UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-38038
Valeritas Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
 
46-5648907
(State or other jurisdiction of
incorporation or organization)
 
(I. R. S. Employer
Identification No.)
 
 
750 Route 202 South, Suite 600
Bridgewater, NJ
 
08807
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (908) 927-9920  
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 Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the 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 checkmark 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(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
VLRX
Nasdaq Capital Market




The number of shares outstanding of the registrant's common stock as of August 7, 2019 was 7,157,639 .




VALERITAS HOLDINGS, INC.
 

2


CAUTIONARY NOTE
REGARDING FORWARD‑LOOKING STATEMENTS
Certain matters discussed in this report, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “estimate,” “may,” “expect” and similar expressions are generally intended to identify forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as other factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Such forward-looking statements include, but are not limited to, statements about our:

•
expectations for increases or decreases in expenses;
•
expectations for the clinical and preclinical development, manufacturing, regulatory approval, and commercialization of our product candidates or any other products that we may acquire or in-license;
•
estimates of the sufficiency of our existing capital resources combined with future anticipated cash flows to finance our operating requirements;
•
expectations for incurring capital expenditures to expand our research and development and manufacturing capabilities;
•
expectations for generating revenue or becoming profitable on a sustained basis;
•
expectations or ability to enter into marketing and other partnership agreements;
•
expectations or ability to enter into product acquisition and in-licensing transactions;
•
expectations or ability to build our own commercial infrastructure to manufacture, market and sell our product candidates;
•
expected losses;
•
ability to obtain and maintain intellectual property protection for our product candidates;
•
acceptance of our products by doctors, patients, or payors;
•
stock price and its volatility;
•
ability to attract and retain key personnel;
•
the performance of third-party manufacturers;
•
expectations for future capital requirements; and
•
our ability to successfully implement our strategy.

The forward-looking statements contained in this report reflect our views and assumptions only as of the date that this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.



3


Part I - Financial Information

Item1. Financial Statements
Valeritas Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share and per share data)
 
 
June 30,
2019
 
December 31,
2018
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,259

 
$
47,758

Accounts receivable, net
5,646

 
6,294

Inventories, net
8,609

 
6,824

Prepaid expense and other current assets
1,469

 
1,200

Total current assets
42,983

 
62,076

Property and equipment, net
6,713

 
6,097

Right-of-use assets
2,494

 
—

Other assets
563

 
447

Total assets
$
52,753

 
$
68,620

Liabilities and stockholders' equity (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,930

 
$
4,916

Accrued expense and other current liabilities
11,226

 
8,851

Current portion of operating lease obligations
377

 
—

Current portion of financing lease obligations
132

 
123

Total current liabilities
16,665

 
13,890

Long-term debt, related parties (net)
41,680

 
40,192

Operating lease obligations
2,244

 
—

Deferred rent
—

 
109

Financing lease liabilities
72

 
140

Total liabilities
60,661

 
54,331

Commitments and contingencies

 

Stockholders' equity (deficit)
 
 
 
Convertible preferred stock, $0.001 par value, 50,000,000 shares authorized at June 30, 2019; 2,750,000 shares issued and outstanding at June 30, 2019 and December 31, 2018. (aggregate liquidation value of $32,511 and $31,411 at June 30, 2019 and December 31, 2018, respectively)
3

 
3

Common stock, $0.001 par value, 300,000,000 shares authorized; 5,988,616 shares issued and 5,988,224 shares outstanding at June 30, 2019 and 4,997,544 shares issued and 4,997,152 shares outstanding at December 31, 2018.
6

 
5

Additional paid-in capital
540,681

 
534,176

Accumulated deficit
(548,574
)
 
(519,871
)
Treasury stock, at cost (392 shares)
(24
)
 
(24
)
Total stockholders' equity (deficit)
(7,908
)
 
14,289

Total liabilities and stockholders' equity (deficit)
$
52,753

 
$
68,620

See accompanying notes to unaudited condensed consolidated financial statements.

4


Valeritas Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except share and per share data)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue, net
$
7,514

 
$
6,497

 
$
13,917

 
$
12,578

Cost of goods sold
3,796

 
3,405

 
7,154

 
6,589

Gross margin
3,718

 
3,092

 
6,763

 
5,989

Operating expense:
 
 
 
 

 

Research and development
1,866

 
1,860

 
3,536

 
3,924

Selling, general and administrative
14,907

 
11,228

 
30,158

 
22,693

Total operating expense
16,773

 
13,088

 
33,694

 
26,617

Operating loss
(13,055
)
 
(9,996
)
 
(26,931
)
 
(20,628
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest expense, net
(958
)
 
(939
)
 
(1,819
)
 
(1,878
)
Other income (expense), net
(6
)
 
(25
)
 
47

 
(28
)
Total other income (expense), net
(964
)
 
(964
)
 
(1,772
)
 
(1,906
)
Loss before income taxes
(14,019
)
 
(10,960
)
 
(28,703
)
 
(22,534
)
Provision for income taxes
—

 
—

 
—

 
—

Net loss
$
(14,019
)
 
$
(10,960
)
 
$
(28,703
)
 
$
(22,534
)
Preferred stock dividend
$
(550
)
 
$
(550
)
 
$
(1,100
)
 
$
(1,100
)
Net loss attributable to common stockholders
$
(14,569
)
 
$
(11,510
)
 
$
(29,803
)
 
$
(23,634
)
Net loss per share of common shares outstanding - basic and diluted
$
(2.73
)
 
$
(12.46
)
 
$
(5.64
)
 
$
(36.97
)
Weighted average common shares outstanding - basic and diluted
5,333,422

 
923,727

 
5,287,659

 
639,358

See accompanying notes to unaudited condensed consolidated financial statements.

5


Valeritas Holdings, Inc.
Condensed Consolidated Statements of Stockholders' Equity / (Deficit)
(Unaudited)
(Dollars in thousands, except share data)
 
Three and Six Months Ended June 30, 2019
 
Preferred Stock
Common Stock
Treasury Stock
 
 
 
 
Shares
Amount
Shares
Amount
Shares
Amount
Additional Paid-in
Capital
Accumulated
Deficit
Total Stockholders' Equity (Deficit)
Balance-December 31, 2018
2,750,000

$
3

4,997,152

$
5

392

$
(24
)
$
534,176

$
(519,871
)
$
14,289

Share-based compensation expense
—

—

—

—

—

—

1,069

—

1,069

Issuance of common stock through sales agreement, net of fees
—

—

109,117

—

—

—

773

—

773

Issuance of common stock with exercise of Series B warrants
—

—

2,096

—

—

—

20

—

20

Net loss
—

—

—

—

—

—

—

(14,684
)
(14,684
)
Balance-March 31, 2019
2,750,000

$
3

5,108,365

$
5

392

$
(24
)
$
536,038

$
(534,555
)
$
1,467

Share-based compensation
—

—

—

—

—

—

813

—

813

Issuance of common stock through sales agreement, net of fees
—

—

879,859

1

—

—

3,830

—

3,831

Net loss
—

—

—

—

—

—

—

(14,019
)
(14,019
)
Balance-June 30, 2019
2,750,000

$
3

5,988,224

$
6

392

$
(24
)
$
540,681

$
(548,574
)
$
(7,908
)
 
Three and Six Months Ended June 30, 2018
 
Preferred Stock
Common Stock
Treasury Stock
 
 
 
 
Shares
Amount
Shares
Amount
Shares
Amount
Additional Paid-in
Capital
Accumulated
Deficit
Total Stockholders' Equity (Deficit)
Balance-December 31, 2017
2,750,000

$
3

350,118

$
—

392

$
(24
)
$
469,884

$
(473,921
)
$
(4,058
)
Cumulative effect of change in accounting principle
—

—

—

—

—

—

—

(21
)
(21
)
Share-based compensation
—

—

—

—

—

—

1,029

—

1,029

Restricted stock vested
—

—

1,500

—

—

—

—

—

—

Issuance of common stock as a result of Employee Stock Purchase Program
—

—

2,755

—

—

—

137

—

137

Net Loss
—

—

—

—

—

—

—

(11,574
)
(11,574
)
Balance-March 31, 2018
2,750,000

$
3

354,373

$
—

392

$
(24
)
$
471,050

(485,516
)
(14,487
)
Share-based compensation
—

—

—

—

—

—

1,011

—

1,011

Issuance of common stock as a result of public offering, net of fees
—

—

765,000

1

—

—

24,358

—

24,359

Issuance of common stock as a result of Purchase Agreements, net of fees
—

—

102,121

—

—

—

2,885

—

2,885

Commitment fee for Second Purchase Agreement
—

—

13,193

—

—

—

—

—

—

Net loss
—

—

—

—

—

—

—

(10,960
)
(10,960
)
Balance-June 30, 2018
2,750,000

$
3

1,234,687

$
1

392

$
(24
)
$
499,304

$
(496,476
)
$
2,808

See accompanying notes to unaudited condensed consolidated financial statements.

6


Valeritas Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Six Months Ended
June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(28,703
)
 
$
(22,534
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation of property and equipment
600

 
660

Change in right-of-use assets
145

 
—

Amortization of financing costs
13

 
9

Noncash interest expense
1,476

 
2,007

Share-based compensation expense
1,882

 
2,040

Obsolete inventory reserve
636

 
196

Change in fair value of derivative liabilities
—

 
4

Impairment of assets
—

 
20

Sales return provision
175

 
(158
)
Changes in:
 
 
 
Accounts receivable
648

 
(870
)
Inventories
(2,421
)
 
870

Prepaid expense and other current assets
(269
)
 
(538
)
Other assets
(151
)
 
(175
)
Accounts payable
(176
)
 
(1,473
)
Accrued expense
2,199

 
166

Operating lease liabilities
(127
)
 
—

Deferred rent liability
—

 
39

Net cash used in operating activities
(24,073
)
 
(19,737
)
Investing activities
 
 
 
Acquisition of property and equipment
(1,026
)
 
(813
)
Net cash used in investing activities
(1,026
)
 
(813
)
Financing activities
 
 
 
Repayment of finance lease
(59
)
 
(46
)
Proceeds from issuance of common stock and exercise of warrants, net of fees
4,659

 
27,542

Proceeds from issuance of common stock through ESPP
—

 
137

Net cash provided by financing activities
4,600

 
27,633

Net increase (decrease) in cash and cash equivalents
(20,499
)
 
7,083

Cash and cash equivalents-beginning of period
47,758

 
25,961

Cash and cash equivalents-end of period
$
27,259

 
33,044

Supplemental disclosures of cash flow information

 
 
Right-of-use assets
$
2,592

 
$
—

Operating lease liability
$
2,700

 
$
—

       Deferred rent
$
109

 
$
—

Cash interest payment on long-term debt
$
764

 
$
—

Commitment fee for Second Purchase Agreement
$
—

 
$
429

Deferred revenue reduction
$
—

 
$
1,638

Sales return reserve
$
—

 
$
778

       Deferred cost of goods sold reduction
$
—

 
$
539

Accrued distribution fees and managed care costs
$
—

 
$
343

Noncash investing and financing
 
 
 
Capital lease obligation
$
—

 
$
315

Accrued offering costs
$
—

 
$
298

Property and equipment additions included in accounts payable
$
190

 
$
—

See accompanying notes to unaudited condensed financial statements.

7


Valeritas Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Organization
Organization and Nature of Operations
Valeritas Holdings, Inc. (the “Company”) was incorporated in the state of Delaware on May 3, 2016. Prior to its incorporation in Delaware, the Company was incorporated in Florida on May 9, 2014 under the name “Cleaner Yoga Mat, Inc.” Valeritas, Inc., the Company’s wholly-owned subsidiary, was incorporated in the state of Delaware on December 27, 2007, when it was converted into a Delaware corporation from a Delaware limited liability company, which was formed on August 2, 2006 under the name Valeritas LLC.
The Company is a commercial-stage medical technology company focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies. The Company’s flagship product, V-Go® Wearable Insulin Delivery device, is a simple, wearable, basal-bolus insulin delivery device for adult patients with type 2 diabetes that enables patients to administer a continuous preset basal rate of insulin over 24 hours. It also provides discreet on-demand bolus dosing at mealtimes. It is the only non-electronic basal-bolus insulin delivery device on the market today specifically designed keeping in mind the needs of adult patients with Type 2 diabetes. V-Go is a small, discreet, easy-to-use wearable and completely disposable insulin delivery device that a patient adheres to his or her skin every 24 hours. V-Go enables patients to closely mimic the body’s normal physiologic pattern of insulin delivery throughout the day and to manage their diabetes with insulin without the need to plan a daily routine around multiple daily injections.

2. Liquidity and Ability to Continue as a Going Concern
The Company is subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, competition from larger companies, other technology companies and other technologies.

In accordance with ASC 205-40, Going Concern, the Company has evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. As of June 30, 2019 , the Company had $27.3 million in cash and cash equivalents ( $0.5 million of which is restricted cash). The Company has incurred losses each year since inception and has experienced negative cash flows from operations in each year since inception and has an accumulated deficit of $548.6 million as of June 30, 2019 . The Company's Term Loan (as defined below) includes a liquidity covenant whereby the Company must maintain a cash balance greater than $2.0 million . Based on its current business plan assumptions and expected cash burn rate, excluding potential share sales associated with its financing agreements discussed below, the Company believes that it has sufficient cash and cash equivalents to fund its current operations into the first quarter of 2020 . These factors raise substantial doubt regarding the Company's ability to continue as a going concern.

