448
Federal agency securities		19,470		—		(124	)		—		19,346		—		15,396		3,950
Municipal securities		1,365		—		(6	)		—		1,359		—		1,359		-
Total marketable securities		78,663		—		(219	)		—		78,444		6,390		64,126		7,928

Preferred stock		518		—		—			—		518		—		—		518
	$	104,343	$	—	$	(219	)	$	—	$	104,124	$	31,552	$	64,126	$	8,446

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

	As of March 31, 2019				As of December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Marketable securities:
Due in one year or less	$	50,995	$	50,918	$	70,667	$	70,517
Due after one year through 5 years		3,229		3,207		7,996		7,927
Due after 5 years through 10 years		—		—		—		—
Due after 10 years		—		—		—		—
	$	54,224	$	54,125	$	78,663	$	78,444

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):

	As of March 31, 2019										As of December 31, 2018
	Less Than 12 Months					Greater Than 12 Months					Less Than 12 Months					Greater Than 12 Months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Marketable securities:
Corporate securities	$	6,836	$	(3	)	$	8,366	$	(28	)	$	16,075	$	(16	)	$	17,985	$	(73	)
Federal agency securities		998		—			12,431		(68	)		3,727		(1	)		14,625		(122	)
Municipal securities		—		—			1,350		(2	)		—		0			1,359		(7	)
	$	7,834	$	(3	)	$	22,147	$	(98	)	$	19,802	$	(17	)	$	33,969	$	(202	)

Marketable securities are reviewed quarterly for possible other than temporary 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 months ended March 31, 2019.

4.	Fair Value Measurement

FASB ASC 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 March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018. All available-for-sale investments held by us at March 31, 2019 and December 31, 2018, 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.

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Our assets and liabilities subject to the disclosure requirements of ASC 820 at March 31, 2019, were as follows (in thousands):

	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	$	9,044	$	—	$	9,044	$	—	$	—
Commercial paper		7,068		—		7,068		—		—
Corporate securities		20,250		—		20,250		—		—
Federal agency securities		16,413		—		16,413		—		—
Municipal securities		1,350		—		1,350		—		—
Total recurring fair value measurements	$	54,125	$	—	$	54,125	$	—	$	—

Nonrecurring fair value measurements
Property and equipment (see Note 6)	$	—	$	—	$	—	$	—	$	(129	)

Our assets and liabilities subject to the disclosure requirements of ASC 820 at December 31, 2018, were as follows (in thousands):

	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	$	10,967	$	—	$	10,967	$	—	$	—
Commercial paper		11,468		—		11,468		—		—
Corporate securities		35,304		—		35,304		—		—
Federal agency securities		19,346		—		19,346		—		—
Municipal securities		1,359		—		1,359		—		—
Total recurring fair value measurements	$	78,444	$	—	$	78,444	$	—	$	—

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

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5.	Inventories, net

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		As of
	March 31, 2019		December 31, 2018
Finished goods	$	1,437	$	2,489
Work-in-process		3,661		3,542
Raw materials and supplies		2,148		2,577
Total inventories		7,246		8,608
Plus: non-current raw materials and finished goods		2,667		4,330
	$	9,913	$	12,938

As of March 31, 2019 and December 31, 2018, 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 consisted of actual production costs, including facility overhead and tooling costs of in-process dronabinol, SUBSYS® and SYNDROS® products. Finished goods inventories consisted of finished SUBSYS® and SYNDROS® products. Non-current raw materials 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 March 31, 2019 and December 31, 2018, all work-in-process inventory is expected to be used within 12 months of the balance sheet date and, therefore, is classified as current 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 March 31, 2019 and December 31, 2018, were reported net of these reserves of $5,561,000 and $2,938,000, respectively. During the three months ended March 31, 2019, we increased these reserves by approximately $1,521,000, partially offset by a decrease of $207,000 for the destruction of previously reserved product. During the three months ended March 31, 2018, we decreased these reserves by approximately $5,000,000 for the destruction of previously reserved product, partially offset by an increase to the reserves of approximately $500,000.

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 months ended March 31, 2019 and 2018, we recorded losses on the disposal of property and equipment of $851,000 and $108,000, respectively.

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 months ended March 31, 2019, we recorded impairment charges in research and development of $129,000. The charge during the three months ended March 31, 2019 was the result of operating failures of equipment that had a cost of $171,000 and accumulated depreciation of $42,000. The equipment had little or no scrap value due to its specialized nature, and was written down to its estimated fair value of $0. There were no such charges during the three months ended March 31, 2018.

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Leases

As discussed in Note 1, we adopted the requirements of the new lease standard on January 1, 2019. Prior to January 1, 2019, we accounted for leases in accordance with ASC Topic 840, Leases. In accordance with the new lease standard, we evaluate all contractual agreements at inception to determine if they contain a lease. In making this determination, we consider any terms and conditions that convey the right to control the use of specifically identifiable property or equipment.

Our operating lease portfolio consists of building leases. We lease office and lab space in Chandler, Arizona and Round Rock, Texas, under lease agreements that expire between June 2021 and February 2032. We have the option to extend our primary manufacturing facility operating lease for two 5-year periods following the February 2032 expiration date. We have the option the extend a second operating lease for one 5-year period following the June 2021 expiration date. Neither of these optional renewal periods have been included in the operating ROU assets or operating lease liabilities on our unaudited condensed consolidated financial statements. We have the option to extend a third operating lease on an annual basis through January 2022, and this renewal option has been included in the operating ROU assets and operating lease liabilities on our unaudited condensed consolidated financial statements. Our primary manufacturing facility lease requires us to maintain an irrevocable letter of credit in the amount of $267,000 during the term of the lease and up to 30 days after the expiration date.

Our operating lease expense for the three months ended March 31, 2019 was $721,000. Cash paid for amounts included in the measurement of operating lease liabilities was $755,000 for the three months ended March 31, 2019. Lease expense recorded under Topic 840 for the three months ended March 31, 2018 was $1,007,000.

As of March 31, 2019, the weighted average remaining lease term of our operating leases is 8.4 years, and the weighted average discount rate of our operating leases is 9.25%.

The maturities of our operating lease liabilities under Topic 842 as of March 31, 2019 are as follows (in thousands):

Years ending December 31,
Remainder of 2019	$	2,289
2020		3,128
2021		2,340
2022		1,283
2023		1,295
Thereafter		11,851
Total operating lease payments		22,186
Less: imputed interest		8,184
Total current and non-current operating lease liabilities	$	14,002

The future minimum commitments of our operating leases under Topic 840 as of December 31, 2018 are as follows (in thousands):

Years ending December 31,
2019	$	3,044
2020		3,128
2021		2,340
2022		1,283
2023		1,295
Thereafter		11,851
Total operating lease payments	$	22,941

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8.	Commitments and Contingencies

Legal Matters

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 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.

Government Proceedings

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 healthcare 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 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.

