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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 March 31, 2020

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:  001-33221

 

HERON THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

94-2875566

(I.R.S. Employer

Identification No.)

 

 

4242 Campus Point Court, Suite 200

San Diego, CA

92121

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 251-4400

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

HRTX

 

The Nasdaq Capital Market

 

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 pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of April 29, 2020 was 90,642,154.

 

 

 


HERON THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED March 31, 2020

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019…...……

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

ITEM 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

29

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

30

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

ITEM 3.

 

Defaults upon Senior Securities

 

58

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

58

 

 

 

 

 

ITEM 5.

 

Other Information

 

58

 

 

 

 

 

ITEM 6.

 

Exhibits

 

59

 

 

 

 

 

 

 

SIGNATURES

 

60

 

1


PART I.

FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HERON THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

(See Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,285

 

 

$

71,898

 

Short-term investments

 

 

253,061

 

 

 

319,074

 

Accounts receivable, net

 

 

34,811

 

 

 

39,879

 

Inventory

 

 

34,849

 

 

 

24,968

 

Prepaid expenses and other current assets

 

 

12,442

 

 

 

23,245

 

Total current assets

 

 

438,448

 

 

 

479,064

 

Property and equipment, net

 

 

21,908

 

 

 

19,618

 

Right-of-use lease assets

 

 

18,239

 

 

 

13,754

 

Other assets

 

 

346

 

 

 

346

 

Total assets

 

$

478,941

 

 

$

512,782

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,562

 

 

$

2,758

 

Accrued clinical and manufacturing liabilities

 

 

35,321

 

 

 

34,614

 

Accrued payroll and employee liabilities

 

 

8,770

 

 

 

15,248

 

Other accrued liabilities

 

 

32,423

 

 

 

36,535

 

Current lease liabilities

 

 

2,755

 

 

 

1,926

 

Convertible notes payable to related parties, net of discount

 

 

5,934

 

 

 

5,624

 

Total current liabilities

 

 

96,765

 

 

 

96,705

 

Non-current lease liabilities

 

 

16,708

 

 

 

12,242

 

Total liabilities

 

 

113,473

 

 

 

108,947

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

906

 

 

 

903

 

Additional paid-in capital

 

 

1,580,903

 

 

 

1,568,317

 

Accumulated other comprehensive income

 

 

708

 

 

 

85

 

Accumulated deficit

 

 

(1,217,049

)

 

 

(1,165,470

)

Total stockholders’ equity

 

 

365,468

 

 

 

403,835

 

Total liabilities and stockholders’ equity

 

$

478,941

 

 

$

512,782

 

 

See accompanying notes.

2


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Net product sales

 

$

25,400

 

 

$

31,602

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

10,622

 

 

 

14,962

 

Research and development

 

 

36,894

 

 

 

42,972

 

General and administrative

 

 

10,422

 

 

 

9,648

 

Sales and marketing

 

 

20,196

 

 

 

28,720

 

Total operating expenses

 

 

78,134

 

 

 

96,302

 

Loss from operations

 

 

(52,734

)

 

 

(64,700

)

Other income, net

 

 

1,155

 

 

 

1,688

 

Net loss

 

 

(51,579

)

 

 

(63,012

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gains on short-term investments

 

 

623

 

 

 

123

 

Comprehensive loss

 

$

(50,956

)

 

$

(62,889

)

Basic and diluted net loss per share

 

$

(0.57

)

 

$

(0.80

)

Shares used in computing basic and diluted net loss per share

 

 

90,409

 

 

 

78,419

 

 

See accompanying notes.