On January 26, 2018, the Company entered into an At the Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. (“FBR”) under which the Company may, from time to time in its sole discretion, issue and sell through FBR, acting as agent, shares of the Company’s common stock (the “Placement Shares”) up to the amount currently authorized in an effective registration statement. FBR has the option to decline any sales orders at its discretion. The issuance and sale of the Placement Shares are made pursuant to the terms of the Sales Agreement and a prospectus supplement on Form S-3, dated March 22, 2019, to the Company’s Shelf Registration Statement on Form S-3 (File No. 333-220799), which was filed with the Securities and Exchange Commission (“SEC”) on October 4, 2017, and declared effective by the SEC on December 15, 2017, which provides for the sale and issuance of up to approximately $10.3 million of Placement Shares. During the six months ended June 30, 2019 , the Company sold 988,976 shares at an average $4.83 per share and received net proceeds of $4.6 million . During the third quarter of 2019 through August 7, 2019 , the Company sold an additional 1,169,415 shares at an average of $3.99 per share for net proceeds of $4.5 million . As of August 7, 2019 , the Company has $0.8 million remaining available for sale under the current prospectus supplement, pursuant to the Sales Agreement.

On June 11, 2018, the Company entered into a purchase agreement (the “Second Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), pursuant to which the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to  7,500  shares of the Company’s common stock per business day, in an aggregate amount of up to  $21.0 million of the Company's common stock (the “Purchase Shares”). At the 2019 annual meeting of stockholders (the “Annual Meeting”) held on May 16, 2019 the stockholders approved pursuant to Nasdaq Listing

8


rules 5635(b) and 5635(d) the potential issuance of shares of the Company's common stock, to Aspire Capital of up to $21.0 million under the Second Purchase Agreement. As a result, the Second Purchase Agreement exchange cap restricting the amount of shares that may be sold to Aspire Capital was removed. The purchase agreement provides that the Company and Aspire Capital shall not effect any sales under the closing sale price of its common stock that is less than $1.00 . For the three and six months ended June 30, 2019 , the company sold no shares under the Second Purchase Agreement. As of June 30, 2019 , the Company has $19.7 million remaining available to sell under the Second Purchase Agreement.

The Company completed a public offering on November 16, 2018 for net proceeds of approximately  $32.5 million , after deducting underwriting discounts and commissions of  $2.7 million  and offering expenses of $0.8 million . This offering also included  3,750,000  Series A warrants and  3,750,000  Series B warrants. The Series A warrants, if exercised at the exercise price of  $12.00  per share prior to their expiration date of  five years  after issuance, could generate an additional  $45.0 million  before fees. The Series B warrants, if exercised at the exercise price of  $9.60  per share prior to their expiration date of nine months after issuance, could generate  $36.0 million  before fees. As of June 30, 2019 a total of 2,096 Series B warrants were exercised at $9.60 per share for de minimis net proceeds.

There is uncertainty regarding the utilization of financing associated from the Sales Agreement and the Second Purchase Agreement, as well as the ability to receive proceeds from the exercise of the Series A and B warrants. This uncertainty makes our ability to provide enough cash to fund operations beyond the first quarter of 2020 unknown. The Company is actively pursuing additional sources of financing to fund its operations. The Company can provide no assurances that additional financings will be consummated on acceptable terms, or at all. If the Company is unable to effect a sufficient financing or capital raise, there could be a material adverse effect on the Company.

These consolidated financial statements have been prepared with the assumption that the Company will continue as a going concern and will be able to realize its assets and discharge its liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.

3. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the Company's annual consolidated financial statements included within the Company's Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on March 6, 2019.
The preparation of the unaudited condensed consolidated financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of expenses during the reported period. Ultimate results could differ from the estimates of management.
In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company's financial position and the results of its operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2019 may not be indicative of results for the full year.
Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Reverse Stock Split
On May 20, 2019 (the “Effective Date”), the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to effect a 1–for–20 reverse stock split of the Company's outstanding shares of common stock. Such amendment and ratio were previously approved by the Company's stockholders and board of directors, respectively. As a result of the reverse stock split, every twenty shares of the Company's outstanding pre–

9


reverse split common stock were combined and reclassified into one share of common stock. Proportionate voting rights and other rights of common stock holders were not affected by the reverse stock split. Stockholders who would otherwise have held a fractional share of common stock received payment in cash in lieu of any such resulting fractional shares of common stock, as the post–reverse split amounts of common stock were rounded down to the nearest full share. Unless otherwise noted, all share and per share information included in the financial statements and notes thereto have been retroactively adjusted to reflect the reverse stock split.

Change in Accounting Principle

The Company adopted Accounting Standards Codification 842, Leases (“ASC 842”) in the first quarter of 2019. As a result, the Company updated its significant accounting policies for leases below. Refer to Note 11 for additional information related to the Company's lease arrangements.

Leases

The Company has two leased buildings in Bridgewater, New Jersey and Marlborough, Massachusetts, that are classified as operating lease right-of use (“ROU”) assets and operating lease liabilities in the Company's condensed consolidated balance sheet. Finance (capital) leases are included in property and equipment. The Company additionally has two service contracts that were determined to be embedded leases within the scope of ASC 842, and accordingly are accounted for as ROU assets.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement.
The Company estimates its incremental borrowing rate for its leases using a portfolio approach based on the respective weighted average term of the agreements. The estimation considers the market rates of the Company's outstanding collateralized borrowings and rates of external outstanding borrowings including market comparisons.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales and general and administrative expenses. Amortization expense for finance (capital) leases is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expenses, while interest expense for finance (capital) leases is recognized using the effective interest method. In addition, as defined by ASC 842 the Company tested its service contracts for embedded leases. For an asset to be considered as a lease in the contract the asset must meet the following criteria: 1) the asset must be explicitly or implicitly specified in the contract; 2) the asset must be physically distinct; and 3) the supplier does not have a substantive substitution right. Once an asset is determined to be an embedded lease it is then tested to determine if it is an operating or financing lease. Embedded leases are determined to be operating leases if the contractual term is less than 75% of the estimated economic life, the allocated cash flows are less than 90% of the fair market value to purchase these assets, there is no purchase option (bargain or otherwise), there is no transfer of ownership at the end, and the assets are not so customized to the Company's needs that they could not be reworked to use for another customer.
The standard was effective for the Company beginning January 1, 2019. The Company elected the available practical expedients on adoption. In preparation for adoption of the standard, the Company has implemented internal controls and key system functionality to enable the preparation of financial information. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. The Company's accounting for finance (capital) leases remained substantially unchanged. Adoption of this standard resulted in the recognition of additional ROU assets and lease liabilities for operating leases and had the following impact to the reported results as of December 31, 2018 on our condensed consolidated financial statements:

10


 
As Reported
 
 
 
Adjusted
 Consolidated State of Financial Condition
December 31, 2018
 
New Lease Standard Adjustment
 
January 1, 2019
 
 
 
 
 
 
 Right-of-use assets
$
—

 
$
1,566

 
$
1,566

 Current portion of operating lease obligations
—

 
272

 
272

 Operating lease long term lease obligations
—

 
1,403

 
1,403

 Current portion of financing lease obligations
123

 
—

 
123

 Deferred rent
109

 
(109
)
 
—

 Long term financing lease obligations
140

 
—

 
140

Significant Accounting Policies
Aside from the adoption of ASC 842, as described above, there have been no other material changes to the significant accounting policies or recent accounting pronouncements previously disclosed in Valeritas Holdings, Inc.'s 2018 annual consolidated financial statements included in the Company's Form 10-K for the fiscal year ended December 31, 2018.
Recently Issued Accounting Standards Not Yet Adopted

On August 28, 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. This ASU removes certain disclosure requirements regarding the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of transfers between the levels. This ASU also adds disclosure requirements regarding unrealized gains and losses included in Other Comprehensive Income for recurring Level 3 fair value measurements and the range and weighted average of unobservable inputs used in Level 3 fair value measurements. ASU 2018-13 is effective for all entities with fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Company is currently evaluating the impact of adopting this standard.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments”. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance applies to loans, accounts receivable, trade receivables and other financial assets measured at amortized cost, loan commitments, debt securities and beneficial interests in securitized financial assets, but the effect on the Company is projected to be limited to accounts receivable. The guidance will be effective for the fiscal year beginning on January 1, 2020, including interim periods within that year. The Company is currently evaluating the impact of adopting this standard.
In May 2019, the FASB issued ASU 2019-05 “Financial Instruments-Credit Losses (Topic 326)” which provides transition relief for companies adopting ASU 2016-13. This guidance amends ASU 2016-13 to allow companies to elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that were previously recorded at amortized cost under certain circumstances. Companies are required to make this election on and instrument by instrument basis. The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. The Company is currently evaluating the impact of adopting this standard.


4. Revenue from Contract with Customers
The majority of the Company’s revenue is generated from V-Go sales in the United States to third-party wholesalers and medical supply distributors that, in turn, sell this product to retail pharmacies or directly to patients. A portion of the Company's revenue is also generated from V-Go sales to international medical supply distributors. Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company

11


expects to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps:

(i)
identification of the promised goods or services in the contract;
(ii)
determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;
(iii)
measurement of the transaction price, including the constraint on variable consideration;
(iv)
allocation of the transaction price to the performance obligations based on estimated selling prices; and
(v)
recognition of revenue when (or as) the Company satisfies each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606.

Revenue from product sales is recorded net of adjustments for managed care rebates, wholesale distributions fees, cash discounts, prompt pay discounts, and co-pay card redemptions, all of which are established at the time of sale. In order to prepare the consolidated financial statements, the company is required to make estimates regarding the amounts earned or to be claimed on the related product sales, including the following:

•
managed care and Medicare rebates, which are based on the estimated end user payor mix and related contractual rebates;
•
distribution fees, prompt pay and other discounts, which are recorded based on specified payment terms, and which vary by customer; and
•
co-pay card redemption charges which are based on the net transaction costs of prescriptions filled via a Company-subsidized card program and other incentive programs.

The Company believes that its estimates related to managed care and Medicare rebates, distribution fees, prompt pay and other discounts, and co-pay card redemption costs do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within a relatively short period of time.

Return Reserve

The Company records allowances for product returns as a reduction of revenue at the time product sales are recorded. Several factors are considered in determining whether an allowance for product returns is required, including the customers’ return rights and the Company's historical experience with returns and the amount of product sales in the distribution channel not consumed by patients and subject to return. The Company relies on historical return rates to estimate returns. In the future, as any of these factors and/or the history of product returns change, adjustments to the allowance for product returns will be reflected.
5. Inventory
Inventory, net consists of:
 
(Dollars in thousands)
June 30,
2019
 
December 31,
2018
Raw materials
$
1,892

 
$
1,355

Work in process
2,986

 
3,110

Finished goods
3,731

 
2,359

Total
$
8,609

 
$
6,824


The Company states inventories at the lower of first-in, first-out cost, or net realizable value. Stated inventories include material costs, labor and applicable overhead. The Company reviews its inventory for excess or obsolescence and writes down inventory that has no alternative uses to its net realizable value. The inventory reserves for excess and obsolete inventory at June 30, 2019 and December 31, 2018 were $0.8 million and $0.2 million , respectively.    
6. Property and Equipment
Property and equipment consisted of the following:

12


(Dollars in thousands)
Useful lives
 
June 30,
2019
 
December 31,
2018
Machinery and equipment
5-10
 
$
11,769

 
$
10,712

Computers and software
3
 
2,083

 
2,017

Leasehold improvements
6-10
 
408

 
408

Office equipment
5
 
89

 
89

Furniture and fixtures
5
 
187

 
187

Construction in process
 
 
1,341

 
1,248

Total
 
 
15,877

 
14,661

Accumulated depreciation
 
 
(9,164
)
 
(8,564
)
Property and equipment, net
 
 
$
6,713

 
$
6,097

Depreciation expense for the three months ended June 30, 2019 and 2018 was $0.3 million and $0.3 million . Depreciation expense for the six months ended June 30, 2019 and 2018 was $0.6 million and $0.7 million , respectively.





7. Accrued Expenses and Other Current Liabilities
The Company's accrued expenses and other current liabilities consisted of the following:
 
(Dollars in thousands)
June 30,
2019
 
December 31, 2018
Compensation
$
3,849

 
$
3,766

Distribution agreements and managed care costs
3,692

 
2,658

Marketing services
659

 
251

Returns Reserve
795

 
621

Professional fees
885

 
832

Other accruals
1,346

 
723

     Total accrued expenses and other current liabilities
$
11,226

 
$
8,851



14


8. Debt
The Company had the following long–term debt, net of issuance costs outstanding:

(Dollars in thousands)
 
June 30,
2019
 
December 31,
2018
Senior Secured Debt, net
 
$
25,000

 
$
25,000

Issuance costs
 
(91
)
 
(104
)
Payment-in-kind (PIK) interest
 
13,055

 
11,758

Total Senior Secured Debt, net
 
37,964

 
36,654

Other Note Payable, net
 
2,500

 
2,500

Payment-in-kind (PIK) interest
 
1,216

 
1,038

Total Other Note Payable, net
 
3,716

 
3,538

Total Debt
 
$
41,680

 
$
40,192


Senior Secured Debt    
On May 23, 2013, the Company entered into the Term Loan (as defined below) of $50.0 million with Capital Royalty Group (“CRG”), structured as a senior secured loan with a six -year term (the “Term Loan” or the “Senior Secured Debt”). The Term Loan is secured by substantially all of the Company’s assets, including its material intellectual property. The Company later entered into a series of forbearance agreements to modify the Term Loan. The terms of the most recently executed amendment of the Term Loan agreement, dated February 9, 2017, bears interest at  11%  per annum and allows the interest-only period of the Term Loan to extend to  March 31, 2022 , requires quarterly cash interest payments of 8% per annum beginning  June 30, 2019 , extends the deadline for full payment under the Term Loan agreement to  March 31, 2022  and brings the Company’s minimum covenant cash and cash equivalent requirements to  $2.0 million. As of  June 30, 2019 , the Company was in compliance with the financial covenant in the restructured Term Loan agreement. On  March 28, 2017 ,  $25.0 million  of the Term Loan was converted to preferred shares upon completion of the public offering at a pre-split conversion rate of  $10.00 per preferred share. CRG received  2,500,000  preferred shares.
During the three months ended  June 30, 2019 and 2018 , the Company incurred cash interest expense of $0.8 million and no cash interest, respectively and non-cash interest expense of $0.3 million and $0.9 million , respectively. During the six months ended June 30, 2019 and 2018 , the Company incurred cash interest expense of $0.8 million and no cash interest, respectively and non-cash interest expense of $1.3 million and $1.8 million , respectively.
  