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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.” 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 represented our best estimate of the minimum liability exposure that we expected to be paid out over five years in connection with the DOJ Investigation. This estimate reflected a minimum exposure at which management had determined a willingness to settle these matters. The accrual was recorded in accrued litigation award and settlements on our consolidated balance sheets and as an operating expense on our consolidated statements of operations and comprehensive income (loss).

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. Our initial estimate of the minimum liability exposure we previously accrued in connection with the DOJ Investigation of $150,000,000 expected to be paid over five years remains unchanged as of December 31, 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. For the three months ended March 31, 2019, we accrued interest expense in connection with the DOJ Investigation of approximately $1,063,000, which is recorded in charges related to litigation award and settlements in these unaudited condensed consolidated statements of operations and comprehensive income (loss). This agreement in principle is subject to the negotiation of final settlement documents with the government. We are uncertain if the Company will be able to complete a final settlement with the DOJ because of the Company’s inability to fulfill demands made by the DOJ, including the execution of a security agreement relating to the assets of the Company to collateralize payments under the settlement. We expect that a final settlement, if it were to be completed, would include other material non-financial terms and conditions, including a fraud-based criminal felony plea by one of our subsidiaries and a deferred prosecution agreement with the Company related to the actions of our former employees. Additionally, we expect that a final settlement, if it were to be completed, will include a corporate integrity agreement and conditional exclusion release between the Company and OIG that will require the Company to exit the opioid business within 12 months of the effective date, in addition to other provisions. If executed, these agreements will require continued 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 some 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.

Because other material, non-financial terms and conditions remain subject to the negotiation of final settlement documents, we cannot provide assurances as to the 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.

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Failure to enter into a settlement agreement with the DOJ will likely result in the indictment of the Company by the U.S. Government.

At this time, the aforementioned accrual does not currently meet the more likely than not standard to recognize a tax benefit; therefore, we have recognized no tax benefit for it in these unaudited condensed consolidated financial statements. It is possible that some or all of this accrual may meet the more likely than not standard in the future, at which time a tax benefit would be recognized.

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.

Healthcare Professionals and Former Employees Related Investigations.

Investigations of Healthcare Professionals. A number of healthcare 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 Georgia, 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 healthcare professionals with which we have interacted with in those states. In addition, at least the following healthcare 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 healthcare providers, pled guilty to violating the federal Anti-Kickback Statute in connection with payments of approximately $83,000 from us.

On or about November 7, 2016, a healthcare professional located in Michigan who served on our speaker bureau pled guilty to healthcare fraud in connection, in part, with receiving payments from us.

On February 23, 2017, two Alabama healthcare professionals who served on our speaker bureau were convicted on 19 of 20 counts brought against them, which included charges related to distribution of a controlled substance, drug conspiracy, healthcare fraud conspiracy and money laundering.

On or about March 22, 2017, the U.S. Attorney’s Office for the District of New Hampshire filed an indictment against a 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 in connection with payments received for serving as an Insys promotional speaker. On December 18, 2018, a jury convicted the physician assistant on all seven counts.

On or about October 20, 2017, a healthcare professional in Rhode Island, who served on our speaker bureau pled guilty to healthcare 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 New York filed an indictment against five healthcare professionals who served on our speaker bureau, charging them with conspiracy to violate the federal Anti-Kickback Statute, violation of the federal Anti-Kickback Statute, and 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 healthcare professional who served on our speaker bureau pled guilty to conspiracy to receive healthcare kickbacks in connection, in part, with receiving payments from us.

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On or about June 28, 2018, an Ohio healthcare 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 healthcare professionals mentioned above. On or about April 23, 2018, the former sales employee was sentenced to six months’ home confinement.

On or about June 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 healthcare 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. On or about March 16, 2018, records were unsealed indicating that the two former employees each pled guilty to the following counts contained in a superseding indictment: conspiracy to violate the Anti-Kickback Statue, violation of the Anti-Kickback Statue, violation of HIPAA, conspiracy to commit honest services wire fraud, and aggravated identity theft, and that the former sales representative also pled guilty to healthcare 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 the Original Indictment and added charges against our former President, CEO and director, Dr. John N. Kapoor. After Dr. Kapoor’s indictment, he agreed to put his ownership of 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 all shares of the Company’s common stock or options to purchase such stock, salaries, bonuses and other benefits. On or around November 28, 2018, Alec Burlakoff pleaded guilty to the racketeering conspiracy count in the second superseding indictment. On or around January 9, 2019, Michael L. Babich pleaded guilty to one count of conspiracy to commit violations of (a) 18 U.S.C. § 1341 (mail fraud) and (b) 18 U.S.C. § 1343 (wire fraud) and one count of mail fraud; aiding and abetting (18 U.S.C. §§ 1341 and 1342). On May 2, 2019, Dr. Kapoor and the four other former employees were convicted on the racketeering conspiracy count in the second superseding indictment.

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 in their defense, subject to certain limitations set forth in the indemnity agreements. We have recognized expenses associated with the criminal and civil defense of Dr. Kapoor of approximately $18,100,000 for the three months ended March 31, 2019. As of March 31, 2019, we have reported $38,100,000 in accrued legal expense in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019. 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 unaudited condensed consolidated statements of operations and comprehensive income (loss). During the three months ended March 31, 2019, the Company made cash payments of $1,800,000 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 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 income (loss). If it is subsequently determined that all of these costs are reasonable, and the Company is required to pay the remaining balance, this could have a material adverse impact on our cash position and liquidity. Consistent with the terms of the indemnity agreement, if Kapoor’s criminal conviction is upheld on appeal, it is expected that the Company will seek to claw back all sums paid pursuant to that agreement.

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 healthcare professionals who prescribed our product and served on our speaker bureau. On August 8, 2018, the former district sales manager pleaded guilty to engaging in a kickback scheme that defrauded federal healthcare programs.

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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 July 11, 2017, a former district sales manager pled guilty to conspiring to violate the federal Anti-Kickback Statute related to her activities in the Southern District of Alabama, as well as the Middle and Southern Districts of Florida, including in connection with the two convicted Alabama healthcare professionals mentioned above.

On or about May 30, 2018, a former specialty sales professional pled guilty to a second-degree charge of conspiracy to commit commercial bribery related to her activities in 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 former employees, as well as other individuals associated with our Company, including healthcare 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.

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) which have ongoing investigations directed at our Company: Arizona, Colorado, Florida, Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Virginia, Washington, and Wisconsin. 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 certain state Attorney General or Department of Justice 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.

In an effort to reach a global resolution of all claims brought by, or that could be brought by, state Attorneys General (or similarly named and authorized offices), we have engaged in preliminary discussions with a multistate group of Attorneys General.

Ongoing Complaints filed in connection with State Related Investigations. Our Company has a number of 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:

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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. On or about November 10, 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 filed our answer to the amended complaint on April 5, 2018.

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. 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. On December 19, 2018, the Court denied our motion to dismiss.

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, on May 25, 2018, the New York Attorney General opposed our motion to dismiss and filed a cross-motion for partial summary judgment related to the 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, and subsequently denied both motions.