3


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands)

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Comprehensive

Income

 

 

Accumulated

Deficit

 

 

Stockholders’

Equity

 

Balance as of December 31, 2019

 

 

90,304

 

 

$

903

 

 

$

1,568,317

 

 

$

85

 

 

$

(1,165,470

)

 

$

403,835

 

Conversion benefit included in Convertible Notes

   issued

 

 

 

 

 

 

 

 

108

 

 

 

 

 

 

 

 

 

108

 

Issuance of common stock on exercise of stock

   options

 

 

70

 

 

 

 

 

 

504

 

 

 

 

 

 

 

 

 

504

 

Issuance of common stock on exercise of warrants

 

 

268

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

11,974

 

 

 

 

 

 

 

 

 

11,974

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(51,579

)

 

 

(51,579

)

Net unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

623

 

 

 

 

 

 

623

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,956

)

Balance as of March 31, 2020

 

 

90,642

 

 

$

906

 

 

$

1,580,903

 

 

$

708

 

 

$

(1,217,049

)

 

$

365,468

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-In

Capital

 

 

Comprehensive

(Loss) Income

 

 

Accumulated

Deficit

 

 

Stockholders’

Equity

 

Balance as of December 31, 2018

 

 

78,174

 

 

$

782

 

 

$

1,330,186

 

 

$

(87

)

 

$

(960,721

)

 

$

370,160

 

Conversion benefit included in Convertible Notes

   issued

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

 

 

 

102

 

Issuance of common stock on exercise of stock

   options

 

 

732

 

 

 

7

 

 

 

6,532

 

 

 

 

 

 

 

 

 

6,539

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

17,902

 

 

 

 

 

 

 

 

 

17,902

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63,012

)

 

 

(63,012

)

Net unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

123

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,889

)

Balance as of March 31, 2019

 

 

78,906

 

 

$

789

 

 

$

1,354,722

 

 

$

36

 

 

$

(1,023,733

)

 

$

331,814

 

 

 

See accompanying notes.

4


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(51,579

)

 

$

(63,012

)

Adjustments to reconcile net loss to net cash used for operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

11,974

 

 

 

17,902

 

Depreciation and amortization

 

 

621

 

 

 

467

 

Amortization of debt discount

 

 

310

 

 

 

247

 

Realized gain on available-for-sale securities

 

 

 

 

 

(8

)

Accretion of discount on short-term investments

 

 

(117

)

 

 

(1,357

)

Impairment of property and equipment

 

 

27

 

 

 

27

 

Loss on disposal of property and equipment

 

 

 

 

 

52

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,068

 

 

 

(9,355

)

Prepaid expenses and other assets

 

 

10,803

 

 

 

(346

)

Inventory

 

 

(9,881

)

 

 

7,611

 

Accounts payable

 

 

8,804

 

 

 

(6,052

)

Accrued clinical and manufacturing liabilities

 

 

707

 

 

 

(868

)

Accrued payroll and employee liabilities

 

 

(6,478

)

 

 

(6,757

)

Other accrued liabilities

 

 

(3,194

)

 

 

12,425

 

Net cash used for operating activities

 

 

(32,935

)

 

 

(49,024

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(28,922

)

 

 

(127,763

)

Maturities and sales of short-term investments

 

 

95,675

 

 

 

164,009

 

Purchases of property and equipment

 

 

(2,938

)

 

 

(2,136

)

Net cash provided by investing activities

 

 

63,815

 

 

 

34,110

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

504

 

 

 

6,539

 

Proceeds from warrant exercises

 

 

3

 

 

 

 

Net cash provided by financing activities

 

 

507

 

 

 

6,539

 

Net increase (decrease) in cash and cash equivalents

 

 

31,387

 

 

 

(8,375

)

Cash and cash equivalents at beginning of year

 

 

71,898

 

 

 

31,836

 

Cash and cash equivalents at end of period

 

$

103,285

 

 

$

23,461

 

 

See accompanying notes.

 

5


HERON THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In this Quarterly Report on Form 10-Q, all references to “Heron,” the “Company,” “we,” “us,” “our” and similar terms refer to Heron Therapeutics, Inc. and its wholly owned subsidiary, Heron Therapeutics B.V. Heron Therapeutics®, the Heron logo, CINVANTI®, SUSTOL® and Biochronomer® are our trademarks. All other trademarks appearing or incorporated by reference into this Quarterly Report on Form 10-Q are the property of their respective owners.

1. Business

We are a commercial-stage biotechnology company focused on improving the lives of patients by developing best-in-class treatments to address some of the most important unmet patient needs. We are developing novel, patient-focused solutions that apply our innovative science and technologies to already-approved pharmacological agents for patients suffering from pain or cancer.