Other Note Payable
In 2011, the Company issued a $5.0 million senior subordinated note, or the WCAS Note or (the “Other Note Payable”), to WCAS Capital Partners IV, L.P., or WCAS. The Company later entered into a series of forbearance agreements to modify the WCAS note. The terms of the most recently executed amendment of the WCAS note, dated  May 23, 2013 and as amended March 28, 2017 bears interest at 10% per annum, and all interest accrues as compounded PIK interest and is added to the aggregate principal amount of the loan semi-annually. The outstanding principal amount of the note, including accrued PIK interest, is due in full in September 2021 .  No  interest payments are required during the term of the loan. The Company may pay off the WCAS Note at any time without penalty. On  March 28, 2017 , $2.5 million of the WCAS Note was converted to preferred shares upon completion of the public offering at a conversion rate of  $10.00 per share. WCAS received  250,000 preferred shares.
During the three months ended  June 30, 2019 and 2018 , the Company incurred non-cash interest expense of $0.1 million and $0.1 million , respectively. During the six months ended June 30, 2019 and 2018 , the Company incurred non-cash interest expense of $0.2 million and $0.2 million , respectively.

9. Warrants

The Company issued 519 warrants to acquire shares of its common stock to the agents in the private placement offering that was conducted as part of the 2016 Merger (the “PPO”). The warrants have a term of five years .


15


At December 31, 2018, the Compa ny had 519 private placement warrants outstanding an exercisable, with a weighted average exercise price of $8.80 and a weighted average remaining life of 2.3 years . No warrants were exercised during the three and six months ended June 30, 2019.

During the six months ended June 30, 2019, the Company sold shares of its common stock under the Sales Agreement. Pursuant to the terms of the warrants issued, the exercise price of the warrants was reduced as a result of the offerings. The financial statement effect was de minimis. A t June 30, 2019, the Company had 519 private placement warrants outstanding and exercisable, with a weighted average exercise price of $8.05 and a weighted average remaining life of 1.8 years .

On November 16, 2018, the Company's public offering of 3,750,000 shares of common stock at a purchase price of $9.60 per share for net proceeds of approximately $32.5 million included in the purchase of each share of common stock one Series A warrant and one Series B warrant. Each Series A warrant has an exercise price of $12.00 per share. The Series A warrants are exercisable commencing from the date of their issuance and will expire five years from the date of issuance. Each Series B warrant has an exercise price of $9.60 per share. The Series B warrants are exercisable commencing from the date of their issuance and will expire nine months from the date of issuance. As of June 30, 2019 , a total of 2,096 Series B warrants have been exercised for de minimis net proceeds. As of June 30, 2019 , no Series A warrants have been exercised.

The activities of the common stock warrants are as follows:


Number of
shares
 
Weighted
average exercise
price
 
Weighted
average
remaining life
Outstanding and exercisable—December 31, 2018
7,500,000

 
$
10.80

 
2.8 years

Warrants exercised
2,096

 
9.60

 
—

Outstanding and exercisable—June 30, 2019
7,497,904

 
$
10.80

 
2.3 years


10. Fair Value Measurements
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and debt instruments. For accounts receivable, accounts payable and accrued liabilities, the carrying amounts of these financial instruments as of June 30, 2019 and December 31, 2018 were considered representative of their fair values due to their short term to maturity. Cash equivalents are carried at cost which approximates their fair value. Debt is carried at its principal balance, plus accrued interest, which approximates its fair value. Debt would be considered a level 2 measurement.
11. Commitments and Contingencies
Litigation

The Company from time to time, is party to pending or threatened legal proceedings. The Company recognizes a liability for contingencies, including an estimate of legal costs to be incurred, when information available indicates both a loss is probable and the amount of the loss can be reasonably estimated. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of the Company.

During 2018, the Company received an offer from Roche Diabetes Care, Inc. (“Roche”) to license its US Patent No. 6,736,795 (the ‘795 patent), which expires on September 23, 2020, and is alleged to cover the Company's V-Go product. The Company does not believe the ‘795 patent to be valid, infringed, and/or enforceable, and therefore does not view Roche’s allegation as having merit. The Company also understands that Roche has never practiced the ‘795 Patent and Roche permitted the European equivalent patent to lapse.  Accordingly, the Company declined Roche’s offer of a license to the ‘795 patent, and on January 24, 2019, the Company filed two Inter Partes Review petitions, which included three previously unconsidered prior art references, with the Patent Trial and Appeal Board (“PTAB”).  In response, in late February 2019, Roche filed a proceeding in federal court in Delaware seeking an unspecified amount of damages and potential injunctive relief.  On April 24, 2019 Roche filed a preliminary response with the US Patent and Trademark Office in which it statutorily disclaimed or abandoned all but 2 of the claims in the ‘795 patent that Roche had suggested covered the V-Go product. A statutory disclaimer means that the subject matter covered by the claims abandoned by Roche are dedicated to the public and free for any party to use. On July 16, 2019, the Company entered into a

16


settlement agreement (the “Settlement”) with Roche whereby the Company and Roche agreed to terminate all Inter Partes Review proceedings related to the ‘795 patent and dismiss with prejudice all claims and counterclaims asserted by the two parties in connection with the above disclosed dispute. In exchange for the Settlement, Roche has granted the Company a non-exclusive, worldwide license (the “License”) to use the ‘795 patent, upon the terms and conditions set forth in the Settlement. The License will be valid from the date of the Settlement until the ‘795 patent expires and/or is no longer enforceable. In connection with the Settlement, the Company agreed pay to Roche an amount determined not to be material to the Company's financial statements. The settlement has been included in the Company's balance sheet as of June 30, 2019 and will be paid over the next 12 months from the settlement date.

Financing (Capital) Leases

In January and November 2018, the Company executed capital leases with Winthrop Resources Corporation (“Winthrop”) for laptops and other electronic equipment. The initial term of the two leases expire in 2021, then continues year to year until terminated. At the end of the initial term, the Company has the option to purchase the leased equipment in whole for a mutually agreed upon price. The assets under this capital lease were recorded at the present value of the minimum lease payments, which amounted to  $0.4 million upon commencement and is depreciated over the term of the lease. The Company is obligated to pay $0.1 million of interest expense under the capital lease. For the six months ended June 30, 2019 and 2018 the gross fixed assets for capital leases were $0.4 million and $0.3 million , respectively. Capital lease depreciation expense was de minimis amounts for the three months ended June 30, 2019 and 2018 . Capital lease depreciation expense was de minimis amounts for the six months ended June 30, 2019 and 2018.

Operating Leases
The Company leases buildings in Bridgewater, New Jersey and Marlborough, Massachusetts. The New Jersey lease expires in June 2023 . The original Massachusetts lease was to expire February 2024 . In 2019, the Company entered into the First Amendment to the Marlborough Massachusetts lease, with payments to commence in June 2019 (the “Massachusetts First Amendment Lease”) . The lease adds 4,076 square feet and extends the term of the lease through February, 2026. In addition to rent expense, the Company is obligated to pay costs of insurance, taxes, repairs and maintenance pursuant to the terms of the building leases. The rental payments include the minimum rentals plus common area maintenance charges. The leases include renewal options. As result of the Massachusetts First Amendment Lease an incremental $0.8 million for the ROU asset and lease liabilities were recorded during the three months ended June 30, 2019 .
The Company has a service contract for the manufacturing of its products with a three year term and a separate contract for the packaging and the shipping of its product with an evergreen term, which the Company accounts for as a one and one half year term. These service contracts are recorded in the cost of sales as overhead. Under ASC 842 Leases, the Company tested these service contacts and determined the assets were implicit in the contract, they are distinct and the supplier does not have practical substantive substitution rights. During the three months ended June 30, 2019 , the Company recorded an ROU asset and associated liability of $0.2 million for these embedded leases. Both leases are determined to be operating leases as the contractual term is less than 75% of the estimated economic life, the allocated cash flows are less than 90% of the fair market value to purchase these assets, there is no purchase option (bargain or otherwise), there is no transfer of ownership at the end, and the assets are not so customized to the Company's needs that they could not be reworked to use for another customer.
Rent, lease amortization and interest expense under the building leases amounted to $0.1 million for the three months ended June 30, 2019 and 2018 , and $0.2 million for the six months ended June 30, 2019 and 2018 . The straight line expense for the embedded lease is a de minimis amount per month and is recorded in cost of sales as manufacturing overhead. During the three and six months ended June 30, 2019 , the Company recorded ROU assets of $1.0 million and $2.6 million , respectively.
 
As of June 30, 2019 , the Company’s right-of-use assets, lease obligations and remaining cash commitment on the operating leases is as follows:

Right-of-use Assets

 Operating Lease Obligations

Remaining Cash Commitment
Building and embedded operating leases
$
2,494


$
2,621


$
3,418


The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 6.2 years .




17



Supplemental cash flows information related to leases for the three and six months ended June 30, 2019 are as follows:


Three Months Ended
June 30, 2019
Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
       Operating cash flows from operating leases
$
102

$
203

       Financing cash flows from finance (capital) leases
30

59

       Operating cash flows from finance (capital) leases
9

19

Right-of-use assets obtained in exchange for new lease obligations:
 
 
       Operating leases
$
1,025

$
2,592


At June 30, 2019 , the Company had the following minimum operating lease commitments:

Year ending December 31:
Operating Lease Commitments

2019, remaining
$
285

2020
612

2021
544

2022
537

2023
446

Thereafter
994

Subtotal
3,418

Imputed interest
(797
)
Total
$
2,621



Development Agreement

On April 16, 2018, the Company entered into an agreement with Glooko, a leader in diabetes data management. With this agreement, the Company will provide future V-Go SIM (Simple Insulin Management) users with Glooko’s cloud-based mobile and web diabetes data management platform to help track and analyze their diabetes care plan. Users can also share their data with their providers. Pursuant to the agreement, the Company was obligated to pay a one-time integration fee of $0.1 million , as well as an annual maintenance fee of $0.1 million as well as a monthly fee per user. The initial term of the agreement is for 3 years, with renewal options available in yearly increments thereafter. There were no fees associated with this agreement during the six months ended June 30, 2019 .

Licensing Agreement
Pursuant to a formation agreement, dated as of August 22, 2006 (the “Formation Agreement”), BioValve and BTI Technologies Inc. (“BTI”), a wholly owned subsidiary of BioValve, contributed to Valeritas, Inc. (formerly Valeritas, LLC) all of their right, title and interest in and to all of the assets, properties and rights of BioValve and BTI to the extent related to BioValve's drug delivery/medical device initiative, consisting of patents and equipment, hereafter referred to as the Device Assets.
On August 26, 2008 , the Formation Agreement was amended and the Company agreed to pay BioValve an amount equal to 9% of any cash received from upfront license or signing fees and any cash development milestone payments received by the Company in connection with licenses or grants of third party rights to the use in development or commercialization of the Company's Rapid Infuser Technology. In certain circumstances the Company would owe 10% of such payments received. As of June 30, 2019 and December 31, 2018 , no amounts were owed under this agreement. Although the Company believes the intellectual property rights around this technology have value, the technology licensed under this agreement is not used in V-Go or any current products under development.

18


12. Stockholder's Equity (Deficit)

On the Effective Date, the Company effected a 1-for-20 reverse stock split of its issued and outstanding shares of common stock, $0.001 par value. See Note 3 - Basis of Presentation and Significant Accounting Policies.
The Company's capital structure consists of 300,000,000 authorized shares of common stock, par value $0.001 per share and 50,000,000 authorized shares of blank check preferred stock.

Initial Public Offering

On March 28, 2017, the Company closed its initial public offering of 262,500 shares of common stock for proceeds of approximately $48.8 million , net of financing costs. Existing investors of the Company invested $40.0 million in the public offering. On March 28, 2017, $25.0 million and $2.5 million of the Term Loan and WCAS Note, respectively, were converted to preferred shares. CRG and WCAS received 2,500,000 and 250,000 of the Company's Series A Preferred Stock, respectively as a result of the conversion.

First Purchase Agreement

On January 7, 2018, the Company entered into the First Purchase Agreement with Aspire Capital. The Company sold an aggregate of  62,543  shares of its common stock and received net proceeds of $1.8 million . The First Purchase Agreement was terminated in June 2018.

Sales Agreement
 
On January 26, 2018, the Company entered into the Sales Agreement with FBR under which the Company may, from time to time in its sole discretion, issue and sell through FBR, acting as agent, the Placement Shares up to the amount currently authorized in an effective registration statement. FBR has the option to decline any sales orders at its discretion. The issuance and sale of the Placement Shares are made pursuant to the terms of the Sales Agreement and a prospectus supplement on Form S-3, dated March 22, 2019, to the Company’s Shelf Registration Statement on Form S-3 (File No. 333-220799), which was filed with the SEC on October 4, 2017, and declared effective by the SEC on December 15, 2017, which provides for the sale and issuance of up to approximately $10.3 million of Placement Shares. During the three months ended June 30, 2019 , the Company sold 879,859 shares at an average $4.49 per share and received net proceeds of $3.8 million . During the six months ended June 30, 2019 , the Company sold 988,976 shares at an average $4.83 per share and received net proceeds of $4.6 million . During the third quarter of 2019 through August 7, 2019 , the Company sold 1,169,415 shares at an average of $3.99 per share for net proceeds of $4.5 million . As of August 7, 2019 , the Company has $0.8 million remaining available for sale under the current prospectus supplement, pursuant to the Sales Agreement.