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, Office of the Attorney General. Insys filed its response to the Statement of Charges on October 17, 2018. On November 21, 2018, Insys filed a Motion to Dismiss the Statement of Charges. On January 31, 2019, the Administrative Law Judge issued a Proposed Ruling on Motion to Dismiss Statement of Charges in which he recommended that the Consumer Protection Division deny the Motion to Dismiss. The merits hearing is scheduled to begin in August 2019.

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 the Court denied both motions on January 15, 2019. 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 set a hearing in this matter for September 2019.

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On November 19, 2018, the Attorney General of the Commonwealth of Kentucky filed a complaint against us in the Hardin County Circuit Court, Commonwealth of Kentucky. The complaint asserts claims related to alleged violations of the Kentucky Consumer Protection Act, as well as Medicaid and Kentucky Assistance Program Fraud, public nuisance, fraud, unjust enrichment, negligence, negligence per se, and punitive damages. On January 16, 2019, Insys moved to dismiss the complaint. The motion remains pending.

Management accrued, as of March 31, 2019, an aggregate of $48,000,000, which represents our best estimate of the minimum liability exposure that we expect to be paid out in connection with the potential settlement of current claims or potential future claims by various states, as discussed above. We estimate that the range of potential loss related to these matters is between $48,000,000 and $130,000,000. The accrual was recorded in accrued litigation award and settlements on the unaudited condensed consolidated balance sheets and as an operating expense on the unaudited condensed consolidated statements of operations and comprehensive loss.

Multi-District Prescription Opioid Litigation. We have been named along with various other opioid manufacturers, opioid distributors, prescribers, pharmacies, and others in complaints focused on the 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, Connecticut, Florida, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, 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 800 of these cases, the majority of which have been consolidated into multi-district litigation (MDL No. 2804) in the Northern District of Ohio. Most of 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 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 October 21, 2019. Additionally, the Court recently set another set of cases for a subsequent litigation track.

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 (1) purchasers of health insurance between 1996 and the present, and (2) children born addicted to opioids. Most of these cases have been consolidated into MDL No. 2804. Finally, Insys has been named in at least one lawsuit in which a personal injury plaintiff sued Insys and other opioid manufacturers for harm allegedly caused by a tortfeasor who was addicted to opioids.

Congressional and Other Inquiries. Many federal agencies and 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.

Members of our U.S. Congress have been conducting hearings and other inquiries into causes and solutions to the national opioid epidemic that 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 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.

The Company also received a letter from Senator Dianne Feinstein dated January 25, 2019, requesting that the Company voluntarily end its promotion of SUBSYS® to physicians. The Company replied to that letter on February 21, 2019.

With the exception of the DOJ investigation and potential settlement of claims or potential future claims by various states, 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 healthcare 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,

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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 and Derivative Complaints

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 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 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 Court denied plaintiff’s motion on March 31, 2018, and Insys filed its answer on April 15, 2018. Plaintiff subsequently filed a motion to certify class, which we opposed. 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 then-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 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 former Interim CEO and Chief Medical Officer, and otherwise denied our motion to dismiss. Insys filed its answer on June 26, 2018. The plaintiffs in both actions seek unspecified monetary damages and other relief. We have agreed to a settlement with the plaintiff, subject to negotiation of, and agreement upon, additional terms.

Management accrued, as of March 31, 2019, an aggregate of $19,800,000, which represents our best estimate of the liability exposure that we expect to be paid out in connection with the potential settlement of the securities litigation discussed above. We estimate that the range of potential loss related to these matters is between $15,600,000 and $24,600,000. The accrual was recorded in accrued litigation award and settlements on the unaudited condensed consolidated balance sheets and as an operating expense on the unaudited condensed consolidated statements of operations and comprehensive loss.

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.

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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. On November 30, 2017, the Court 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 provide additional discovery to the plaintiffs. On March 16, 2018, the Court entered the parties’ stipulated proposed order implementing the Court’s ruling of February 8, 2018. On January 15, 2019, the plaintiffs filed a motion to lift the stay, which the Court denied. We continue to vigorously defend this matter.

On or about June 5, 2018, Jim Soltau filed a derivative complaint (“the Soltau complaint”) in the United States District Court, District of 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 Estate of Dr. Theodore Stanley, and 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 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 a 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 to the complaint. On December 3, 2018, the Court granted a motion to stay the case. We intend to vigorously defend this matter.

Shareholder Demands. On or about April 18, 2018, putative shareholder Kyle Stefurak demanded that the Company’s Board of Directors take action to remedy breaches of fiduciary duties by certain of our current and/or former directors and executive officers. The Board of Directors referred this demand to the Special Litigation Committee of the Board of Directors (“SLC”).

On or about November 20, 2018, putative shareholder Cora Foxx Greenwald demanded that the Company’s Board of Directors take action against present or former Board members and former executives who are allegedly responsible for violations of law and damages sustained by the Company as a result of certain misconduct. The Board of Directors referred this demand to the SLC.

On April 10, 2019, we received a demand letter from Gotham Asset Management, LLC (“Gotham”) asserting that between March 3, 2015 and March 15, 2017, Gotham “suffered over $20 million of losses as the market learned the truth about Insys’s illegal kick-back scheme and improper accounting practices.” We intend to vigorously defend this matter.

Paragraph IV Challenges

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. On January 15, 2018, TEVA USA filed an answer and counterclaims, to which we have replied. Additionally, on December 3, 2018, TEVA USA filed a claim construction brief, to which we replied. A Markman claim construction hearing occurred on February 12, 2019. The Court ruled in favor of Insys and has upheld the patent claims as originally issued. We intend to represent our interests vigorously in this matter.

On or about January 31, 2018, we received a Paragraph IV Notice Letter from counsel for TEVA USA related to SUBSYS® 0.1mg, 0.2mg, 0.6mg, 1.2mg and 1.6mg doses. The letter asserts that (i) the FDA received an ANDA from TEVA

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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 lawsuit against TEVA USA on March 16, 2018. TEVA USA filed its answer to our complaint and counterclaims, to which we 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 lawsuit against TEVA USA on August 23, 2018. TEVA USA filed its answer to our complaint and counterclaims, to which we have replied. We intend to represent our interests vigorously in this matter.

On September 26, 2018, we 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 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 filed a patent infringement lawsuit on November 9, 2018. We intend to represent our interests vigorously in this matter.

The Court has consolidated the aforementioned TEVA USA patent infringement lawsuits in case C.A. No. 17-1303 (CFC).

General Litigation and Disputes

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.

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.

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 issued findings of fact and conclusions of law in its final trial ruling, which included a finding 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 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.

On or around November 1, 2015, we received a notice from 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. On June 1, 2018, Dr. Kottayil filed a complaint in Superior Court in the State of Arizona in and for the 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, which the Court granted. 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, plus interest. The legal rate of interest is 5% over the Federal Reserve discount rate.

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.

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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 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. Discovery in this case is ongoing. 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. On May 6, 2019, this case was transferred to MDL No. 2804. We intend to vigorously defend this matter.