In August 2016, our first commercial product, SUSTOL (granisetron) extended-release injection (“SUSTOL”), was approved by the U.S. Food and Drug Administration (“FDA”). SUSTOL is indicated in combination with other antiemetics in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracycline and cyclophosphamide (AC) combination chemotherapy regimens. SUSTOL is an extended-release, injectable 5-hydroxytryptamine type 3 receptor antagonist that utilizes our proprietary Biochronomer drug delivery technology to maintain therapeutic levels of granisetron for ≥5 days. We commenced commercial sales of SUSTOL in the U.S. in October 2016.

In November 2017, our second commercial product, CINVANTI (aprepitant) injectable emulsion (“CINVANTI”) was approved by the FDA. In October 2019, the FDA approved our supplemental New Drug Application (“sNDA”) for CINVANTI to expand the indication and recommended dosage to include the 130 mg single-dose regimen for patients receiving moderately emetogenic cancer chemotherapy (“MEC”). CINVANTI, in combination with other antiemetic agents, is indicated in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer chemotherapy (HEC) including high-dose cisplatin as a single-dose regimen, delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic cancer chemotherapy (MEC) as a single-dose regimen, and nausea and vomiting associated with initial and repeat courses of MEC as a 3-day regimen. CINVANTI is an intravenous (“IV”) formulation of aprepitant, a substance P/neurokinin-1 (“NK1”) receptor antagonist. CINVANTI is the first and only IV formulation of an NK1 receptor antagonist indicated for the prevention of acute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC that is free of synthetic surfactants, including polysorbate 80. We commenced commercial sales of CINVANTI in the U.S. in January 2018. In February 2019, the FDA approved our sNDA for CINVANTI, for IV use, which expanded the administration of CINVANTI beyond the initially approved administration method (a 30-minute IV infusion) to include a 2-minute IV injection.

HTX-011, an investigational non-opioid, is a dual-acting, fixed-dose combination of the local anesthetic bupivacaine with a low dose of the nonsteroidal anti-inflammatory drug meloxicam. It is the first and only extended-release local anesthetic to demonstrate in Phase 3 studies significantly reduced pain and opioid use through 72 hours compared to bupivacaine solution, the current standard-of-care local anesthetic for postoperative pain control. HTX-011 was granted Fast Track designation from the FDA in the fourth quarter of 2017 and Breakthrough Therapy designation in the second quarter of 2018. Heron submitted a New Drug Application (“NDA”) to the FDA for HTX-011 in October 2018 and received Priority Review designation in December 2018. A Complete Response Letter was received from the FDA regarding the NDA for HTX-011 on April 30, 2019 relating to chemistry, manufacturing and controls and non-clinical information. No issues related to clinical efficacy or safety were noted. Heron resubmitted an NDA to the FDA for HTX-011 in September 2019. The Prescription Drug User Fee Act goal date is June 26, 2020. A Marketing Authorisation Application for HTX-011 was validated by the European Medicines Agency in March 2019 for review under the Centralised Procedure. Heron’s New Drug Submission for HTX-011 for the management of postoperative pain was granted Priority Review status by Health Canada in October 2019 and accepted by Health Canada in November 2019.

HTX-034, our next-generation product candidate for postoperative pain management, is in development for postoperative pain via local application. Based on the positive results of preclinical studies in which HTX-034 demonstrated significant pain reduction for 7 days, we have initiated formal development of this next-generation postoperative pain management product candidate.

6


As of March 31, 2020 we had $356.3 million in cash, cash equivalents and short-term investments. We have incurred significant operating losses and negative cash flows from operations. Management believes that the Company’s existing cash, cash equivalents and short-term investments will be sufficient to meet the Company’s anticipated cash requirements for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (“SEC”).

2. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for other quarters or the year ending December 31, 2020. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements as of that date, but does not include all of the information and disclosures required by GAAP. For more complete financial information, these condensed consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 2, 2020.

3. Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Heron Therapeutics, Inc. and its wholly-owned subsidiary, Heron Therapeutics B.V., which was organized in the Netherlands in March 2015. Heron Therapeutics B.V. has no operations and no material assets or liabilities, and there have been no significant transactions related to Heron Therapeutics B.V. since its inception.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Our significant accounting policies that involve significant judgment and estimates include revenue recognition, investments, inventory and the related reserves, accrued clinical liabilities, income taxes and stock-based compensation. Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and highly liquid investments with contractual maturities of three months or less from the original purchase date.

Short-term investments consist of securities with contractual maturities of greater than three months from the original purchase date. Securities with contractual maturities greater than one year are classified as short-term investments on the condensed consolidated balance sheets, as we have the ability, if necessary, to liquidate these securities to meet our liquidity needs in the next 12 months. We have classified our short-term investments as available-for-sale securities in the accompanying condensed consolidated financial statements. Available-for-sale securities are stated at fair market value, with net changes in unrealized gains and losses reported in other comprehensive loss and realized gains and losses included in other income (expense), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Our bank and investment accounts have been placed under a control agreement in accordance with our Senior Secured Convertible Notes (“Convertible Notes”) (see Note 8).

 

 

Concentration of Credit Risk

Cash, cash equivalents and short-term investments are financial instruments that potentially subject us to concentrations of credit risk. We deposit our cash in financial institutions. At times, such deposits may be in excess of insured limits. We may also invest our excess cash in money market funds, U.S. government and agencies, corporate debt securities and commercial paper. We have established guidelines relative to our diversification of our cash investments and their maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.


7


Our products are distributed in the U.S. through a limited number of specialty distributors and full line wholesalers (collectively, “Customers”) that resell our products to healthcare providers and hospitals, the end users. The following table includes the percentage of net product sales and accounts receivable balances for our three major Customers, each of which comprised 10% or more of our net product sales:

 

 

 

Net Product Sales

 

 

Accounts

Receivable

 

 

 

Three Months Ended

March 31, 2020

 

 

As of

March 31, 2020

 

Customer A

 

 

40.7

%

 

 

46.9

%

Customer B

 

 

36.7

%

 

 

41.4

%

Customer C

 

 

21.0

%

 

 

11.0

%

Total

 

 

98.4

%

 

 

99.3

%

 

Accounts Receivable, Net

Accounts receivable are recorded at the invoice amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects accounts receivable balances that are believed to be uncollectible. In estimating the allowance for doubtful accounts, we consider: (1) our historical experience with collections and write-offs; (2) the credit quality of our Customers and any recent or anticipated changes thereto; and (3) the outstanding balances and past due amounts from our Customers.

We offered extended payment terms to our Customers in connection with our product launches of SUSTOL and CINVANTI in October 2016 and January 2018, respectively, in anticipation of the timing of reimbursement by government and commercial payers. Effective January 2018, we shortened payment terms to certain of our SUSTOL Customers. Effective January 2019, we shortened payment terms to our CINVANTI Customers. As of March 31, 2020, extended payment terms given to our Customers were evaluated in accordance with GAAP and did not impact the collectability of accounts receivables.

As of March 31, 2020, we determined that an allowance for doubtful accounts was not required. For the three months ended March 31, 2020, we did not write off any accounts receivable balances.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value on a first-in, first-out, or FIFO, basis. We periodically analyze our inventory levels and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory quantities that are in excess of expected sales requirements as cost of product sales. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required, which would be recorded as cost of product sales.

 

 

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements and ASU No. 2018-10, Codification Improvements to Topic 842, Leases. ASU 2016-02 and the subsequent modifications are identified as the FASB Accounting Standards Codification (“ASC”) Topic 842 (“Topic 842”). Topic 842 requires lessees to classify leases as either finance or operating based on whether or not the lease is effectively a financed purchase. Lease expense is recognized over the term of the lease using an effective interest method for finance leases and on a straight-line basis over the lease term for operating leases. A lessee is also required to record a right-of-use (“ROU”) lease asset and a lease liability for all leases with a lease term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to historical guidance for operating leases under the FASB ASC Topic 840, Leases. We adopted Topic 842 on January 1, 2019 using the alternative transition method allowed under ASU No. 2018-11. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical assessments of: (i) whether a contract is or contains a lease; (ii) lease classification; and (iii) initial direct costs. We elected a policy of not recording leases on the balance sheet when the lease term is 12 months or less. The adoption of Topic 842 had a substantial impact on the condensed consolidated balance sheet with the recognition of lease liabilities and corresponding ROU lease assets. There was no material impact on our results of operations or liquidity (see Note 7).