Spring 2018 Public Offering

The Company completed a public offering on April 26, 2018 in which it sold 685,000 shares and received aggregate net proceeds of approximately $21.8 million , after deducting underwriting discounts and commissions of $1.8 million and offering expenses of $0.4 million . On May 2, 2018, the underwriters in the public offering exercised a portion of their 30-day option to purchase additional shares of the Company's common stock, as a result of which the Company sold 80,000 shares and received additional net proceeds of approximately $2.6 million , after deducting underwriting discounts of $0.2 million .
Second Purchase Agreement

In June 2018, the Company entered into the Second Purchase Agreement with Aspire Capital, pursuant to which, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to  7,500  shares of the Company’s common stock per business day, in an aggregate amount of up to  $21.0 million  of the Purchase Shares over the  thirty month term of the Second Purchase Agreement at a per share price equal to the lesser of the lowest sale price of the Company’s common stock on the purchase date; or the arithmetic average of the three lowest closing sale prices for the Company’s common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date. The Company may sell an aggregate of  236,319  shares of its common stock (which represented  19.99%  of the Company’s outstanding shares of common stock on June 11, 2018) without stockholder approval (the “Exchange Cap”). The Company may sell additional shares of its common stock above the  19.99%  limit provided that (i) it obtains stockholder approval or (ii) shareholder approval has not been obtained at any time the  236,319  share limitation is reached and at all times thereafter the average price paid for all shares issued under the Purchase Agreement, including the  13,193  shares of common stock issued to Aspire Capital as consideration for entering into the Purchase Agreement (the “Commitment Shares”) and the 39,578 shares

19


purchased on the date of the agreement (the “Initial Purchase Shares”), is equal to or greater than  $32.40  (the “Minimum Price”), which was the consolidated closing bid price (adjusted for reverse stock split) of the Company’s common stock on the date it entered into the Second Purchase Agreement. In addition to these restrictions, the Company is prohibited from selling shares to Aspire under the Purchase Agreement at a price per share less than  $1.00 . Through June 30, 2019 , the Company has issued an aggregate of 60,271 shares of its common stock to Aspire Capital pursuant to the Second Purchase Agreement (including 13,193 shares issued as a commitment fee). There were no shares sold to Aspire Capital during the three and six months ended June 30, 2019 .

At the 2019 Annual Meeting, the shareholders approved pursuant to Nasdaq Listing rules 5635(b) and 5635(d), of the potential issuance of shares of the Company’s common stock, par value $0.001 (the “Common Stock”), to Aspire Capital, LLC. As a result the exchange cap restricting the amount of shares that may be sold to Aspire Capital was removed. Shareholder approval was granted for the potential issuance of up to $21.0 million of the Company's common stock under the purchase agreement. The purchase agreement provides that the Company and Aspire Capital shall not effect any sales under the closing sale price of its common stock that is less than $1.00 .

Fall 2018 Public Offering

On November 16, 2018 , the Company completed a public offering of 3,750,000 shares of common stock at a purchase price of $9.60 per share and received aggregate net proceeds of approximately $32.5 million , after deducting underwriting discounts and commissions of $2.7 million and offering expenses of $0.8 million . Included in the purchase of each share of common stock was 3,750,000 Series A warrants and 3,750,000 Series B warrants. Each Series A warrant has an exercise price of $12.00 per share. The Series A warrants are exercisable commencing from the date of their issuance and will expire five years from the date of issuance. Each Series B warrant has an exercise price of $9.60 per share. The Series B warrants are exercisable commencing from the date of their issuance and will expire nine months from the date of issuance. Series A warrants outstanding as of June 30, 2019 were 3,750,000 at an exercise price of $12.00 and Series B warrants outstanding were 3,747,904 at an exercise price of $9.60 .
Nasdaq Notifications

On December 31, 2018 the Company received a written notification from the Listing Qualifications Department of Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market because its minimum bid price was less than $1.00 per share for 30 consecutive business days. The notification letter provided that the Company had 180 calendar days, or until July 1, 2019 to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the bid price of the Company's common stock must have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. If the Company did not regain compliance by July 1, 2019 , an additional 180 days could have been granted to regain compliance, so long as the Company meets The Nasdaq Capital Market continued listing requirements (except for the bid price requirement) and notifies Nasdaq in writing of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split. On the Effective Date, the Company effected a 1-for-20 reverse stock split of its issued and outstanding shares of common stock.
On June 25, 2019, the Company received written notification (the “MVLS Notice”) from the Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon Nasdaq’s review of the Market Value of Listed Securities (“MVLS”) for the last 30 consecutive business days preceding the date of notification, the Company no longer meets the minimum MVLS of $35 million as set forth in Nasdaq Listing Rule 5550(b)(2). In accordance with the MVLS Notice, the Company has a period of 180 calendar days, or until December 23, 2019, to regain compliance with Nasdaq Listing Rule 5550(b)(2). In order to regain compliance, the Company must maintain an MVLS of at least $35 million for a minimum of ten consecutive business days during the 180-day compliance period. In lieu of complying with the MVLS requirement, the Company may also regain compliance with Nasdaq if it achieves stockholders’ equity of at least $2.5 million by December 23, 2019, in accordance with the Equity Standard for continued listing on the Nasdaq Capital Market. If the Company does not regain compliance with the MVLS requirement, or otherwise comply with the Equity Standard by December 23, 2019, Nasdaq will notify the Company of its determination to delist its common stock, at which point the Company will have an opportunity to appeal the delisting determination to a Hearings Panel.




Preferred Stock

Shares of preferred stock may be issued from time to time in one or more series, each of which will have such distinctive designation or title as shall be determined by the Company's Board of Directors prior to the issuance of any shares thereof. The number of

20


authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of the Company's capital stock entitled to vote.

On February 14, 2017 , the Company entered into an agreement with CRG and WCAS to convert a total of $27.5 million of the outstanding principal amount of the Company's debt, including the Term Loan, into shares of Series A Convertible Preferred Stock at the public offering price. The shares of Series A Preferred Stock are convertible at the option of the holder at any time into shares of the Company's common stock at a conversion rate determined by dividing the Series A Original Issue Price by the Series A Conversion Price (both as defined in the Certificate of Designation) in effect at the time of conversion. This formula initially results in a one -to- one conversion ratio, but may change in the future. The Series A Conversion Price is subject to adjustment for stock splits and the like subsequent to the date of issuance of the Series A Preferred Stock. On or after January 1, 2021, at the Company's option, if the Company has achieved an average market capitalization of at least $300 million for the Company's most recent fiscal quarter, the Company may elect to automatically convert all of the outstanding shares of Series A Preferred Stock into shares of the Company's common stock.

The holders of shares of Series A Preferred Stock are entitled to receive cumulative annual dividends at a rate of $8 per every $100 of Series A Preferred Stock, payable either in cash or in shares of the Company's common stock, at each holder’s election; provided, that to the extent any holder elects to receive cash dividends, such dividends shall accrue from day to day and be payable only upon a Deemed Liquidation Event (as defined in the Certificate of Designation). The shares of Series A Preferred Stock have no voting rights. The Company has the right to redeem all or less than all of the Series A Preferred Stock, at any time, at a price equal to the Series A Conversion Price, as adjusted, plus any accrued but unpaid dividends. In the event of a Deemed Liquidation Event, upon board approval, the holders of Series A Preferred Stock are eligible to receive the greater of (i) $27.5 million , plus accrued but unpaid dividends or (ii) what they would have received as a holder of common stock had they converted their shares of Series A Preferred Stock into shares of the Company's common stock immediately prior to the Deemed Liquidation Event. Furthermore, shareholders of Series A Preferred Stock will have preferential treatment to common shareholders, however, they are only entitled to receive the same form of consideration upon the occurrence of a Deemed Liquidation Event. To the extent permitted under Delaware law, the holders of shares of Series A Preferred Stock have the right to prevent the Company from liquidating, dissolving, amending the Company's governing documents in a manner that affects the rights of the Series A Preferred Stock, authorizing shares of capital stock on parity or senior to the Series A Preferred Stock, or issuing any shares of Series A Preferred Stock to any individual, entity or person other than CRG or WCAS.
Equity Compensation Plans

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (the “ESPP”), which was established in 2017, the Company is authorized to issue up to 2% of the shares of its capital stock outstanding as of May 3, 2017. The purchase price of the stock will not be less than 85% of the lower of (i) the fair market value per share of the Company's common stock on the start date of the offering period or (ii) the fair market value on the purchase date. The fair market value per share of the Company’s common stock on any particular date under the ESPP will be the closing selling price per share on such date on the national stock exchange serving as the primary market for the Company’s common stock at that time (or if there is no closing price on such date, then the closing selling price per share on the last preceding date for which such quotation exists). Shares of the Company's common stock will be offered for purchase under the ESPP through a series of successive offering periods. Each offering period will be comprised of one or more successive 6-month purchase intervals, unless determined otherwise by the plan administrator. On the start date of each offering period, each participant will be granted a purchase right to acquire shares of the Company's common stock on the last day of each purchase period interval during the offering period. Fair value is determined based on two factors: (i) the  15%  discount amount on the underlying stock’s market value on the first day of the applicable offering period, and (ii) the fair value of the look-back feature determined by using the Black-Scholes model.

Shares of the Company's common stock, were offered for purchase under the ESPP through a series of successive offering periods. Each offering period was comprised of one or more successive 6-month purchase intervals, unless determined otherwise by the plan administrator. On the start date of each offering period, each participant was granted a purchase right to acquire shares of the Company’s common stock on the last day of each purchase interval during that offering period.

During calendar year 2018, our employees purchased 7,718 shares under the ESPP and all the plan shares were issued as of December 31, 2018 and the Company suspended the Employee Stock Purchase Plan.
 
In May 2019, the Company's shareholders approved the amended and restated ESPP which (i) provides an additional 75,000 shares of common stock for issuance thereunder, and (ii) provides for an increase in the automatic annual increase in the number of shares

21


available for issuance under the current ESPP from 0.25% of the total number of shares of common stock outstanding as measured as of the last trading day in the immediately preceding calendar year to 1.0% . For the six months ended June 30, 2019 , no purchase rights have been requested. The Company has not authorized a new offering period to begin as of the date of this filing.

2018 Inducement Plan

In November 2018, the Company established the 2018 Inducement Plan (the “2018 Plan”). The 2018 Plan is intended to (i) help the Company secure and retain the services of eligible award recipients, (ii) provide an inducement material for such persons to enter into employment with the Company, (iii) provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and (iv) provide a means by which the eligible recipients may benefit from increases in value of the Common Stock. The Company made 50,000 shares available for issuance under the 2018 Plan. During the six months ended June 30, 2019 the Company granted 17,998 shares under the 2018 Plan and an aggregate of 32,002 shares of the Company's common stock were available for issuance.

The options generally vest over a period of three or four years, and options that lapse or are forfeited are available to be granted again. The contractual life of all options is ten years from the date the option was granted. The restricted stock awards vest on the first, second and third anniversaries of the original grant date. The Company recognizes compensation expense on all of these awards on a straight-line basis over the vesting period. The fair value of the awards was determined based on the market value of the underlying stock price at the grant date.
Stock Options

The Company's 2016 Equity Incentive Compensation plan (the “2016 Plan”) was established on May 3, 2016. The 2016 Plan permits the Company to grant cash, stock and stock-based awards to its employees, consultants and directors. The 2016 Plan includes (i) the discretionary grant program under which eligible persons may be granted options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs, or stock appreciation rights, or SARs; (ii) the stock issuance program under which eligible persons may be issued direct stock, restricted stock awards, restricted stock units, performance shares or other stock-based awards; and (iii) the incentive bonus program under which eligible persons may be issued performance unit awards, dividend equivalent rights or cash incentive awards. The Company initially had 105,800 options available for issuance under the 2016 plan.

In July 2018, the Company's shareholders approved an amendment to the 2016 Plan and as a result, a total of 400,000 options were made available for issuance under the 2016 Plan. On January 1, 2019 an additional 199,896 options became available for issuance pursuant to the 2016 Plan's evergreen provision. At June 30, 2019 , an aggregate of 37,818 options were available for future issuance under the 2016 Plan.
The combined 2016 Employee Equity Compensation Plan Stock and 2018 Inducement Plan option activity for the six months ended June 30, 2019 was as follows:
(Dollars in thousands, except per share amounts)
 
Shares
 
Weighted-
Average
Exercise
Price (in
dollars per
share)
 
Weighted-
Average
Contractual
Life (in
years)
 
Aggregate
Intrinsic
Value
Options outstanding at December 31, 2018
 
368,226

 
$
62.55

 
9.32

 
$
—

Granted
 
223,410

 
8.34

 
—

 
$
—

Forfeited / Canceled
 
(10,927
)
 
65.36

 
—

 
—

Options outstanding at June 30, 2019
 
580,709

 
$
41.64

 
9.24

 
$
—

Vested and exercisable
 
70,970

 
$
233.73

 
7.73

 
$
—


Share based compensation expense related to options issued under the 2016 Plan and 2018 Inducement Plan was $0.8 million and $1.9 million for the three and six months ended June 30, 2019 , respectively. Share based compensation expense related to options issued under the 2016 Plan and 2018 Inducement Plan was $1.0 million and $2.0 million for the three and six months ended June 30, 2018 , respectively. The weighted average grant date fair value of options granted during the three and six months ended June 30, 2019 was $1.08 and $6.17 , respectively. The weighted average grant date fair value of options granted during the three and six months ended June 30, 2018 was $25.40 and $45.60 , respectively. The total grant date fair value of options granted during the three and six months ended June 30, 2019 was a de minimis amount and $1.4 million , respectively. The total grant date fair value of options granted during the three and six months ended June 30, 2018 was $0.1 million and $1.2 million , respectively.