On December 10, 2018, Blue Cross and Blue Shield of Louisiana and HMO Louisiana, Inc., on behalf of themselves and all others similarly situated, filed a putative class action complaint in the United States District Court, District of Massachusetts, against Insys Therapeutics, Inc. Plaintiffs bring claims for violation of 18 U.S.C. § 1962(c) (RICO), violation of 18 U.S.C. § 1962(d) (RICO conspiracy), civil conspiracy, unjust enrichment, and violation of the Alaska Unfair Trade Practices and Consumer Protection Act, the Arizona Consumer Fraud Act, the California Consumers Legal Remedies Act, the California Unfair Competition Law, the Colorado Consumer Protection Act, the Connecticut Unfair Trade Practices Act, the Delaware Consumer Fraud Act, the District of Columbia Consumer Protection Procedures Act, the Florida Deceptive and Unfair Trade Practices Act, the Idaho Consumer Protection Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, the Indiana Deceptive Consumer Sales Act, the Kentucky Consumer Protection Act, the Maine Unfair Trade Practices Act, the Maryland Consumer Protection Act, the Michigan Consumer Protection Act, the Minnesota Prevention of Consumer Fraud Act, the Missouri Merchandising Practices Act, the Nebraska Consumer Protection Act, the Nevada Deceptive Trade Practices Act, the New Hampshire Consumer Protection Act, the New Jersey Consumer Fraud Act, the New Mexico Unfair Trade Practices Act, New York General Business Law § 349, the North Carolina Unfair and Deceptive Trade Practices Act, the North Dakota Unlawful Sales or Advertising Practices Act, the Ohio Deceptive Trade Practices Act, the Oklahoma Consumer Protection Act, the Pennsylvania Unfair Trade Practices and Consumer Protection Law, the Rhode Island Unfair Trade Practices and Consumer Protection Act, the South Dakota Deceptive Trade Practices and Consumer Protection Law, the Virginia Consumer Protection Act, the Washington Consumer Protection Act, the West Virginia Consumer Credit and Protection Act, and the Wisconsin Deceptive Trade Practices Act. We tagged this case for inclusion in MDL No. 2804, to which the plaintiff objected. We intend to vigorously defend this matter.

On February 19, 2019, United Healthcare Services, Inc. (“United”) filed a complaint in the Superior Court of the State of California, for the County of Orange, against Insys Therapeutics, Inc. Plaintiff brings claims for common law fraud, negligent misrepresentation, unjust enrichment, and unlawful and fraudulent business practices. Through all of its claims, United alleges that it paid over $50 million for SUBSYS® prescriptions that did not qualify for coverage under United’s criteria and for unnecessarily high doses. We intend to vigorously defend this matter.

On February 22, 2019, Horizon Blue Cross Blue Shield of New Jersey filed a complaint in the Superior Court of New Jersey, Essex County, against Insys Therapeutics, Inc., a number of our former employees, and a former member of our speaker bureau. Plaintiff brings claims for violation of New Jersey RICO (N.J.S.A. 2C:41-2(c)), conspiracy to violate New Jersey RICO (N.J.S.A. 2C:41-2(d)), insurance fraud – violation of New Jersey Insurance Fraud Prevention Act (N.J.S.A. 17:33A-4), common law fraud, unjust enrichment, and misrepresentation. Plaintiff asserts that it paid over $4,000,000 for off-label prescriptions of SUBSYS®, over $2,000,000 of which was allegedly paid for plan members with no history of cancer. We intend to vigorously defend this matter.

Management accrued, as of March 31, 2019, an aggregate of $16,000,000, which represents our best estimate of the minimum liability exposure that we expect to be paid out in connection with the potential settlement of insurance litigation discussed above. The accrual was recorded in accrued litigation award and settlements in the unaudited condensed consolidated balance sheets and as an operating expense on the unaudited condensed consolidated statements of operations and comprehensive loss.

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Goodell, Devries, Leech & Dann, LLP. On or around February 19, 2019, Goodell, Devries, Leech & Dann, LLP filed a complaint in Baltimore City Circuit Court, Maryland, against Insys Therapeutics, Inc. Plaintiff brings a claim for breach of contract. We intend to vigorously defend this matter.

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 filed a motion to dismiss and on or about May 6, 2017, the 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, when taken individually, 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 held oral argument on the motion on June 29, 2017. On July 27, 2017, the Court issued a ruling on the multi-party motion to dismiss. The 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. 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 dismiss, in part, plaintiffs’ first amended complaint. Plaintiffs filed a response in opposition to the motion on July 18, 2018, and the Court set a return date of August 6, 2018. Plaintiffs subsequently stipulated to dismiss certain allegations and claims against Insys, and the motion 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. 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.

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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. 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. Insys filed its answer to the complaint on November 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.

Jordan. On January 5, 2018, Bobby Ray Jordan, individually and as Special Administrator of the Estate of Doris L. Jordan, deceased, filed a complaint in the District Court of Leavensworth 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, John N. Kapoor, Michael L. Babich, and Alec Burlakoff. The plaintiff brings 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 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 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. On January 23, 2019, the Court denied our motion to dismiss. 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. On November 13, 2018, the Court granted in part and denied in part our motion to dismiss. Plaintiffs subsequently filed a third amended complaint and we filed our answer on January 18, 2019. 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.

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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. Plaintiffs subsequently filed an amended complaint and we moved to dismiss the amended complaint on January 22, 2019. 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 issued an order that appears to dismiss the complaint against all the defendants. As Insys had not previously sought dismissal, however, Insys filed a motion for clarification of the Court’s dismissal order and a motion for summary judgment. The Court denied the motion for clarification and granted the motion for summary judgment, but granted leave for plaintiff to amend the complaint to add a fraud claim. 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.

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.

Kelley. On July 18, 2018, Michael and Julie Kelley 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 United States District Court for the Northern District of Ohio. On September 21, 2018, we moved to dismiss the complaint. On January 25, 2019, the Court granted in part and denied in part our motion to dismiss. 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.

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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. On January 14, 2019, we filed a motion to dismiss. 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.

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. Insys filed an answer to the complaint. 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. On November 21, 2018, a co-defendant removed this case to the United States District Court for the Western District of Missouri. The co-defendant also requested that the case be transferred to MDL No. 2804, currently pending in the Northern District of Ohio. 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. On December 19, 2018, Insys removed this case to the United States District Court for the District of New Hampshire. 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.

Cordes. On December 18, 2018, Eleanor Cordes filed a complaint in the Superior Court of New Jersey, Warren County, against Dr. Kenneth Sun, New Jersey Progressive Pain Solutions LLC, Insys Therapeutics, Inc., Linden Care LLC, Michelle Breitenbach, and Jeffrey Pearlman. Plaintiff brings claims against Insys for negligence and fraud. Insys filed a motion to dismiss, which was denied. 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.