8


We determine if an agreement is a lease or contains lease components at inception. Operating leases are recorded as lease liabilities with corresponding ROU lease assets on the condensed consolidated balance sheets. ROU lease assets represent our right to use the underlying assets over the lease term, and lease liabilities represent the present value of our obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU lease assets equal the lease liabilities, less unamortized lease incentives, unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease. The lease term includes any option to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with both lease and non-lease components, which are generally accounted for separately.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Product Sales

CINVANTI is distributed in the U.S. through a limited number of Customers that resell CINVANTI to healthcare providers and hospitals, the end users of CINVANTI. SUSTOL is distributed in the U.S. through a limited number of Customers that resell SUSTOL to healthcare providers, the end users of SUSTOL.

Revenue is recognized in an amount that reflects the consideration we expect to receive in exchange for our products. To determine revenue recognition for contracts with customers within the scope of Topic 606, we performed the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations of the contract(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract(s); and (v) recognize revenue when (or as) we satisfy the performance obligations.

 

Product Sales Allowances

We recognize product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with Customers, historical product returns, rebates or discounts taken, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, we may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Our product sales allowances include:

 

Product Returns—We allow our Customers to return product for credit up to 12 months after its product expiration date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.

 

Distributor Fees—We offer contractually determined discounts to our Customers. These discounts are paid no later than two months after the quarter in which product was shipped.

 

Group Purchasing Organization (“GPO”) Discounts and Rebates—We offer cash discounts to GPO members. These discounts are taken when the GPO members purchase product from our Customers, who then charge back to us the discount amount. Additionally, we offer volume and contract-tier rebates to GPO members. Rebates are based on actual purchase levels during the quarterly rebate purchase period.

 

GPO Administrative Fees—We pay administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the GPOs’ members.

 

Medicaid Rebates—We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which the product was sold.

9


We believe our estimated allowance for product returns requires a high degree of judgment and is subject to change based on our experience and certain quantitative and qualitative factors. We believe our estimated allowances for distributor fees, GPO discounts, rebates and administrative fees and Medicaid rebates do not require a high degree of judgment because the amounts are settled within a relatively short period of time.

Our product sales allowances and related accruals are evaluated each reporting period and adjusted when trends or significant events indicate that a change in estimate is appropriate. Changes in product sales allowance estimates could materially affect our results of operations and financial position.

Net product sales for the three months ended March 31, 2020 were $25.4 million, compared to $31.6 million for the same period in 2019. For the three months ended March 31, 2020, net products sales of CINVANTI were $25.2 million, compared to $28.0 million for the same period in 2019. For the three months ended March 31, 2020, net product sales of SUSTOL were $0.2 million, compared to $3.6 million for the same period in 2019.

The following table provides a summary of activity with respect to our product returns, distributor fees and discounts, rebates and administrative fees, which are included in other accrued liabilities on the condensed consolidated balance sheets (in thousands):

 

 

 

Product

Returns

 

 

Distributor

Fees

 

 

Discounts,

Rebates and

Administrative Fees

 

 

Total

 

Balance at December 31, 2019

 

$

2,351

 

 

$

3,999

 

 

$

21,589

 

 

$

27,939

 

Provision

 

 

152

 

 

 

4,219

 

 

 

25,645

 

 

 

30,016

 

Payments/credits

 

 

(79

)

 

 

(4,221

)

 

 

(29,910

)

 

 

(34,210

)

Balance at March 31, 2020

 

$

2,424

 

 

$

3,997

 

 

$

17,324

 

 

$

23,745

 

 

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net changes in unrealized gains and losses on available-for-sale securities are included in other comprehensive income and represent the difference between our net loss and comprehensive loss for both periods presented.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, warrants and shares of common stock underlying Convertible Notes are considered to be common stock equivalents and are included in the calculation of diluted net loss per share only when their effect is dilutive.