22


There have been no option exercises under both plans. As of June 30, 2019 there remained $4.9 million of unrecognized share-based compensation expense related to unvested stock options issued to be recognized as expense over a weighted average period of 1.74 years.
The fair value of the options in both plans at the date of issuance was estimated based on the Black-Scholes option pricing model. Key assumptions used to apply this model upon issuance were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Dividend yield
—

 
—

 
—

 
—

Expected volatility
99.36
%
 
97.83
%
 
98.98
%
 
93.49
%
Risk-free rate of return
2.47
%
 
2.85
%
 
2.50
%
 
2.63
%
Expected term (years)
5.92

 
6.01

 
5.93

 
5.95

Fair Value per share
$
1.08

 
$
25.40

 
$
6.17

 
$
45.60



13. Related Party Transactions
On September 8, 2011, the Company issued the WCAS Note (see Note 8). Certain affiliates of WCAS are also common stock shareholders as of June 30, 2019 .

On May 23, 2013, the Company entered into the Term Loan with CRG (see Note 8). CRG is also a common stock and preferred stock shareholder as of  June 30, 2019 .

On March 28, 2017 , CRG participated in the Company's initial public offering of common stock, in which it acquired 200,000  shares for  $40.0 million .

On November 16, 2018, CRG participated in the Company's public offering of common stock, and acquired  750,000  shares for  $7.2 million . Concurrent with the acquisition of public stock, CRG acquired 750,000  Series A warrants and  750,000  Series B warrants. As of June 30, 2019 , CRG has not exercised any warrants.    

CRG held an aggregate of 1,009,298  of the Company's common stock at  June 30, 2019 .
As of June 30, 2019 , CRG and WCAS held an aggregate of 2,500,000 and 250,000 shares of the Company's Series A Preferred Stock, convertible into 125,000 and 12,500 shares of common stock, respectively.
14. Net Loss Per Share
Basic net loss per share excludes the effect of dilution and is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding.
Diluted net loss per share is computed by giving effect to all potential shares of common stock, including convertible preferred stock, stock options and warrants to the extent dilutive. Basic net loss per share was the same as diluted net loss per share for the three and six months ended June 30, 2019 and 2018 as the inclusion of all potential common shares outstanding would have an anti-dilutive effect.

Holders of Series A Convertible Preferred Stock do not have voting rights and receive cumulative annual dividends of $8 for every $100 . Cumulative dividends are presented as a loss attributable to the common shareholders.
The following awards outstanding at June 30, 2019 and 2018 were not included in the computation of common shares:
 

23


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Stock options
580,709

 
105,979

 
580,709

 
105,979

Private placement offering (PPO) warrants
519

 
519

 
519

 
519

Series A & B warrants
7,497,904


—

 
7,497,904

 
—

Preferred Stock
137,500


137,500

 
137,500

 
137,500

Employee Stock Purchase Program
—


3,320

 
—

 
3,320

Total
8,216,632

 
247,318

 
8,216,632

 
247,318



24


15. Subsequent Events

On July 16, 2019, the Company entered into the Settlement with Roche whereby the Company and Roche agreed to terminate all Inter Partes Review proceedings related to the ‘795 patent and dismiss with prejudice all claims and counterclaims asserted by the two parties in connection with the previously disclosed dispute. See Note 11 - Commitments and Contingencies, for more information.

On July 26, 2019, the Company filed a Registration Statement on Form S-1 to register 4,000,000 shares of the aggregate potential additional shares of common stock that the Company may issue to Aspire Capital pursuant to the Second Purchase Agreement following the results of the Company’s May 2019 Annual Meeting vote. See Note 12 - Stockholder's Equity (Deficit), for more information.

During the third quarter of 2019 through August 7, 2019 , the Company sold 1,169,415 shares at an average of $3.99 per share for net proceeds of $4.5 million under the Sales Agreement with FBR. See Note 12 - Stockholder's Equity (Deficit), for more information.


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and the related notes thereto contained in this report and in connection with management's discussion and analysis and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission, or SEC on March 6, 2019. The following discussion contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors" in this Quarterly Report and those included in our Annual Report on Form 10-K for the year ended December 31, 2018 and in our subsequent public filings, that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. See also the "Cautionary Note Regarding Forward-Looking Statements" set forth at the beginning of this report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report .
Overview
We are a commercial-stage medical technology company focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies. Our flagship product, V-Go® Wearable Insulin Delivery device, is a simple, affordable, all-in-one, basal-bolus insulin delivery option for patients with type 2 diabetes is worn like a patch and can eliminate the need for taking multiple daily shots. V-Go administers a continuous preset basal rate of insulin over 24 hours and it provides discreet on-demand bolus dosing at mealtimes. It is the only basal-bolus insulin delivery device on the market today specifically designed keeping in mind the needs of type 2 diabetes patients.
V- Go enables patients to closely mimic the body’s normal physiologic pattern of insulin delivery throughout the day and to manage their diabetes with insulin without the need to plan a daily routine around multiple daily injections.
We currently focus on the treatment of patients with type 2 diabetes-a pervasive and costly disease that, according to the 2017 National Diabetes Statistics Report released by the U.S. Centers for Disease Control and Prevention, or CDC, currently affects 90% to 95% of the approximately 23 million U.S. adults diagnosed with diabetes. The American Diabetes Association estimates that the total costs of diagnosed diabetes in the United States, which includes direct medical and drug costs and indirect lost productivity costs have risen to $327 billion annually in 2017 from $245 billion annually in 2012. We believe the majority of the 12.6 million U.S. adults treating their type 2 diabetes with more than one daily oral anti-diabetic drug, or OAD, or an injectable diabetes medicine can benefit from the innovative approach of V-Go to manage type 2 diabetes.

Our primary market consists of approximately 5.6 million of these patients who currently take insulin, of which up to 4.5 million may not be achieving their target blood glucose goal. This patient population represents a $20.5 billion annual U.S. market when applying the annual wholesale acquisition cost, or WAC, of V-Go to the 4.5 million patients not achieving glycemic control. WAC is the gross price paid by wholesalers and does not take into account fees, discounts, and rebates from us. If we were able to

25


capture even 15% of this 4.5 million patient population, that would represent $3.0 billion in annual revenue. The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein.

The following discussion and analysis is based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. You should read the discussion and analysis together with such financial statements and the related notes thereto included elsewhere in this Quarterly Report.

Corporate Information

On May 3, 2016, pursuant to an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, by and among Valeritas Holdings, Inc., a Delaware Corporation, Valeritas Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of Valeritas Holdings, Inc., or the Acquisition Subsidiary, and Valeritas, Inc., a Delaware Corporation, Acquisition Subsidiary was merged with and into Valeritas Inc., with Valeritas Inc. surviving as a direct wholly-owned subsidiary of Valeritas Holdings, Inc.

Reverse Stock Split
On May 20, 2019 , we filed a certificate of amendment to our amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to effect a 1–for–20 reverse stock split of our outstanding shares of common stock. Unless otherwise noted, all share and per share information included in this report have been retroactively adjusted to reflect the reverse stock split.


Financial Overview

Revenue

We generate revenue from sales of V-Go to third-party wholesalers and medical supply distributors that take delivery and ownership of V-Go and, in turn, sell it to retail pharmacies or directly to patients with type 2 diabetes. V-Go 30-day kits are sold to wholesalers and distributors at WAC and we report net revenue after taking into consideration sales deductions as described in our financial statements and the related notes thereto. To date, the majority of our revenue is generated in the United States and we view our operations as one operating segment. Financial information is reviewed on a consolidated basis to allow management to make decisions regarding resource allocations and assess performance.

In 2018, we expanded our distribution network to include certain international distributors. Although we have entered into distribution agreements with distributors in several international countries, V-Go is currently only available for distribution in Australia, New Zealand and Italy. We do not expect to see meaningful revenue from these distribution agreements, or the other countries with which we have entered into distribution agreements, until 2020. Additionally in 2018, we entered into an agreement with an international contract research organization to begin the medical device registration process for V-Go in China and expect the number of countries in which V-Go is available to increase as we continue to grow and expand our network of international agreements.
Cost of Goods Sold and Gross Margin
Cost of goods sold includes raw materials, labor costs, manufacturing overhead expenses and reserves for anticipated scrap and inventory obsolescence.
We currently manufacture V-Go and the EZ Fill accessory in cleanrooms at a contract manufacturing organization, or CMO, in Southern China. We also have a relationship with a separate CMO that performs our final inspection and packaging functions. Any single-source components and suppliers are managed through our global supply chain operation. Management reviews regularly the inventory levels and demand and will adjust production accordingly, which could give rise to under-absorbed fixed production costs. We continually work with our manufacturing CMO's to refine our manufacturing processes and production lines to improve efficiencies, reduce labor cost and leverage our overhead expenses. These improvements, combined with overhead cost reductions represent the primary drivers in the current year reduction in cost of goods sold per unit.

26


We expect our overall gross margin, which is calculated as revenue less cost of goods sold for a given period, to fluctuate in future periods as a result of varying manufacturing output as necessary to manage inventory levels. In the future, planned changes in and improvements to our manufacturing processes and expenses, as well as increases in production volume up to our current capacity are expected to further improve our gross margins.

Research and Development Expense
Our research and development activities primarily consist of activities associated with our core technologies and process engineering as well as research programs associated with products under development. These expenses are primarily related to employee compensation, including salary, fringe benefits, share-based compensation and contract employee expenses.
We expect our research, development and engineering expenses to increase from current levels as we initiate and advance our development projects, including both the V-Go SIM™ (Simple Insulin Management) and V-Go Prefill devices, in addition to continuing to pursue clinical studies with insulin.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist primarily of salary, fringe benefits and share-based compensation for our executive, financial, marketing, sales, business development, regulatory affairs and administrative functions. Other significant expenses include product demonstration samples, trade show expenses, professional fees for our contracted customer support center, external legal counsel, independent auditors and other consultants, insurance, facilities and information technologies expenses. We expect our selling, general and administrative expenses to increase as our business expands.
Additionally, we increased our investment in sales and marketing programs and materials used to drive our capital-efficient marketing initiatives, as well as the volume of sample products provided to patients. This overall growth in commercial spending is part of our strategic plan to expand our business operations.
Other Income (Expense)
Other income (expense), net primarily consists of interest expense and amortization of debt discount associated with our loan agreements with Capital Royalty Group, or CRG, and WCAS Capital Partners IV, L.P., or WCAS, partially offset by interest income from cash equivalents.

Results of Operations
Results of Operations for the Three Months Ended June 30, 2019 and 2018
The following is a comparison of revenue and expense categories for the three months ended June 30, 2019 and 2018:
 
(Dollars in thousands)
 
Three Months Ended
June 30,
 
Change
2019
 
2018
 
$
 
%
Revenue, net
 
$
7,514

 
$
6,497

 
1,017

 
15.7
 %
Cost of goods sold
 
3,796

 
3,405

 
391

 
11.5
 %
Gross margin
 
3,718

 
3,092

 
626

 
20.2
 %
Operating expense:
 
 
 
 
 
 
 
 
Research and development
 
1,866

 
1,860

 
6

 
0.3
 %
Selling, general and administrative
 
14,907

 
11,228

 
3,679

 
32.8
 %
Total operating expense
 
16,773

 
13,088

 
3,685

 
28.2
 %
Operating loss
 
(13,055
)
 
(9,996
)
 
(3,059
)
 
30.6
 %
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest expense, net
 
(958
)
 
(939
)
 
(19
)
 
2.0
 %
Other income (expense), net
 
(6
)
 
(25
)
 
19

 
(76.0
)%
Total other income (expense), net
 
(964
)
 
(964
)
 
—

 
—
 %
Net loss
 
$
(14,019
)
 
$
(10,960
)
 
(3,059
)
 
27.9
 %


27


Results of Operations
Results of Operations for the Six Months Ended June 30, 2019 and 2018
The following is a comparison of revenue and expense categories for the six months ended June 30, 2019 and 2018 :
 
(Dollars in thousands)
 
Six Months Ended
June 30,
 
Change
2019
 
2018
 
$
 
%
Revenue, net
 
$
13,917

 
$
12,578

 
1,339

 
10.6
 %
Cost of goods sold
 
7,154

 
6,589

 
565

 
8.6
 %
Gross margin
 
6,763

 
5,989

 
774

 
12.9
 %
Operating expense:
 
 
 
 
 
 
 
 
Research and development
 
3,536

 
3,924

 
(388
)
 
(9.9
)%
Selling, general and administrative
 
30,158

 
22,693

 
7,465

 
32.9
 %
Total operating expense
 
33,694

 
26,617

 
7,077

 
26.6
 %
Operating loss
 
(26,931
)
 
(20,628
)
 
(6,303
)
 
30.6
 %
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest expense, net
 
(1,819
)
 
(1,878
)
 
59

 
(3.1
)%
Other income (expense), net
 
47

 
(28
)
 
75

 
(267.9
)%
Total other income (expense), net
 
(1,772
)
 
(1,906
)
 
134

 
(7.0
)%
Net loss
 
$
(28,703
)

