hrtx-10q_20210331.htm
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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, 2021

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 May 4, 2021 was 101,829,066.

 

 

 


 

HERON THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED March 31, 2021

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020…...……

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2021 and 2020 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

ITEM 2.

 

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

 

18

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

26

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

28

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

 

ITEM 3.

 

Defaults upon Senior Securities

 

60

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

60

 

 

 

 

 

ITEM 5.

 

Other Information

 

60

 

 

 

 

 

ITEM 6.

 

Exhibits

 

61

 

 

 

 

 

 

 

SIGNATURES

 

62

 

1


 

PART I.

FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HERON THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Unaudited)

 

 

(See Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,739

 

 

$

105,138

 

Short-term investments

 

 

106,727

 

 

 

103,353

 

Accounts receivable, net

 

 

38,525

 

 

 

41,850

 

Inventory

 

 

42,629

 

 

 

41,905

 

Prepaid expenses and other current assets

 

 

24,668

 

 

 

21,950

 

Total current assets

 

 

272,288

 

 

 

314,196

 

Property and equipment, net

 

 

22,704

 

 

 

22,737

 

Right-of-use lease assets

 

 

15,594

 

 

 

16,277

 

Other assets

 

 

346

 

 

 

346

 

Total assets

 

$

310,932

 

 

$

353,556

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,689

 

 

$

525

 

Accrued clinical and manufacturing liabilities

 

 

54,219

 

 

 

49,962

 

Accrued payroll and employee liabilities

 

 

9,629

 

 

 

13,597

 

Other accrued liabilities

 

 

24,744

 

 

 

28,369

 

Current lease liabilities

 

 

3,081

 

 

 

2,997

 

Convertible notes payable to related parties, net of discount

 

 

7,555

 

 

 

7,053

 

Total current liabilities

 

 

100,917

 

 

 

102,503

 

Non-current lease liabilities

 

 

13,790

 

 

 

14,561

 

Total liabilities

 

 

114,707

 

 

 

117,064

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

914

 

 

 

913

 

Additional paid-in capital

 

 

1,640,552

 

 

 

1,628,070

 

Accumulated other comprehensive income

 

 

121

 

 

 

257

 

Accumulated deficit

 

 

(1,445,362

)

 

 

(1,392,748

)

Total stockholders’ equity

 

 

196,225

 

 

 

236,492

 

Total liabilities and stockholders’ equity

 

$

310,932

 

 

$

353,556

 

 

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,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

Net product sales

 

$

20,018

 

 

$

25,400

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

9,207

 

 

 

10,622

 

Research and development

 

 

38,116

 

 

 

36,894

 

General and administrative

 

 

9,573

 

 

 

10,422

 

Sales and marketing

 

 

15,236

 

 

 

20,196

 

Total operating expenses

 

 

72,132

 

 

 

78,134

 

Loss from operations

 

 

(52,114

)

 

 

(52,734

)

Other income (expense)

 

 

(500

)

 

 

1,155

 

Net loss

 

 

(52,614

)

 

 

(51,579

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gains (losses) on short-term investments

 

 

(136

)

 

 

623

 

Comprehensive loss

 

$

(52,750

)

 

$

(50,956

)

Basic and diluted net loss per share

 

$

(0.58

)

 

$

(0.57

)

Shares used in computing basic and diluted net loss per share

 

 

91,388

 

 

 

90,409

 

 

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, 2020

 

 

91,310

 

 

$

913

 

 

$

1,628,070

 

 

$

257

 

 

$

(1,392,748

)

 

$

236,492

 

Conversion benefit included in Convertible Notes issued

 

 

 

 

 

 

 

 

114

 

 

 

 

 

 

 

 

 

114

 

Issuance of common stock under equity incentive plan

 

 

97

 

 

 

1

 

 

 

882

 

 

 

 

 

 

 

 

 

883

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

11,486

 

 

 

 

 

 

 

 

 

11,486

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,614

)

 

 

(52,614

)

Net unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

(136

)

 

 

 

 

 

(136

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,750

)

Balance as of March 31, 2021

 

 

91,407

 

 

$

914

 

 

$

1,640,552

 

 

$

121

 

 

$

(1,445,362

)

 

$

196,225

 

 

 

 

 

 

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 under equity incentive plan

 

 

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

 

 

 

See accompanying notes.