Because we have incurred a net loss for both periods presented in the unaudited condensed consolidated statements of operations and comprehensive loss, the following common stock equivalents were not included in the computation of net loss per share because their effect would be anti-dilutive (in thousands):

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Stock options outstanding

 

 

16,510

 

 

 

14,281

 

Warrants outstanding

 

 

220

 

 

 

640

 

Shares of common stock underlying Convertible Notes

   outstanding

 

 

9,095

 

 

 

8,600

 

 


 

10


Recent Accounting Pronouncements

Adopted in 2020

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. In the first quarter of 2020, we adopted the provisions of ASU 2018-13 which did not have a material impact on our financial statement disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”), which amends ASU 2016-13 by providing entities with an option to irrevocably elect the fair value option to be applied on an instrument-by-instrument basis for eligible financial instruments that are within the scope of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. On January 1, 2020, we adopted the provisions of ASU 2016-13, which did not have a material impact on our results of operations, financial condition or internal controls.

Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which is intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Adoption of ASU 2019-12 requires certain changes to be made prospectively and other changes to be made retrospectively. We plan to adopt the provisions of ASU 2019-12 in the first quarter of 2021, and we are currently evaluating the impact on our results of operations, financial condition and internal controls.

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

11


We measure cash, cash equivalents and short-term investments at fair value on a recurring basis. The fair values of such assets were as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance at

March 31,

2020

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and money market funds

 

$

103,285

 

 

$

103,285

 

 

$

 

 

$

 

U.S. treasury bills and government agency obligations

 

 

101,431

 

 

 

101,431

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

69,938

 

 

 

 

 

 

69,938

 

 

 

 

Foreign corporate debt securities

 

 

25,493

 

 

 

 

 

 

25,493

 

 

 

 

U.S. commercial paper

 

 

25,873

 

 

 

 

 

 

25,873

 

 

 

 

Foreign commercial paper

 

 

30,326

 

 

 

 

 

 

30,326

 

 

 

 

Total

 

$

356,346

 

 

$

204,716

 

 

$

151,630

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance at

December 31,

2019

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and money market funds

 

$

56,931

 

 

$

56,931

 

 

$

 

 

$

 

U.S. treasury bills and government agency obligations

 

 

140,626

 

 

 

140,626

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

80,170

 

 

 

 

 

 

80,170

 

 

 

 

Foreign corporate debt securities

 

 

23,203

 

 

 

 

 

 

23,203

 

 

 

 

U.S. commercial paper

 

 

32,801

 

 

 

 

 

 

32,801

 

 

 

 

Foreign commercial paper

 

 

57,241

 

 

 

 

 

 

57,241

 

 

 

 

Total

 

$

390,972

 

 

$

197,557

 

 

$

193,415

 

 

$

 

 

We have not transferred any investment securities between the three levels of the fair value hierarchy.

As of March 31, 2020, cash equivalents included $103.3 million of available-for-sale securities with contractual maturities of three months or less. As of March 31, 2020, short-term investments included $220.9 million of available-for-sale securities with contractual maturities of three months to one year and $32.1 million of available-for-sale securities with contractual maturities greater than one year. As of December 31, 2019, cash equivalents included $15.0 million of available-for-sale securities with contractual maturities of three months or less. As of December 31, 2019, short-term investments included $279.7 million of available-for-sale securities with contractual maturities of three months to one year and $39.4 million of available-for-sale securities with contractual maturities greater than one year. The money market funds as of March 31, 2020 and December 31, 2019 are included in cash and cash equivalents on the condensed consolidated balance sheets.

A company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item such as debt issuance costs must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings and any changes in fair value are recognized in earnings. We have elected to not apply the fair value option to our financial assets and liabilities.