$
(22,534
)
 
(6,169
)
 
27.4
 %


Comparison of the Three Months Ended June 30, 2019 and 2018

Revenue, net
Revenue was $7.5 million for the three months ended June 30, 2019 , compared to $6.5 million for the three months ended June 30, 2018 , an increase of $1.0 million or 15.7% . Overall total prescriptions increased by 22% in Q2 2019 as compared to the same period in 2018. Because of our high touch and higher service sales and marketing model and the planned increase in our field sales force, we generated year-over-year total and new prescription growth of 36% and 42% respectively in our targeted accounts for the three months ended March 31, 2019 as compared to the same period in 2018. This represents the sixth consecutive quarter that we have realized year-over year total prescription growth in these accounts. This growth was partially offset by an expected decline in the second quarter of 2019 of total prescriptions in our non-targeted accounts by 7% when compared to the same period in 2018. We continue to see important signs of stabilization in these territories. The total volume of V-Go sold kits during the three months ended June 30, 2019 grew by 18% as compared to the same period in 2018. This volume growth was partially offset by a decrease of 2% in average net prices realized during the three months ended June 30, 2019 as compared to the same period in 2018. This net price decrease was primarily the result of the mix of volume through our contracted preferred commercial and Medicare Part-D plans. We implemented a 6.0% WAC price increase late in the first quarter of 2019, and an 8.0% increase in the second quarter of 2018.
Cost of Goods Sold and Gross Margin
Cost of goods sold was $3.8 million for the three months ended June 30, 2019 , compared to $3.4 million for the three months ended June 30, 2018 , an increase of $0.4 million driven by increased sales volume. As a percentage of revenue, cost of goods sold decreased during the three months ended June 30, 2019 to approximately 50.5% from approximately 52.4% during the three months ended June 30, 2018 .
Our gross profit as a percentage of revenues, or gross margin, for the three months ended June 30, 2019 was 49.5% , compared to 47.6% for the three months ended June 30, 2018 . The increase in gross margin was driven by manufacturing efficiencies, which benefited from an 18% increase in unit sales volume, and was partially offset by a 2% decrease in our net selling price.
Research and Development Expense

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Total research and development expenses were $1.9 million for the three months ended June 30, 2019 and 2018 . Changes in R&D spend are driven mostly by the timing of variable external service expenditures regarding the development of our V-Go SIM device. We expect to introduce V-Go SIM in the U.S. on a limited basis by the end of 2019, although we do not expect full market introduction to occur until 2020.
Selling, General and Administrative Expense
Our selling, general and administrative expenses were $14.9 million for the three months ended June 30, 2019 , compared to $11.2 million for the three months ended June 30, 2018 , an increase of $3.7 million . The increase in expenses was due primarily to a planned 50% increase in our U.S. field sales force in 2019. We also increased our other commercial spend by 15%, driven partially by growth in our V-Go Cares program which included an expansion of our contract trainers and our live coaching program, as well as some additional promotional programs related to the larger sales force. The remainder of the increase was due to non-recurring legal costs related to the settlement agreement with Roche Diabetes Care, Inc., or Roche.
Other Income (Expense), net
Interest expense, net was $1.0 million for the three months ended June 30, 2019 , compared to $0.9 million for the three months ended June 30, 2018 , an increase of less than $0.1 million . The decrease in the net expense was due primarily to the increased interest income earned from cash equivalents.
Comparison of the Six Months Ended June 30, 2019 and 2018

Revenue, net

Revenue was $13.9 million for the six months ended June 30, 2019 , compared to $12.6 million for the six months ended June 30, 2018 , an increase of $1.3 million or 11% . The increase was driven by a 13% growth in volume, which was primarily due to our high touch and higher service sales and marketing model, and the increase of our field sales force during 2019. During the six months ended June 30, 2019 and on a year-over-year basis, total prescriptions grew 19%, and new prescriptions increased by 18%. In our targeted accounts, total and new prescriptions grew 33% and 38% year-over-year, respectively. In our non-targeted accounts, prescriptions declined by 8% and 10% for total and new prescriptions respectfully year-over-year. We realized a net selling price decrease of 2% for the six months ended June 30, 2019 , compared to the six months ended June 30, 2018 . The net selling price decrease was driven by an increased mix of volume through our contracted preferred commercial and Medicare Part-D plans, accompanied by an increase in our net average copay card costs. These reductions offset the WAC price increases that we implemented of 6% and 8% respectively late in the first quarter of 2019 and in the second quarter of 2018.
Cost of Goods Sold and Gross Margin
Cost of goods sold was $7.2 million for the six months ended June 30, 2019 , compared to $6.6 million for the six months ended June 30, 2018 , an increase of $0.6 million due to increased sales volume. As a percentage of revenue, cost of goods sold decreased to 51.4% during the six months ended June 30, 2019 from 52.4% during the six months ended June 30, 2018 .
Our gross margin for the six months ended
June 30, 2019 was 48.6% , compared to 47.6% for the six months ended June 30, 2018 . The increase in gross margin was driven by manufacturing efficiencies, which benefited from a 13% increase in unit sales volume, and was partially offset by a 2% decrease in our net selling price of V-Go.
Research and Development Expense
Total research and development expenses were $3.5 million for the six months ended June 30, 2019 , compared to $3.9 million for the six months ended June 30, 2018 , a decrease of $0.4 million . The decrease was primarily driven by the timing of variable external service expenditures regarding the development of our V-Go SIM device, as well as the timing of certain clinical studies. As stated above, we expect to introduce V-Go SIM in the U.S. on a limited basis by the end of 2019, although we do not expect full market introduction to occur until 2020.
Selling, General and Administrative Expense
Our selling, general and administrative expenses were $30.2 million for the six months ended June 30, 2019 , compared to $22.7 million for the three months ended June 30, 2018 , an increase of $7.5 million . The increase in expenses was due primarily to a

29


planned 50% increase in our U.S. field sales force in 2019. We also increased our other commercial spend by 24%, driven partially by growth in our V-Go Cares program which included an expansion of our contract trainers and our live coaching program, as well as some additional promotional programs related to the larger sales force. The remainder of the increase was due to non-recurring legal costs related to the settlement agreement with Roche.
Other Income (Expense), net
Interest expense, net was $1.8 million for the six months ended June 30, 2019 , compared to $1.9 million for the six months ended June 30, 2018 , a decrease of $0.1 million . The decrease in the net expense was due primarily to the increased interest income earned from higher average cash equivalents during the period.



Liquidity and Capital Resources
We are subject to a number of risks similar to those of early stage commercial companies, including dependence on key individuals, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital necessary to fund the development of our products, and competition from larger companies. We expect that our sales performance and the level of selling and marketing efforts, as well as the status of each of our new product development programs, will significantly impact our cash requirements.
We have incurred losses and have experienced negative cash flows from operations in each year since inception. As of June 30, 2019 , we had $27.3 million in cash and cash equivalents and an accumulated deficit of $548.6 million . Our restructured Term Loan with CRG, see “Indebtedness - Senior Secured Debt,” includes a liquidity covenant whereby we must maintain a cash balance greater than $2.0 million . We believe that our cash balance and liquidity will not be sufficient to satisfy our operating cash requirement for the next 12 months from the date of this report or to maintain this liquidity covenant, which raises substantial doubt about our ability to continue as a going concern. We expect our current cash and cash equivalents will be sufficient to finance our current operations into the first quarter of 2020 . This estimate is based upon certain assumptions regarding volume growth in sales of V-Go and future expenses. Our ability to fund operations beyond the first quarter of 2020 is dependent on our ability to obtain cash from our common stock purchase agreement, or the Second Purchase Agreement (see Note 2), with Aspire Capital Fund, LLC, or Aspire Capital, that we entered into in June of 2018, our “at-the-market” sales agreement, or the Sales Agreement, with B. Riley FBR, Inc. or FBR, that we entered into on January 26, 2018, and warrant exercises from the November 2018 offering, all of which are described in further detail elsewhere in this report. FBR has the option to decline any sales orders at its discretion. We are not required to sell shares under the Second Purchase Agreement or the Sales Agreement. Through the six months ended June 30, 2019 , we have sold 988,976 shares at an average price of $4.83 per share under the Sales Agreement and received net proceeds of $4.6 million.

We intend to maintain compliance with the liquidity covenant and fund future operations by raising additional capital in addition to the Second Purchase Agreement and the Sales Agreement. There can be no assurances that these agreements will be fully available to us or that future financing will be available on terms acceptable to us, or at all. If we are unable to raise additional capital prior to achieving sustained profitability from operations, there could be a material adverse effect on our business, results of operations and financial condition.

Historically, our sources of cash have included private placement of equity securities, debt arrangements, and cash generated from operations, primarily from the collection of accounts receivable resulting from sales. In 2018, we completed two public offerings for net proceeds of approximately $56.9 million and used the First Purchase Agreement and Second Purchase Agreement to generate an additional $3.1 million of capital, net of fees. In the six months ended June 30, 2019 we generated $4.6 million of capital, net of fees through the Sales Agreement. During the third quarter of 2019 through August 7, 2019 , we sold an additional 1,169,415 shares at an average of $3.99 per share for net proceeds of $4.5 million through the Sales Agreement. As of August 7, 2019 , we have $0.8 million remaining available for sale under the current prospectus supplement, pursuant to the Sales Agreement.

We are pursuing additional sources of financing to fund our operations. These sources may include the issuance of our equity to new or existing investors.
The following table shows a summary of our cash flows for the six months ended June 30, 2019 and 2018 :
 

30


 
Six Months Ended June 30,
(Dollars in thousands)
2019
 
2018
Net cash provided by (used in):
 
 
 
Operating activities
$
(24,073
)
 
$
(19,737
)
Investing activities
(1,026
)
 
(813
)
Financing activities
4,600

 
27,633

Total
$
(20,499
)
 
$
7,083

Operating Activities
The increase in net cash used in operating activities by 22.0% for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 was primarily due to our sales force expansion, in addition to our increase in working capital which was driven by our planned increase in inventory levels.
Investing Activities
The increase in net cash used in investing activities for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 of 26.2% was primarily a result of purchases of capital equipment for our production lines, augmenting the already existing lines and corresponding capacity with improved automation.
Financing Activities
The net cash provided by financing activities for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 decreased by 83.4% . This decrease was primarily driven by the net proceeds of $24.4 million received during the six months ended June 30, 2018 from our public offering.

Indebtedness
Senior Secured Debt
On May 23, 2013, we entered into the Term Loan of $50.0 million with Capital Royalty Group, or CRG, structured as a senior secured loan with a six -year term, which we refer to as the Term Loan or the Senior Secured Debt. The Term Loan is secured by substantially all of our assets, including our material intellectual property. We later entered into a series of forbearance agreements to modify the Term Loan. The terms of the most recently executed amendment of the Term Loan agreement, dated February 9, 2017, bears interest at  11%  per annum and allows the interest-only period of the Term Loan to extend to  March 31, 2022 , requires quarterly cash interest payments of 8% per annum beginning  June 30, 2019 , extends the deadline for full payment under the Term Loan agreement to  March 31, 2022  and brings our minimum covenant cash and cash equivalent requirements to  $2.0 million. On  March 28, 2017 ,  $25.0 million  of the Term Loan was converted to preferred shares upon completion of the public offering at a conversion rate of  $10.00 per share. CRG received  2,500,000  preferred shares. As of  June 30, 2019 , we were in compliance with the financial covenant in the restructured Term Loan agreement. We may, at our discretion, repay the revised loan in whole or in part without any penalty or prepayment fees.

Other Note
In 2011, we issued a $5.0 million senior subordinated note, or the WCAS Note, to WCAS Capital Partners IV, L.P., or WCAS. We later entered into a series of forbearance agreements to modify the WCAS note. The terms of the most recently executed amendment of the WCAS note, dated  May 23, 2013 and as amended March 28, 2017 bears interest at 10% per annum, and all interest accrues as compounded PIK interest and is added to the aggregate principal amount of the loan semi-annually. The outstanding principal amount of the note, including accrued PIK interest, is due in full in September 2021 .  No  interest payments are required during the term of the loan. The Company may pay off the WCAS Note at any time without penalty. On  March 28, 2017 , $2.5 million of the WCAS Note was converted to preferred shares upon completion of the public offering at a conversion rate of  $10.00 per share. WCAS received  250,000 preferred shares.


Related Party Transactions

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We transact business with certain parties related to us, primarily with key stakeholders with the intent of managing working capital through additional debt or equity financing.
Critical Accounting Policies and Use of Estimates
This management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this Quarterly Report, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results.
Revenue Recognition

The majority of our revenue is generated from V-Go sales in the United States to third-party wholesalers and medical supply distributors that, in turn, sell this product to retail pharmacies or directly to patients. A portion of our revenue is also generated from V-Go sales to international medical supply distributors. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC 606, we perform the following five steps:

(i)
identification of the promised goods or services in the contract;
(ii)
determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;
(iii)
measurement of the transaction price, including the constraint on variable consideration;
(iv)
allocation of the transaction price to the performance obligations based on estimated selling prices; and
(v)
recognition of revenue when (or as) we satisfy each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606.

Revenue from product sales is recorded net of adjustments for managed care rebates, wholesale distributions fees, cash discounts, and prompt pay discounts, all of which are established at the time of sale. In order to prepare our consolidated financial statements, we are required to make estimates regarding the amounts earned or to be claimed on the related product sales, including the following:

•
managed care rebates, which are based on the estimated end user payor mix and related contractual rebates;
•
distribution fees and prompt pay discounts, which are recorded based on specified payment terms, and which vary by customer and other incentive programs; and
•
Co-pay card redemption charges which are based on the net transaction costs of prescriptions filled via a company-subsidized card program and other incentive programs.