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Haddock. On December 21, 2018, Iliana Haddock filed a complaint in the Circuit Court, in and for the Fifteenth Judicial Circuit of Palm Beach County, against Insys Therapeutics, Inc. and My Community Pharmacy of Boynton, Inc. d/b/a My Best Pharmacy. Plaintiff brings claims against Insys for negligence and strict products liability design defect and Insys responded to the complaint. 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.

Sorrentino. On December 21, 2018, Paula Sorrentino sent a letter to Insys Therapeutics, Inc. alleging that she sustained injuries by reason of Insys’s negligence and improper marketing and promotion and distribution 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.

Langlois. On January 2, 2019, Pamela Langlois filed a complaint in the State of New Hampshire Superior Court, Stratford, against Insys Therapeutics, Inc. Plaintiff brings claims for fraud, consumer protection, and negligence and civil conspiracy. 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.

Nicholson. On January 16, 2019, Peter Nicholson filed a complaint in the Superior Court of Providence, Rhode Island, against Insys Therapeutics, Inc. and Jerrold Rosenberg, M.D. Plaintiff brings claims against Insys for common law fraud and misrepresentation, conscious misrepresentation involving risk of physical harm, violation of R.I.G.L. 9-1-2, negligent misrepresentation, negligent misrepresentation involving risk of physical harm, negligence, violation of R.I.G.L. 6- 13.1-1 et seq. – Rhode Island Deceptive Trade Practices Act, and punitive damages relating to certain claims. 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.

DeRuiter/Medina/Santiago/Mitchell. On January 17, 2019, Frances DeRuiter, Daisey Medina, Marysol Santiago, Jennifer Mitchell, and Douglas Mitchell 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 and misrepresentation, conscious misrepresentation involving risk of physical harm, violation of R.I.G.L. 9-1‑2, negligent misrepresentation, negligent misrepresentation involving risk of physical harm, negligence, violation of R.I.G.L. 6- 13.1-1 et seq. – Rhode Island Deceptive Trade Practices Act, and punitive damages relating to certain claims. 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.

Management accrued, as of March 31, 2019, an aggregate of $3,600,000, which represents our best estimate of the liability exposure that we expect to be paid out in connection with the personal injury litigation brought by individuals discussed above, to the extent such an estimate is possible for any particular case. For those cases for which an estimate is possible, we estimate that the range of potential loss is between $2,000,000 and $10,000,000 in the aggregate. The accrual was recorded in accrued litigation award and settlements in the unaudited condensed consolidated balance sheets and as an operating expense on the unaudited condensed consolidated statements of operations and comprehensive loss.

Except as it pertains to (i) the accrual of $150,000,000 related to the DOJ Investigation, (ii) the accrual of $48,000,000 related to the potential settlement of claims and potential claims by the states, (iii) the accrual of $19,800,000 related to the potential settlement of securities litigation, (iv) the accrual of $16,000,000 related to the potential settlement of insurance litigation, (v) the accrual of $3,600,000 related to the potential settlement of certain personal injury litigation brought by individuals, and (vi) the potential for damages in the federal securities litigation and derivative action that we believe could be 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 an unfavorable outcome or loss is remote, reasonably possible, or is not determinable, and estimates 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.

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Material Agreements

Aptar

In October 2015, we entered into an amended and restated supply, development and exclusive licensing agreement with 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 of supply, development and exclusive licensing agreement with Aptar from our parent to our manufacturing subsidiary as part of a corporate restructuring.

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 March 31, 2019, our remaining estimated annual contractual obligation under our agreement with Aptar was $6,000,000.

Renaissance

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.

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 eliminated any prior minimum purchase (and batch) obligations that had been set forth in the amendment dated July 2016 and replaced them with new annual purchase commitments 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 reduced our aggregated purchase commitment with Renaissance from $12,000,000 to $7,000,000 through December 31, 2020.

In February 2019, we, through our manufacturing subsidiary, entered into a further amendment to our Renaissance manufacturing and supply agreement. This amendment effectively eliminates any prior and future minimum purchase (and batch) obligations that had been set forth in the amendment dated April 2018. In addition, we entered into an Asset Purchase Agreement in which we agreed to sell, and Renaissance agreed to purchase, certain of our manufacturing equipment. As discussed in Note 6, Property and Equipment, we recorded a loss on the disposal of this equipment of approximately $0.9 million in these unaudited condensed consolidated statements of operations and comprehensive loss.

As of March 31, 2019, we have no remaining annual contractual obligation under our agreement with Renaissance .

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

Years ending December 31,
Remainder of 2019	$	2,000
2020		2,000
2021		2,000
2022		—
2023		—
Total	$	6,000

9.	Stock-based Compensation

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

	Three Months Ended
	March 31,
	2019		2018
Research and development	$	715	$	847
General and administrative		2,394		2,323
Total cost of stock-based compensation	$	3,109	$	3,170

Included in stock-based compensation for the three months ended March 31, 2019 and 2018 was approximately $786,000 and $0, respectively, of expense associated with the accelerated vesting of options awards related to terminated employees.

The following table summarizes stock option activity during the three months ended March 31, 2019:

						Weighted
				Weighted		Average	Aggregate
				Average		Remaining	Intrinsic
	Number of			Exercise		Contractual	Value
	Shares			Price		Term (in years)	(in millions)
Vested and exercisable as of December 31, 2018		3,798,636		$	12.33	6.1	$	1.2
Outstanding as of December 31, 2018		6,127,202		$	11.55
Granted		2,543,119		$	3.94
Cancelled		(525,882	)	$	10.58
Exercised		(4,537	)	$	4.05
Outstanding as of March 31, 2019		8,139,902		$	9.24	7.6	$	4.0
Vested and exercisable as of March 31, 2019		4,095,983		$	12.02	5.9	$	2.2

As of March 31, 2019, we expected to recognize $15,780,000 of stock-based compensation for outstanding options over a weighted-average period of 2.8 years.

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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 three months ended March 31, 2019:

				Weighted
				Average
				Grant-Date
	Number of			Fair Value
	Units			Per Unit
Outstanding as of December 31, 2018		535,828		$	9.01
Granted		486,494		$	4.06
Exercised		(127,446	)	$	9.61
Cancelled		(90,749	)	$	0.69
Outstanding as of March 31, 2019		804,127		$	2.43

As of March 31, 2019, we expected to recognize $3,671,000 of stock-based compensation for outstanding restricted stock units over a weighted-average period of 2.0 years.

Cash received from option exercises under all stock-based payment arrangements for the three months ended March 31, 2019 and 2018 was $18,000 and $524,000, respectively.

10.	Net Loss per Share

Basic net loss per common share is computed by dividing the net loss allocable to the common stockholders by the weighted average number of common shares outstanding during the period. As we have incurred a net loss for the three months ended March 31, 2019 and 2018, 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 8,944,029 and 7,615,687 outstanding restricted stock units and stock options as of March 31, 2019 and 2018, respectively.