Financial instruments, including cash, cash equivalents, receivables, inventory, prepaid expenses, other current assets, accounts payable and accrued expenses are carried at cost, which is considered to be representative of their respective fair values because of the short-term maturity of these instruments. Short-term available-for-sale investments are carried at fair value. Our Convertible Notes outstanding at March 31, 2020 do not have a readily available ascertainable market value, however, the carrying value is considered to approximate its fair value.

12


5. Short-term Investments

The following is a summary of our short-term investments (in thousands):

 

 

 

March 31, 2020

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. treasury bills and government agency obligations

 

$

100,499

 

 

$

932

 

 

$

 

 

$

101,431

 

U.S. corporate debt securities

 

 

70,077

 

 

 

 

 

 

(139

)

 

 

69,938

 

Foreign corporate debt securities

 

 

25,578

 

 

 

 

 

 

(85

)

 

 

25,493

 

U.S. commercial paper

 

 

25,873

 

 

 

 

 

 

 

 

 

25,873

 

Foreign commercial paper

 

 

30,326

 

 

 

 

 

 

 

 

 

30,326

 

Total

 

$

252,353

 

 

$

932

 

 

$

(224

)

 

$

253,061

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. treasury bills and government agency obligations

 

$

140,567

 

 

$

59

 

 

$

 

 

$

140,626

 

U.S. corporate debt securities

 

 

80,159

 

 

 

11

 

 

 

 

 

 

80,170

 

Foreign corporate debt securities

 

 

23,188

 

 

 

15

 

 

 

 

 

 

23,203

 

U.S. commercial paper

 

 

32,801

 

 

 

 

 

 

 

 

 

32,801

 

Foreign commercial paper

 

 

42,274

 

 

 

 

 

 

 

 

 

42,274

 

Total

 

$

318,989

 

 

$

85

 

 

$

 

 

$

319,074

 

 

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. We regularly monitor and evaluate the realizable value of our marketable securities. We did not recognize any impairment losses during the three months ended March 31, 2020 and 2019.

Realized gains and losses associated with our available-for-sale securities, if any, are reported in the statements of operations and comprehensive loss. We did not recognize any realized gains or losses during the three months ended March 31, 2020. We recognized $8,000 of realized gains during the three months ended March 31, 2019.

6. Inventory

Inventory consists of the following (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Raw materials

 

$

14,756

 

 

$

6,635

 

Work in process

 

 

17,160

 

 

 

12,571

 

Finished goods

 

 

2,933

 

 

 

5,762

 

Total inventory

 

$

34,849

 

 

$

24,968

 

 

As of March 31, 2020, total inventory included $33.5 million related to CINVANTI and $1.3 million related to SUSTOL. As of December 31, 2019, total inventory included $23.5 million related to CINVANTI and $1.5 million related to SUSTOL. In addition, cost of product sales for the three months ended March 31, 2019 included charges of $1.6 million resulting from the write-off of short-dated SUSTOL inventory.

 

 

7. Leases

In December 2019, we amended our existing operating lease for laboratory and office space in San Diego, California to expand the office space by an additional 21,180 square feet (“Lease Amendment”). The Lease Amendment commenced on January 1, 2020 and expires on December 31, 2025. We have an option to extend the lease for an additional 5 years on expiration.

As of March 31, 2020, our operating lease for laboratory and office space in San Diego, California had a remaining lease term of 69 months.

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On January 1, 2019, on the adoption of Topic 842, we recognized initial ROU lease assets of $13.7 million and initial lease liabilities of $14.5 million. Our weighted-average remaining lease term for our operating lease was 69 months. The option to extend our operating lease in San Diego was not recognized as part of our lease liability and ROU lease assets. During the three months ended March 31, 2020, we recognized $1.0 million of operating lease expense and we paid $0.8 million for our operating leases.