We believe our estimates related to managed care rebates and Medicare rebates, distribution fees, prompt pay and other discounts, and co-pay card redemptions do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within a relatively short period of time.

Return Reserve

We record allowances for product returns as a reduction of revenue at the time product sales are recorded. Several factors are considered in determining whether an allowance for product returns is required, including the customers’ return rights and our historical experience with returns and the amount of product sales in the distribution channel not consumed by patients and subject




to return. We rely on historical return rates to estimate returns. In the future, as any of these factors and/or the history of product returns change, adjustments to the allowance for product returns will be reflected.
Inventories

Inventories consist of raw materials, work in process and finished goods, which are valued at the lower of cost or net realizable value. Cost is determined on a first in, first out basis and includes material costs, labor and applicable overhead. We review our inventory for excess or obsolescence and write down inventory that has no alternative uses to its net realizable value. Economic conditions, customer demand and changes in purchasing and distribution can affect the carrying value of inventory. As circumstances warrant, we record provisions for potentially obsolete or slow moving inventory and lower of cost or net realizable value inventory adjustments. In some instances, these adjustments can have a material effect on the financial results of an annual or interim period. In order to determine such adjustments, we evaluate the age, inventory turns, future sales forecasts and the estimated fair value of inventory.
Impairment of Long-Lived Assets
We assess the impairment of long-lived assets, on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our impairment review process is based upon an estimate of future undiscounted cash flow. Factors we consider that could trigger an impairment review include the following:

•
significant underperformance relative to expected historical or projected future operating results;
•
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
•
significant negative industry or economic trends; and
•
significant technological changes, which would render equipment and manufacturing processes obsolete.
 
Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs. No additional impairments to long-lived assets were required during the six months ended June 30, 2019 and 2018 , respectively.

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Share-Based Compensation
The fair value of stock options on the date of grant is calculated using the Black-Scholes option pricing model, based on key assumptions such as the fair value of common stock, expected volatility and expected term. Previously, we used a peer group of companies to calculate volatility in the Black-Scholes option pricing model. In 2018, we began to use a blended rate, which included our company and the peer group of companies to calculate volatility. Compensation cost for restricted stock awards issued to employees is measured using the grant date fair value of the award, adjusted to reflect actual forfeitures. Our estimates of these important assumptions are primarily based on third-party valuations, historical data, peer company data and our judgment regarding future trends and other factors.
Off-Balance Sheet Arrangements

We did not engage in any “off-balance sheet arrangements” (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of June 30, 2019 .


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Item 3.     Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to financial market risks in the ordinary course of our business. Our cash and cash equivalents include cash in readily available checking and money market accounts, as well as certificates of deposit. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate. Additionally, the interest rate on our outstanding indebtedness is fixed and is therefore not subject to changes in market interest rates.
Inflation Risk
Inflation generally affects us by increasing our cost of labor and pricing of contracts. We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.
Recently Issued Accounting Standards

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which changes the fair value measurement disclosure requirements of ASC 820. This ASU removes certain disclosure requirements regarding the amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of transfers between the levels. This ASU also adds disclosure requirements regarding unrealized gains and losses included in Other Comprehensive Income for recurring Level 3 fair value measurements and the range and weighted average of unobservable inputs used in Level 3 fair value measurements. ASU 2018-13 is effective for all entities with fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. We are currently evaluating the impact of adopting this standard.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments”. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance applies to loans, accounts receivable, trade receivables and other financial assets measured at amortized cost, loan commitments, debt securities and beneficial interests in securitized financial assets, but the effect on us is projected to be limited to accounts receivable. The guidance will be effective for the fiscal year beginning on January 1, 2020, including interim periods within that year. We are currently evaluating the potential effect of the guidance on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05 “Financial Instruments-Credit Losses (Topic 326)” which provides transition relief for companies adopting ASU 2016-13. This guidance amends ASU 2016-13 to allow companies to elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that were previously recorded at amortized cost under certain circumstances. Companies are required to make this election on and instrument by instrument basis. The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. We are currently evaluating the impact of adopting this standard.





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Item 4.     Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2019 . In designing and evaluating disclosure controls and procedures, we recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of June 30, 2019 , based on the evaluation of these disclosure controls and procedures, management concluded that our disclosure controls and procedures were effective.
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the first six months of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Management does not expect that our disclosure controls or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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Part II - Other Information


Item 1. Legal Proceedings

We, and our subsidiaries, are not a party to, and our property is not the subject of, any material pending legal proceedings; however, we may become involved in various claims and legal actions arising in the ordinary course of business.

Item 1A.     Risk Factors

Although we are not required to include risk factors in our Quarterly Report on Form 10-Q because we are a smaller reporting company, we believe the following risk factors are important to highlight in addition to the risk factors described in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 6, 2019 and in our subsequent public filings.

Risks Related to Our Business
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. These factors raise substantial doubt about our ability to continue as a going concern.
Since our inception in 2006, we have incurred significant net losses. Our recurring losses from operations raise substantial doubt about our ability to continue as a going concern, and as a result our independent registered public accounting firm included an explanatory paragraph regarding the same in our Annual Report on Form 10-K. Substantial doubt about our ability to continue as a going concern may create negative reactions to the price of our common stock and we may have a more difficult time obtaining financing in the future.
As of June 30, 2019 , we had $27.3 million in cash and cash equivalents and an accumulated deficit of $548.6 million . To date, we have financed our operations primarily through sales of our capital stock, debt financings and limited sales of V-Go. We expect our current cash and cash equivalents will be sufficient to finance our current operations into the first quarter of 2020 . This estimate is based upon certain assumptions regarding volume growth in sales of V-Go and future expenses and assumes no additional cash inflows from other financing activities.
On May 23, 2013, we entered into the Term Loan of $50.0 million with Capital Royalty Group, or CRG, structured as a senior secured loan with a six-year term, which we refer to as the Term Loan or the Senior Secured Debt. The Term Loan is secured by substantially all of our assets, including our material intellectual property. We later entered into a series of forbearance agreements to modify the Term Loan. The terms of the most recently executed amendment of the Term Loan agreement, dated February 9, 2017, bears interest at 11% per annum and allows the interest-only period of the Term Loan to extend to March 31, 2022, requires quarterly cash interest payments of 8% beginning June 30, 2019, extends the deadline for full payment under the Term Loan agreement to March 31, 2022 and brings our minimum covenant cash and cash equivalent requirements to $2.0 million. The restrictive covenant that requires us to maintain an end-of-day balance of  $2.0  million in cash or cash equivalents may limit our ability to engage in new lines of business, make certain investments, pay dividends, or enter into various transactions. We therefore may not be able to engage in any of the foregoing transactions if we fail to satisfy our liquidity covenant by maintaining $2.0 million in cash, unless we obtain the consent of the lender or terminate our Term Loan. 
In February 2017, we entered into an agreement with CRG and WCAS Capital Partners IV, L.P., or WCAS, to convert a total of $27.5 million of the outstanding principal amount of our debt, including the Term Loan, into shares of Series A Convertible Preferred Stock at a price of $10.00 per share, which was the common stock offering price in our March 2017 public offering. The shares of Series A Preferred Stock are convertible at the option of the holder at any time into shares of common stock (the preferred shares were initially convertible into common stock at a ratio of 1 share of common stock for every 1 share of preferred stock then-outstanding, but following the reverse stock split, the preferred shares are now convertible at a ratio of 1 share of common stock for every 20 shares of preferred stock outstanding). In the event of a Deemed Liquidation Event (as defined in the Certificate of Designation) the holders of Series A Preferred Stock are eligible to receive the greater of (i) $27.5 million , plus accrued but unpaid dividends or (ii) what they would have received as a holder of common stock had they converted their shares of Series A Preferred Stock into shares of our common stock immediately prior to the Deemed Liquidation Event. To the extent permitted under Delaware law, the holders of shares of Series A Preferred Stock have the right to prevent us from liquidating, dissolving, amending our governing documents in a manner that affects the rights of the Series A Preferred Stock, authorizing shares of capital stock on parity or senior to the Series A Preferred Stock, or issuing any shares of Series A Preferred Stock to any individual, entity or person other than CRG or WCAS.

37


In November 2018, we completed a public offering of 3,750,000 shares of common stock at a purchase price of $9.60 per share and received aggregate net proceeds of approximately $32.5 million , after deducting underwriting discounts, commissions and offering expenses. Included in the purchase of each share of common stock was one Series A warrant and one Series B warrant. Each Series A warrant has an exercise price of $12.00 per share. The Series A warrants are exercisable commencing from the date of their issuance and will expire five years from the date of issuance. Each Series B warrant has an exercise price of $9.60 per share. The Series B warrants are exercisable commencing from the date of their issuance and will expire nine months from the date of issuance. As of June 30, 2019 , a total of 2,096 Series B warrants were exercised at $9.60 per share with de minimis net proceeds.
In January 2018, we entered into a common stock purchase agreement, or the First Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, at our discretion, Aspire Capital would be committed to purchase up to an aggregate of  $20.0 million of shares of our common stock over the 30-month term of the First Purchase Agreement. In June 2018, we terminated the First Purchase Agreement and entered into a second common stock purchase agreement, or the Second Purchase Agreement, with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, at our discretion, Aspire Capital is committed to purchase up to an aggregate of $21.0 million of shares of our common stock over the 30-month term of the Second Purchase Agreement. We sold 62,543 shares of common stock to Aspire Capital under the First Purchase Agreement for net proceeds of approximately $1.8 million , and as of June 30, 2019 , have sold 60,271 shares of common stock to Aspire Capital under the Second Purchase Agreement for net proceeds of approximately $1.3 million . At the 2019 annual meeting of stockholders, or the Annual Meeting of Valeritas Holdings, Inc., or the Company, held on May 16, 2019, the shareholders approved pursuant to Nasdaq Listing rules 5635(b) and 5635(d), of the potential issuance of shares of our common stock, par value $0.001 , or the Common Stock, to Aspire Capital, LLC. As a result the exchange cap restricting the amount of shares that may be sold to Aspire Capital was removed. Shareholder approval was granted for the potential issuance of up to $21.0 million of our common stock under the purchase agreement.
Additionally, in January 2018, we entered into an “at-the-market” sales agreement, or the Sales Agreement, with B. Riley FBR, Inc., or FBR, pursuant to which we may sell up a certain amount of shares of our common stock from time to time through FBR, acting as our sales agent, in one or more at-the-market offerings. FBR has the option to decline any sales orders at its discretion. On March 22, 2019 we issued a prospectus supplement relating to the issuance and sale of $10.3 million shares of our common stock. These sales will be made pursuant to the terms of the Sales Agreement. The prospectus supplement updates and supersedes the prior prospectus supplement dated January 26, 2018 , and was filed to increase the number of our shares that may be offered from time to time in the offering. As of June 30, 2019 we have sold 988,976 shares at an average $4.83 per share and received net proceeds of $0.8 million .
Both the Second Purchase Agreement and the Sales Agreement are subject to limitations as described elsewhere in this Quarterly Report, and therefore there are no assurances that we will be able to raise funds from the Second Purchase Agreement or the Sales Agreement. We have devoted substantially all of our resources to the research, development and engineering of our products, the commercial launch of V-Go, the development of a sales and marketing team and the assembly of a management team to lead our business.
To implement our business strategy we need to, among other things, increase sales of our products with our existing sales and marketing infrastructure, fund ongoing research, development and engineering activities, expand our manufacturing capabilities, and obtain regulatory clearance in other markets outside the United States and European Union, or EU, or approval to commercialize our products currently under development. We expect our expenses to increase significantly as we pursue these objectives. The extent of our future operating losses and the timing of profitability are highly uncertain, especially given that we only recently commercialized V-Go, which makes predicting our sales more difficult. We will need to affect a financing or capital raise in the near term in order to sustain operations and implement our business strategy until we can achieve profitability from operations, if ever. Our inability to affect a financing or capital raise and continued losses from operations could have a material adverse effect on us. Any additional operating losses will have an adverse effect on our stockholders’ equity/(deficit), and we cannot assure you that we will ever be able to achieve or sustain profitability.

Risks Related to Ownership of Our Common Stock
If we are not able to comply with the applicable continued listing requirements or standards of the Nasdaq Capital Market, Nasdaq could delist our common stock.
Our common stock is currently listed on the Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders' equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.

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On December 31, 2018 we received a written notification from the Listing Qualifications Department of the Nasdaq Stock Market LLC, or Nasdaq, indicating that we were not in compliance with Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market because our minimum bid price was less than $ 1.00 per share for 30 consecutive business days. The notification letter provided that we had 180 calendar days , or until July 1, 2019 to regain compliance with Nasdaq Listing Rule 5550(a)(2) by maintaining a closing bid price of our common stock of at least $1.00 per share for a minimum of 10 consecutive business day s. If we did not regain compliance by July 1, 2019 , we may have been granted an additional 180 days to regain compliance, so long as we met The Nasdaq Capital Market continued listing requirements (except for the bid price requirement) and notified Nasdaq in writing of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. If we did not qualify for the second compliance period or failed to regain compliance during the second 180-day period, then Nasdaq would have notified us of its determination to delist our common stock, at which point we would have had an opportunity to appeal the delisting determination to a Hearings Panel.