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

	Three Months Ended
	March 31,
	2019			2018
Historical net loss per share - Basic
Numerator:
Net loss	$	(123,844	)	$	(20,370	)
Denominator:
Weighted average number of common shares outstanding		74,426,030			73,745,202
Basic net loss per common share	$	(1.66	)	$	(0.28	)
Historical net loss per share - Diluted
Numerator:
Net loss	$	(123,844	)	$	(20,370	)
Denominator:
Weighted average number of common shares outstanding		74,426,030			73,745,202
Effect of dilutive stock options		—			—
Weighted average number of common shares outstanding		74,426,030			73,745,202
Diluted net loss per common share	$	(1.66	)	$	(0.28	)

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11.	Product Lines, Concentration of Credit Risk and Significant Customers

We are engaged in the business of developing and selling pharmaceutical products. During the three months ended March 31, 2019, we had two product lines, SUBSYS® and SYNDROS®. Our CODM evaluates revenues based on product lines.

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

	Net Revenue by Product Line
	Three Months Ended
	March 31,
	2019		2018
SUBSYS®	$	7,233	$	23,274
SYNDROS®		397		637
Total net revenue	$	7,630	$	23,911

	Percent of Revenue by Route to Market
	Three Months Ended
	March 31,
	2019			2018
Pharmaceutical wholesalers		61	%		61	%
Specialty pharmaceutical retailers		39	%		39	%
		100	%		100	%

All our products are sold in the United States of America. Product shipments to our three largest pharmaceutical wholesalers accounted for 24%, 21% and 13% of total shipments and product shipments to our two largest specialty pharmaceutical retailers accounted for 20% and 19% of total shipments for the three months ended March 31, 2019. Product shipments to our two largest pharmaceutical wholesalers accounted for 31%, and 18% of total shipments and product shipments to our two largest specialty pharmaceutical retailers accounted for 22% and 17% of total shipments for the three months ended March 31, 2018. Our three largest pharmaceutical wholesalers’ accounts receivable balances accounted for 25%, 24%, and 16% of accounts receivable and our two largest specialty pharmaceutical retailers’ accounts receivable balances accounted for 20% and 13% of accounts receivable balance as of March 31, 2019. One pharmaceutical wholesalers’ accounts receivable balances accounted for 58% of accounts receivable balance as of December 31, 2018, and two specialty pharmaceutical retailers’ accounts receivable balances accounted for 19% and 11% of accounts receivable as of December 31, 2018. On May 9, 2019, the Company was notified by its logistics provider that such provider has ceased shipments to a specialty pharmaceutical retailer, which accounted for approximately 19% of our total product shipments for the three months ended March 31, 2019. As a result, the Company is effectively precluded from shipping products to this specialty pharmaceutical retailer at this time. Management is monitoring the situation and evaluating the impact of this cessation on its operations and future results.

12.Subsequent Events

Leadership Changes and Compensation Arrangements

On April 14, 2019, Saeed Motahari resigned as President and Chief Executive Officer and Andrew G. Long was appointed as Chief Executive Officer. In connection with these leadership changes, Andrece Housley was appointed as Chief Financial Officer, succeeding Mr. Long, and Dr. Venkat Goskonda was promoted to Chief Scientific Officer, overseeing the Company’s research and development and manufacturing activities.

On April 17, 2019, the Company’s Board of Directors approved cash retention bonuses for each of Mr. Long, Chief Executive Officer of the Company; Andrece Housley, Chief Financial Officer of the Company; and Mark Nance, Chief Legal Officer and General Counsel of the Company, in the amounts of $1,100,000, $400,000 and $613,000, respectively. The retention bonuses include certain terms and conditions, including full clawback if any such officer’s employment terminates under certain conditions within twelve months of the agreement date.

On April 23, 2019, the Company exercised its authority pursuant to Mr. Motahari’s Employment Agreement via power of attorney to tender his resignation as a director of the Company (in connection with his resignation as Chief Executive Officer).

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Grant from National Institute on Drug Abuse

On May 7, 2019, the Company was awarded a grant from the National Institute on Drug Abuse (NIDA), part of the National Institutes of Health (NIH), for a series of clinical studies designed to evaluate the effects of pharmaceutical-grade cannabidiol (CBD) on craving and relapse prevention in opioid use disorder. The total grant amount is $10.3 million over 5 years and is subject to certain milestones. We will provide the drug required for the studies, R&D expertise and clinical and regulatory support, among other services in kind.

Suspension of 2013 Employee Stock Purchase Plan

Effective May 10, 2019, the Board of Directors suspended indefinitely the 2013 Employee Stock Purchase Plan (the “ESPP”).

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

The following discussion and analysis of our financial condition and 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, 2018, 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, 2018.

Forward-Looking Statements

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. 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. 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;

•

our ability to continue as a going concern;

•

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

•

the impact and potential outcomes of pending claims, litigation, and other legal proceedings, along with our strategies and actions relating thereto;

•

our expectations regarding completion of the settlement in principle with the DOJ;

•

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

•

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

•

our pursuit of strategic transactions such as the divestiture of existing or candidate product lines or licensing of assets;

•

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

•

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

•

the effects of U.S. tax reform.

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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, 2018 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. Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the SEC.

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 management of BTCP patients 18 years of age and older who are already receiving and are tolerant to around-the-clock opioid therapy for their underlying persistent cancer pain. We received FDA approval for SUBSYS® in January 2012 and commercially launched SUBSYS® in March 2012. On November 5, 2018, we announced that we 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.

•

SYNDROS® — a proprietary, orally administered liquid formulation of dronabinol for the treatment of 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. We received FDA approval for SYNDROS® in July 2016. In March 2017, the DEA issued an interim final ruling that would result 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.

Going Concern

While we have no outstanding debt, our available liquidity is limited to $87.6 million in cash and cash equivalents and investments as of March 31, 2019, and we expect to have continued negative cash flows from operating activities. We have experienced recurring and increasing losses from operations over the previous 18 months due to significant declines in the TIRF market and significant legal expenses resulting from the DOJ Investigation and other significant litigation matters to which we are subject (see Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of these legal matters). We have estimated liabilities of approximately $240.3 million as of March 31, 2019 for proposed settlements of our various litigation matters, and there are other matters for which we have not been able to determine a reasonable estimated loss. Furthermore, we are uncertain if we will be able to complete a final settlement with the DOJ because of the Company’s inability to fulfill demands made by the DOJ, including the execution of a security agreement relating to the assets of the Company to collateralize payments under the settlement. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of the unaudited condensed consolidated financial statements.

Management’s plans, in order to meet our operating cash flow requirements, include the pursuit of strategic alternatives related to the sale or licensing of the Company’s assets. On November 5, 2018, we announced that we 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. The Company has engaged Lazard Freres & Co. LLC to advise the Company on capital planning and the evaluation of strategic alternatives.

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Basis of Presentation

Net Revenue

We sell SUBSYS® and SYNDROS® in various dosing packages to wholesale pharmaceutical distributors and specialty retail pharmacies (collectively, our customers) on a wholesale basis. Sales to our customers are subject to specified rights of return. 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). Net revenue is measured as the amount of consideration we expect to receive in exchange for 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®. As of March 31, 2019, we had 51 full-time sales and marketing personnel as compared to 163 full-time sales and marketing personnel at March 31, 2018.