Future minimum lease payments under our operating leases as of March 31, 2020 are as follows (in thousands):

 

2020

 

$

2,876

 

2021

 

 

3,942

 

2022

 

 

4,058

 

2023

 

 

4,178

 

2024

 

 

4,274

 

Thereafter

 

 

4,379

 

Total future minimum lease payments

 

$

23,707

 

Less: discount

 

 

(4,244

)

Total lease liabilities

 

$

19,463

 

 

8. Secured Notes to Related Party

Convertible Notes

In April 2011, we entered into a securities purchase agreement for a private placement of up to $4.5 million in Convertible Notes with certain investors, including Tang Capital Partners, LP (“TCP”). TCP is controlled by Tang Capital Management, LLC (“TCM”). The manager of TCM is Kevin Tang, who served as a director at the time and currently serves as the Chairman of our Board of Directors. At the time of issuance, the terms of the Convertible Notes were determined by our independent directors to be no less favorable than terms that would be obtained in an arm’s length financing transaction. We received a total of $4.3 million, net of issuance costs, from the issuance of these Convertible Notes.

The Convertible Notes are secured by substantially all of our assets, including placing our bank and investment accounts under a control agreement. The Convertible Notes bear interest at 6% per annum, payable quarterly in cash or in additional principal amount of Convertible Notes, at the election of the purchasers. The Convertible Notes mature on May 2, 2021; however, the holders of the Convertible Notes may require prepayment of the Convertible Notes at any time, at each holder’s option.

The Convertible Notes are convertible into shares of our common stock at a rate of 1,250 shares for every $1,000 of outstanding principal due under the Convertible Notes. There is no right to convert the Convertible Notes to the extent that, after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of our outstanding common stock. Each holder of the Convertible Notes can increase or decrease this beneficial ownership conversion limit by written notice to us, which will not be effective until 61 days after delivery of the notice.

As of March 31, 2020, we were in compliance with all covenants under the Convertible Notes. On the occurrence of an event of default under the Convertible Notes, the holders of the Convertible Notes have the right to require us to redeem all or a portion of their Convertible Notes.

In 2011, we filed a registration statement with the SEC to register for resale 3.5 million shares underlying the Convertible Notes. The registration statement was declared effective on July 29, 2011. The Convertible Note holders have agreed to waive their right to require us to maintain the effectiveness of the registration statement and to register the additional shares underlying the Convertible Notes until they provide notice otherwise.

 

The Convertible Notes contain an embedded conversion feature that was in-the-money on the issuance dates. Based on an effective fixed conversion rate of 1,250 shares for every $1,000 of principal and accrued interest due under the Convertible Notes, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a debt discount was recorded in an amount equal to the face value of the Convertible Notes on the issuance dates, and we began amortizing the resultant debt discount over the respective 10-year term of the Convertible Notes. During the three months ended March 31, 2020, accrued interest of $0.1 million was paid-in-kind and rolled into the Convertible Note principal balance, which resulted in an additional debt discount of $0.1 million. For each of the three months ended March 31, 2020 and 2019, interest expense relating to the stated rate was $0.1 million. For each of the three months ended March 31, 2020 and 2019, interest expense relating to the amortization of the debt discount was $0.2 million.

As of March 31, 2020, the carrying value of the Convertible Notes was $5.9 million, which is comprised of the $7.2 million principal amount of the Convertible Notes outstanding, less debt discount of $1.3 million. As of March 31, 2020, the Convertible Notes were convertible into 9.1 million shares of our common stock.

14


9. Stockholders’ Equity

Common Stock Offering

In October 2019, we sold 9.9 million shares of our common stock at a public offering price of $17.50 per share. We received total net cash proceeds of $162.2 million (net of $10.3 million in issuance costs) from the sale of the common stock.

Public Offering Warrants

In June 2014, as a component of our public offering, we sold 600,000 pre-funded warrants to purchase shares of our common stock. The pre-funded warrants have an exercise price of $0.01 per share and expire on June 30, 2021. During the three months ended March 31, 2020, warrant holders exercised 267,870 warrants, which resulted in the issuance of 267,870 shares for net cash proceeds of $2,679. As of March 31, 2020, 195,574 warrants from the June 2014 public offering remain outstanding.

Stock Option Activity

The following table summarizes the stock option activity for the three months ended March 31, 2020:

 

 

 

Shares

(in thousands)

 

 

Weighted-

average

Exercise Price

 

 

Weighted-

average

Remaining

Contractual

Term (Years)