At our 2019 annual meeting of stockholders held on May 16, 2019, or the Annual Meeting, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split at a ratio of at least 1-for-2 and up to 1-for-20, with the exact ratio within the foregoing range to be determined by our board of directors. On May 20, 2019 , we effected a reverse stock split prior to Nasdaq’s July 1, 2019 deadline in order to rectify the aforementioned minimum bid price deficiency. On June 4, 2019, we received a written notification from Nasdaq indicating that we had regained compliance with Nasdaq Listing Rule 5550(a)(2) because the closing bid price of our common stock had been at $1.00 per share or greater for the a period of at least 10 consecutive business days. Although we were successful in receiving approval for and implementing the reverse stock split at a ratio that allowed us to regain compliance with Nasdaq’s minimum bid price requirements, the reverse stock split did not and will not cure any additional deficiencies that Nasdaq identified after the Annual Meeting or will identify in the future.

Accordingly, on June 25, 2019, we received a written notification from Nasdaq indicating that, based upon Nasdaq’s review of the Market Value of Listed Securities, or MVLS, for the 30 consecutive business days preceding the date of the notification, we no longer meet the minimum MVLS of $35 million as set forth in Nasdaq Listing Rule 5550(b)(2). In accordance with the notification letter, we have 180 calendar days, or until December 23, 2019 to regain compliance with Nasdaq Listing Rule 5550(b)(2). To regain compliance, we must maintain an MVLS of at least $35 million for a minimum of ten consecutive business days during the 180-day compliance period. In lieu of complying with the MVLS requirement, we may also regain compliance with Nasdaq if we achieve stockholders’ equity of at least $2.5 million by December 23, 2019, in accordance with Nasdaq’s Equity Standard, or the Equity Standard, for continued listing on the Nasdaq Capital Market. If we do not regain compliance with the MVLS requirement, or otherwise comply with the Equity Standard by December 23, 2019, Nasdaq will notify us of its determination to delist our common stock, at which point we will have an opportunity to appeal the delisting determination to a Hearings Panel.

Although we were successful in curing the Nasdaq minimum bid price deficiency by effecting a reverse stock split, the MVLS requirement and the Equity Standard cannot be cured by effecting one or more similar corporate actions, and there is therefore no guarantee that we will be successful in addressing Nasdaq’s most recent deficiency letter. If we are unable to meet either the MVLS requirement or the Equity Standard by December 23, 2019, our common stock may be subject to delisting, which would negatively impact the trading price of our common stock and have a substantial negative impact on our ability to raise future capital and continue our current business operations. Even if we are able to regain compliance with Nasdaq’s continued listing standards, there is no guarantee that we will be able to maintain such compliance, and we may receive additional deficiency letters in the future.

The price of our common stock may be volatile, fluctuate substantially and is subject to overhang.

The quoted price of our common stock has been, and we expect it to continue to be, volatile. The stock market in general and the market for smaller medical device and pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your shares of common stock at or above your purchase price. In connection with the Term Loan with CRG, our common stock is subject to preferences upon the sale of our company, including a liquidation preference for holders of our Series A Convertible Preferred Stock, in addition to the other rights and privileges of our senior secured debtholders.

The market price for our common stock may be influenced by many factors, including:

•
the success of competitive products or technologies;
•
developments related to our earnings or any future collaborations;
•
regulatory or legal developments in the United States and other countries;
•
developments or disputes concerning patent applications, issued patents or other proprietary rights;
•
the recruitment or departure of key personnel;

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•
the level of expenses related to any of our product candidates;
•
the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;
•
actual or anticipated changes in estimates as to financial results, development time lines or recommendations by securities analysts;
•
variations in our financial results or those of companies that are perceived to be similar to us;
•
changes in the structure of healthcare payment systems;
•
market conditions in the pharmaceutical and biotechnology sectors;
•
general economic, industry and market conditions; and
•
the other factors described in this “Risk Factors” section and in our Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 6, 2019.

We may in the future become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful.

The medical device industry has been characterized by frequent and extensive intellectual property litigation. Our competitors or other patent holders may assert that our products and the methods employed in our products are covered by their patents. For example, other companies hold patents stating broad claims in the drug delivery device field which, if construed to cover our products and held to be valid and enforceable, could have a material adverse effect on our business. Although we believe we have adequate defenses available if faced with any allegations that we infringe third-party patents, it is possible that V-Go could be found to infringe these patents. If our product or methods are found to infringe, we could be prevented from manufacturing or marketing our products.

We do not know whether our competitors or potential competitors have patents, or have applied for, will apply for, or will obtain patents that will prevent, limit or interfere with our ability to make, have made, use, sell, import or export our products. Competitors may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To stop any such infringement or unauthorized use, litigation may be necessary. Our intellectual property has not been tested in litigation. A court may declare our patents invalid or unenforceable, may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question, or may interpret the claims of our patents narrowly, thereby substantially narrowing the scope of patent protection they afford.

In addition, third parties may initiate legal proceedings against us to challenge the validity or scope of our intellectual property rights, or may allege an ownership right in our patents, as a result of their past employment or consultancy with us. Many of our current and potential competitors have the ability to dedicate substantially greater resources to defend their intellectual property rights than we can. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Competing products may also be sold in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, alleging our infringement of a competitor’s patents, we could be prevented from marketing our products in one or more foreign countries.

Litigation related to infringement and other intellectual property claims such as trade secrets, with or without merit, is unpredictable, can be expensive and time-consuming, and can divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, treble damages, and attorneys’ fees, and could prohibit us from using technologies essential to our product, any of which would have a material adverse effect on our business, results of operations, and financial condition. If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our products unless we can obtain licenses to use technology or ideas covered by such patents. We do not know whether any necessary licenses would be available to us on satisfactory terms, if at all. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon the products altogether. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could cause the price of our common stock to decline.

During 2018, we received an offer from Roche to license its US Patent No. 6,736,795, which we refer to as the ‘795 patent, which expires on September 23, 2020 and that is alleged to cover our V-Go product. We do not believe the ‘795 patent to be valid, infringed, and/or enforceable and therefore we do not view Roche’s allegation as having merit. We also understand that Roche has never practiced the ‘795 Patent and Roche permitted the European equivalent patent to lapse. Accordingly, we declined Roche’s offer of a license to the ‘795 patent, and on January 24, 2019, we filed two Inter Partes Review petitions, which included three previously unconsidered prior art references, with the Patent Trial and Appeal Board, or PTAB. In response, in late February

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2019, Roche filed a proceeding in federal court in Delaware seeking an unspecified amount of damages and potential injunctive relief. On April 24, 2019 Roche filed a preliminary response with the US Patent and Trademark Office in which it statutorily disclaimed or abandoned all but 2 of the claims in the ‘795 patent that Roche had suggested covered the V-Go product. A statutory disclaimer means that the subject matter covered by the claims abandoned by Roche are dedicated to the public and free for any party to use.

On July 16, 2019, we entered into a confidential Settlement Agreement, or the Settlement, with Roche, whereby we and Roche agreed to terminate our previously disclosed Inter Partes Review proceedings related to the ‘795 patent and dismiss with prejudice all claims and counterclaims asserted by us and Roche in connection with our previously disclosed dispute surrounding the ‘795 patent. In exchange for the Settlement, Roche has granted us a non-exclusive, worldwide, license, or the License, to use the ‘795 patent, upon the terms and conditions set forth in the Settlement. The License will be valid from the date of the Settlement until the ‘795 patent expires and/or is no longer enforceable. In connection with the Settlement, we will pay to Roche an undisclosed amount in multiple payments over time determined not to be material. Although we have settled with Roche, in the future, we may be subject to additional claims in connection with other patents.

Our principal stockholders own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

As of August 7, 2019, our 5% stockholders and their affiliates, which includes stockholders that would own greater than 5% of our common stock if they converted certain of our outstanding derivative securities into shares of common stock, including our Series A Convertible Preferred Stock and warrants exercisable for shares of our common stock, beneficially owned an aggregate of 5,183,220 shares, or 56.4% of our outstanding common stock assuming such conversion and exercise, or 3,147,563 shares of our common stock, or only 44.0% assuming no conversion or exercise of such derivative securities (as of August 7, 2019, we had 7,157,639 shares of common stock outstanding; however, the beneficial ownership calculation above assumes the exercise by each of our 5% holders and their affiliates of our outstanding derivative securities currently held by these persons, which would increase the total number of shares of our common stock outstanding to 9,193,296 shares). Additionally, in connection with our debt conversion agreement with CRG and WCAS, the shares of Series A Convertible Preferred Stock we issued to those investors contains certain liquidation benefits and preferences to the holders of the shares of common stock, in addition to the other rights and preferences these stockholders have by virtue of their status as holders of our outstanding debt. To the extent these stockholders choose to convert additional debt or preferred stock into shares of our common stock in the future, or our other 5% holders convert their outstanding derivative securities into shares of our common stock, the ownership percentages of such stockholders could increase, which could give them significant influence over our affairs or allow them to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transactions. This concentration of ownership could delay or prevent any acquisition of our company on terms that other stockholders may desire, and may adversely affect the market price of our common stock. Notwithstanding that some of these holders are considered 5% owners because they own warrants exercisable for shares of our common stock, which if exercised, would increase their actual ownership of our common stock above 5%, the exercise price of our outstanding warrants is significantly higher than the current trading price of our common stock. For example, our Series B warrants, which expire on August 20, 2019, have an exercise price of $9.60 per share, and our Series A Warrants, which expire on November 20, 2023, have an exercise price of $12.00 per share. We do not expect these stockholders to exercise their warrants unless the trading price of our common stock appreciates significantly.

Risks Related to Our Legal and Regulatory Environment

Our products and operations are subject to extensive governmental regulation, and failure to comply with applicable requirements could cause our business to suffer. In order to successfully use our h-Patch ™ technology in other drug delivery applications beyond the use of insulin to treat type 2 diabetes, we will need to secure one or more collaboration partners and we or our partner may need to obtain regulatory approval to sell any such resulting products, which may require additional nonclinical and/or clinical data to support the use of those products. This process involves significant regulatory risks. If we are unable to secure one or more collaboration partners, or if we are unable to demonstrate the safety and/or effectiveness of any such resulting products, we will be unable to successfully use our h-Patch ™ technology in other drug delivery applications beyond the use of insulin to treat type 2 diabetes, and will not realize the potential profits that could be derived from such potential future uses.

In order to successfully use our h -Patch™ technology in other drug delivery applications beyond the use of insulin to treat type 2 diabetes, we will need to secure one or more collaboration partners. For example, we recently announced positive results from a preclinical pharmacokinetic (PK) study of cannabidiol (CBD) subcutaneous infusion with two dosing regiments delivered via our h -Patch™ technology as well as PK data with apomorphine. We cannot assure you that we will be able to successfully identify other potential drugs that could be combined with our h -Patch™ technology, or if we are able to identify such drugs, that we will

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be able to reach an agreement with such third party or parties necessary in order to combine our h -Patch™ technology with those drugs.

The drug or drugs that we and our collaboration partners combine with our h -Patch™ technology may not be approved in the markets in which we and our collaboration partners want to introduce such products. If such drugs are not approved in our target market(s), those drugs must first be approved or they may be approved simultaneously for use in combination with our h -Patch™ technology. In either case, we, or our collaboration partner, will be required to demonstrate the safety and if the drug is not yet approved, the effectiveness of the drug when combined with our h -Patch™ technology, which may require nonclinical and/or clinical data. Obtaining regulatory approval of a drug in combination with an injection technology can be a lengthy, expensive, and uncertain process. Even if we believe and our collaboration partners agree that we have sufficient nonclinical and/or clinical data to support the use of such drugs in combination with our h -Patch™ technology, the FDA and other regulatory authorities may disagree that such data are adequate to support approval. If we or our collaboration partners are unable to get such necessary approvals, then we will be unable to successfully expand the use of our h -Patch™ technology to other potential drug delivery applications, and will not realize the potential profits that could be derived from any such potential future uses.

Failure to obtain regulatory clearance for the use of Regular Human Insulin in V-Go, or other delays in the regulatory approval process, could adversely affect our ability to grow our business.

Commercial expansion of the V-Go device to include the use of Regular Human Insulin, or RHI, requires FDA clearance of a traditional 510(k) premarket notification submission, or Traditional 510(k). In June 2019, we filed a “Special 510(k): Device Modification” submission, or Special 510(k), with the FDA to expand the V-Go label to include using RHI in V-Go. Under the Special 510(k) submission program, the FDA could have potentially approved the use of RHI in V-Go as early as 30 days from the date of our submission. However, the FDA subsequently converted our Special 510(k) into a Traditional 510(k), which means that we will have a longer approval process than previously anticipated. While we expect that we will be able to obtain Traditional 510(k) approval for the use of RHI in V-Go by the end of 2019, the process for submitting and obtaining FDA clearance of a Traditional 510(k) can be expensive and lengthy, and given that the FDA’s Traditional 510(k) clearance process can take several months or longer, we may not be able to obtain Traditional 510(k) clearance for the use of RHI in V-Go by year-end, if at all. The FDA’s refusal to ultimately grant clearance of this label expansion, or any significant delays in receiving Traditional 510(k) clearance for the use of RHI in V-Go, could have an adverse effect on our ability to expand our business.








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Item 6.     Exhibits  

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.

 
 
10.1*



 
 
31.1*

 
 
 
31.2*

 
 
 
32.1*

 
 
 
32.2*

 
 
 
101
The following materials from Valeritas Holdings Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the six months ended June 30, 2019 and June 30, 2018, (ii) Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018, (iii) Condensed Consolidated Statements of Shareholders' Equity / (Deficit) at June 30, 2019 and June 30, 2018, (iv) Notes to Condensed Consolidated Financial Statements.
* Filed herewith

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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.
Valeritas Holdings, Inc.
(Registrant)
 
/s/ John Timberlake
John Timberlake
Chief Executive Officer and President
Principal Executive Officer
/s/ Erick Lucera
Erick Lucera
Vice President, Finance and Chief Financial Officer
Principal Financial Officer

Dated: August 8, 2019


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