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, investigative sites, manufacturers and consultants;

•

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

•

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

Our recent research and development efforts have been focused primarily on our cannabidiol, naloxone, dronabinol, buprenorphine, and epinephrine programs. As of March 31, 2019, we had 45 full-time research and development personnel as compared to 57 full-time research and development personnel at March 31, 2018.

The following table provides a breakdown of our research and development expenses during the three months ended March 31, 2019 and 2018 (in millions):

	Three Months Ended
	March 31,
	2019		2018
Cannabidiol	$	3.6	$	4.2
Buprenorphine		0.1		0.1
Fentanyl		0.2		0.1
Epinephrine		-		0.1
Naloxone		1.0		0.3
Dronabinol		0.1		1.0
Buprenorphine/Naloxone		0.1		0.7
Internal research and development costs		5.2		5.2
Other		0.2		0.6
Total research and development expenses	$	10.5	$	12.3

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General and Administrative Expenses

Our general and administrative expenses consist primarily of:

•

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

•

regulatory fees for commercialized products;

•

insurance premiums;

•

fees for investor relations service and internal support functions;

•

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

•

professional fees for consulting and accounting services.

As of March 31, 2019 and 2018, we had 38 and 53 full-time general and administrative personnel, respectively.

Legal Expenses

Our legal expenses consist primarily of salaries and related costs for legal personnel and professional fees for legal services. See Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of our ongoing disputes and other legal matters.

Charges Related to Litigation Award and Settlements

Charges related to litigation award and settlements for the three months ended March 31, 2019 and 2018 were $73.9 million and $0.7 million, respectively. See Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of our ongoing disputes and other legal matters.

Income Tax Expense

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.

Significant Accounting Policies and Estimates

Significant changes to our accounting policies as a result of adopting ASC Topic 842 are discussed in Note 1 and Note 7 of the notes to our unaudited condensed consolidated financial statements. There were no other changes in our significant accounting policies and estimates during the three months ended March 31, 2019, from those set forth in “Note 2, Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Results of Operations

Comparison of Three Months Ended March 31, 2019 to Three Months Ended March 31, 2018

The following table presents certain selected unaudited condensed consolidated financial data for the three months ended March 31, 2019 and 2018, expressed as a percentage of net revenue:

	Three Months Ended
	March 31,
	2019			2018
Net revenue		100.0	%		100.0	%
Cost of revenue		60.0			9.2
Gross profit		40.0			90.8
Operating expenses:
Sales and marketing		54.0			37.9
Research and development		137.9			51.3
General and administrative		144.0			39.9
Legal		336.4			43.3
Charges related to litigation award and settlements		968.1			3.1
Total operating expenses		1,640.4			175.5
Operating loss		(1,600.4	)		(84.7	)
Other income (expense):
Interest income		5.5			2.1
Other expense, net		(11.9	)		(1.9	)
Total other income (expense)		(6.4	)		0.2
Loss before income taxes		(1,606.8	)		(84.5	)
Income tax expense		16.3			0.7
Net loss		(1623.1	)%		(85.2	)%

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Net Revenue. Net revenue decreased $16.3 million, or 68.2%, to $7.6 million for the three months ended March 31, 2019, compared to $23.9 million for the three months ended March 31, 2018. The decrease in net revenue was primarily attributable to a 67.3% decrease in SUBSYS® shipments to our customers for the three months ended March 31, 2019 primarily due to reduced demand for SUBSYS®, as compared to the three months ended March 31, 2018, and a 1.6% 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 a price increase in January 2019. Provisions for patient discounts, wholesaler discounts, rebates, and returns were $0.9 million, $1.1 million, $3.3 million, and $0.8 million, respectively, for the three months ended March 31, 2019, compared to $1.7 million, $2.9 million, $6.6 million, and $3.4 million, respectively, for the three months ended March 31, 2018. 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 March 31, 2019 as compared to the three months ended March 31, 2018. As we have previously disclosed, 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 2019 when compared to 2018. In addition, for the same reasons, we anticipate that we will experience future declines in SUBSYS® revenue for the remainder of 2019 when compared to prior quarters in 2018. On May 9, 2019, the Company was notified by its logistics provider that such provider has ceased shipments to a specialty pharmaceutical retailer, which accounted for approximately 19% of our total product shipments for the three months ended March 31, 2019. As a result, the Company is effectively precluded from shipping products to this specialty pharmaceutical retailer at this time. Management is monitoring the situation and evaluating the impact of this cessation on its operations and future results.

Cost of Revenue, Gross Profit and Gross Margin. Cost of revenue increased $2.4 million to $4.6 million for the three months ended March 31, 2019, compared to $2.2 million for the three months ended March 31, 2018. The increase in cost of revenue was primarily attributable to an increase in reserves for excess and obsolete inventory, partially offset by the decrease in sales of SUBSYS® during the three months ended March 31, 2019. Gross profit decreased $18.6 million to $3.1 million for the three months ended March 31, 2019, compared to $21.7 million for the three months ended March 31, 2018, due primarily to the decrease in sales of SUBSYS®. Gross margin for the three months ended March 31, 2019 was approximately 40% compared to approximately 91% for the three months ended March 31, 2018. The decrease in gross margin was primarily due to the increase in reserves for excess and obsolete inventory.

Sales and Marketing Expense. Sales and marketing expense decreased $5.0 million to $4.1 million for the three months ended March 31, 2019, compared to $9.1 million for the three months ended March 31, 2018. 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 $1.8 million to $10.5 million for the three months ended March 31, 2019, compared to $12.3 million for the three months ended March 31, 2018. 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 increased $1.4 million to $11.0 million for the three months ended March 31, 2019, compared to $9.6 million for three months ended March 31, 2018. The increase in general and administrative expense was primarily due to fees for professional services and consulting.

Legal Expense. Legal expense increased $15.4 million to $25.7 million for the three months ended March 31, 2019, compared to $10.3 million for the three months ended March 31, 2018. 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.

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Charges Related to Litigation Award and Settlements. Charges related to litigation award and settlements for the three months ended March 31, 2019 were $73.9 million, and consist primarily of $48.0 million in connection with state related investigations, $19.2 million in connection with securities litigation, $3.6 million in connection with personal injury litigation, and $2.0 million in connection with insurance litigation. Charges related to litigation award and settlements for the three months ended March 31, 2018 were $0.7 million. See Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of our ongoing disputes and other legal matters.

Income Tax Expense. Income tax expense was $1.2 million for the three months ended March 31, 2019, representing an effective tax rate of (1.0)%, as compared to expense of $0.2 million for the three months ended March 31, 2018, representing an effective tax rate of (0.8)%. The change in the effective rate for the period ended March 31, 2019, compared with the same period in the previous year, was primarily due to an increase in uncertain tax positions for the three months ended March 31, 2019. As of March 31, 2019, we had approximately $130.0 million of federal NOLs, and $238.6 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 have maintained a full valuation allowance through the current quarter. The establishment of a valuation 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 $6.5 million as of March 31, 2019, primarily associated with tax positions taken in prior years. Penalties and interest of approximately $0.2 million and $1.1 million, respectively, are included in income taxes and accounted for on the balance sheet related to unrecognized tax positions.

Liquidity and Capital Resources

Sources of Liquidity and Funding Requirements

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

As discussed in “—Going Concern” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section and in Note 1 of the notes to our unaudited condensed consolidated financial statements, we have experienced recurring and increasing losses from operations over the previous 18 months due to significant declines in the TIRF market and significant legal expenses resulting from the DOJ Investigation and other significant litigation matters to which we are subject (see Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of these legal matters). We have estimated liabilities of approximately $240.3 million as of March 31, 2019 for proposed settlements of our various litigation matters, and there are other matters for which we have not been able to determine a reasonable estimated loss. Furthermore, we are uncertain if we will be able to complete a final settlement with the DOJ because of the Company’s inability to fulfill demands made by the DOJ, including the execution of a security agreement relating to the assets of the Company to collateralize payments under the settlement. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of the unaudited condensed consolidated financial statements.

Management’s plans, in order to meet our operating cash flow requirements, include the pursuit of strategic alternatives related to the sale or licensing of the Company’s assets. There are no assurances that the Company will be successful in implementing a strategic plan for the sale or licensing of its assets in order to address its impending liquidity constraints. If the Company cannot successfully implement its strategic plan for the sale or licensing of its assets, and/or reach an agreement with the DOJ, its liquidity, financial condition and business prospects will be materially and adversely affected. Accordingly, it may be necessary for the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring. Our Board of Directors has not made any decisions related to any strategic alternatives at this time.

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Cash Flows

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

	Three Months Ended
	March 31,
	2019			2018
Net cash used in operating activities	$	(16.7	)	$	(17.4	)
Net cash provided by investing activities		21.6			3.4
Net cash provided by financing activities		-			0.5
Net decrease in cash and cash equivalents		4.9			(13.5	)
Cash and cash equivalents, beginning of period		31.6			32.0
Cash and cash equivalents, end of period	$	36.5		$	18.5

Cash Flows from Operating Activities. Net cash used in operating activities was $16.7 million and $17.4 million for the three months ended March 31, 2019 and 2018, respectively. The net cash used during the three months ended March 31, 2019 and 2018 primarily reflects the net loss for the period driven by a reduction in SUBSYS® net sales, adjusted in part by inventory obsolescence reserves, depreciation and amortization, and stock-based compensation expense.

Cash Flows from Investing Activities. Net cash provided by investing activities was $21.6 million and $3.4 million for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, the net cash provided by investing activities primarily consists of the net sale and maturity of investments to meet our operational needs. For the three months ended March 31, 2018, the net cash provided by investing activities consists primarily of the net sale and maturity of investments, partially offset by purchases of property and equipment.

Cash Flows from Financing Activities. There was no net cash provided by financing activities for the three months ended March 31, 2019. Net cash provided by financing activities was $0.5 million for the three months ended March 31, 2018, consisting of proceeds from the exercise of stock options.

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

Off-Balance Sheet Arrangements

During the three months ended March 31, 2019, 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 of the notes 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 March 31, 2019, $24.3 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.

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 $54.2 million as of March 31, 2019, and $78.7 million as of December 31, 2018. These securities, like all fixed income instruments, are subject to interest rate risk and would likely decline in value if market interest rates increase. Currently, 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.

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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 March 31, 2019

Remainder of

2019

2020

2021

2022

2023

Thereafter

CD's and Available-for-sale securities

46.2

8.0

—

Weighted-average yield rate

2.04

0.30

—

0.00

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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our 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. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended March 31, 2019, 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.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 8 of the notes to the unaudited condensed consolidated financial statements is incorporated herein by reference.

ITEM 1A. RISK FACTORS

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, 2018, as well as the other information discussed herein, including the risk factors below. Our business, financial condition and results of operations could be adversely affected by any of the risks and uncertainties described. There have been no material changes from the risk factors disclosed in Part I, Item 1A, in our Annual Report on Form 10-K other than as disclosed below.

We have concluded there is substantial doubt about our ability to continue as a going concern and our independent registered public accounting firm’s report on our financial statements for the fiscal year ended December 31, 2018 contains an explanatory paragraph describing our ability to continue as a going concern.

If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment.

We may seek the protection of the United States Bankruptcy Court (the “Bankruptcy Court”), which may harm our business, adversely affect our ability to retain key personnel, and result in a loss of value for our stockholders.

We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address our liquidity and capital structure. However, as discussed herein, there can be no assurance that the strategic review will be successful, and a filing under Chapter 11 may be unavoidable. Seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the process related to a Chapter 11 proceeding continues, our senior management would be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. Bankruptcy Court protection also might make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer a Chapter 11 proceeding continues, the more likely it is that our customers would lose confidence in our ability to reorganize our businesses successfully and would seek to establish alternative commercial relationships. Therefore, trading in our securities is highly speculative and poses substantial risks.

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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 healthcare 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. We are uncertain if the Company will be able to complete a final settlement with the DOJ because of the Company’s inability to fulfill demands made by the DOJ, including the execution of a security agreement relating to the assets of the Company to collateralize payments under the settlement. We expect that a final settlement, if it were to be completed, would include other material non-financial terms and conditions, including a fraud-based criminal felony plea by one of our subsidiaries and a deferred prosecution agreement with the Company related to the actions of our former employees. Additionally, we expect that a final settlement, if it were to be completed, will include a corporate integrity agreement and conditional exclusion release between the Company and OIG that will require the Company to exit the opioid business within 12 months of the effective date, in addition to other provisions. We cannot be certain that a final agreement will be reached. If a final agreement cannot be reached, it is likely that the Company will be indicted.

If completed and executed, these agreements will require continued 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 some form of employee training, third party reviews, compliance monitoring, reporting obligations and management attention. We estimate a minimum exposure of $150 million (plus interest) to be paid over 5 years. In addition, we also anticipate certain contingency payments estimated between $0 and $75 million. If we fail to comply with the final agreement with DOJ and OIG (including a potential requirement to exit the opioid business), the DOJ or OIG may impose substantial monetary penalties, exclude us from federal healthcare programs, including Medicare, Medicaid and Veterans Health Administration programs, and/or criminally prosecute the Company, 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. See Note 8 of the notes to our unaudited condensed consolidated financial statements for a discussion of these legal matters.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

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^Ω		Amendment to Manufacturing and Supply Agreement, dated as of February 26, 2019, by and between the Registrant and Renaissance (filed herewith)
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

(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.

Ω Portions of the exhibit have been omitted.

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INSYS THERAPEUTICS, INC.

SIGNATURES

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.

	INSYS THERAPEUTICS, INC.

Dated: May 10, 2019	By:	/s/ Andrew G. Long
		Andrew G. Long
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Andrece Housley
		Andrece Housley
		Chief Financial Officer
		(Principal Financial and Accounting Officer)