4


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(52,614

)

 

$

(51,579

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

11,486

 

 

 

11,974

 

Depreciation and amortization

 

 

739

 

 

 

621

 

Amortization of debt discount

 

 

502

 

 

 

310

 

Amortization of premium (accretion of discount) on short-term investments

 

 

48

 

 

 

(117

)

Impairment of property and equipment

 

 

80

 

 

 

27

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,325

 

 

 

5,068

 

Prepaid expenses and other assets

 

 

(2,718

)

 

 

10,803

 

Inventory

 

 

(724

)

 

 

(9,881

)

Accounts payable

 

 

1,164

 

 

 

8,804

 

Accrued clinical and manufacturing liabilities

 

 

4,257

 

 

 

707

 

Accrued payroll and employee liabilities

 

 

(3,968

)

 

 

(6,478

)

Other accrued liabilities

 

 

(3,515

)

 

 

(3,194

)

Net cash used for operating activities

 

 

(41,938

)

 

 

(32,935

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(44,058

)

 

 

(28,922

)

Maturities and sales of short-term investments

 

 

40,500

 

 

 

95,675

 

Purchases of property and equipment

 

 

(786

)

 

 

(2,938

)

Net cash (used for) provided by investing activities

 

 

(4,344

)

 

 

63,815

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock under equity incentive plan

 

 

883

 

 

 

504

 

Proceeds from warrant exercises

 

 

 

 

 

3

 

Net cash provided by financing activities

 

 

883

 

 

 

507

 

Net (decrease) increase in cash and cash equivalents

 

 

(45,399

)

 

 

31,387

 

Cash and cash equivalents at beginning of year

 

 

105,138

 

 

 

71,898

 

Cash and cash equivalents at end of period

 

$

59,739

 

 

$

103,285

 

 

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®, ZYNRELEF™ 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. Our advanced science, patented technologies, and innovative approach to drug discovery and development have allowed us to create and commercialize a portfolio of products that aim to advance the standard of care for acute care and oncology patients.

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. 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.

 

In September 2020, our third approved product, ZYNRELEF (also known as HTX-011) was granted a marketing authorization by the European Commission. As of January 1, 2021, ZYNRELEF is approved in 31 European countries including the countries of the European Union and European Economic Area and the United Kingdom. ZYNRELEF is indicated for the treatment of somatic postoperative pain from small- to medium-sized surgical wounds in adults. ZYNRELEF, a 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. As we build large-scale manufacturing capacity to meet the anticipated commercial demand in the U.S. and the rest of the world, we are developing a coordinated global marketing strategy.


6


 

HTX-011 (ZYNRELEF in Europe) is an investigational agent in the United States and Canada. The FDA granted Breakthrough Therapy designation to HTX-011 and the New Drug Application (“NDA”) received Priority Review designation. A Complete Response Letter (“CRL”) was received from the FDA regarding the NDA for HTX-011 in June 2020. The CRL stated that the FDA is unable to approve the NDA in its present form based on the need for additional non-clinical information. Based on the complete review of the NDA, the FDA did not identify any clinical safety or efficacy issues or chemistry, manufacturing and controls issues. There are four non-clinical issues in the CRL, none of which relate to any observed toxicity. Three relate to confirming exposure of excipients in preclinical reproductive toxicology studies, and the fourth relates to changing the manufacturing release specification of the allowable level of an impurity based on animal toxicology coverage. At the Type A End-of-Review meeting in September 2020 (the “Type A Meeting”), the FDA agreed with the change to the manufacturing specification proposed by Heron to address the FDA’s concern and agreed with our proposal to bridge the clinical and nonclinical excipient exposure data to address the other 3 deficiencies. In November 2020, we resubmitted the NDA to the FDA for HTX-011 based on the outcome and final minutes of the Type A Meeting. The Prescription Drug User Fee Act goal date is May 12, 2021. Our New Drug Submission for HTX-011 for the management of postoperative pain was accepted by Health Canada in November 2019. In April 2021, we responded to a list of questions received from Health Canada and we anticipate up to a 300-day review period following screening of our responses.

HTX-034, our next-generation product candidate for postoperative pain management, is an investigational non-opioid, fixed-dose combination, extended‑release solution of the local anesthetic bupivacaine, the nonsteroidal anti-inflammatory drug meloxicam and an additional agent that further potentiates the activity of bupivacaine. HTX-034 is formulated in the same proprietary polymer as HTX-011 (ZYNRELEF in the Europe). By combining two different mechanisms that each enhance the activity of the local anesthetic bupivacaine, HTX-034 is designed to provide superior and prolonged analgesia. Local administration of HTX-034 in a validated preclinical postoperative pain model resulted in sustained analgesia for 7 days. In May 2020, we initiated a Phase 1b/2 clinical study in patients undergoing bunionectomy of HTX-034. In the Phase 1b portion of this Phase 1b/2 double-blind, randomized, active-controlled, dose-escalation study in 33 patients undergoing bunionectomy, the reduction in pain intensity observed was greater with the lowest dose of HTX-034 evaluated (containing 21.7 mg of bupivacaine plus meloxicam and aprepitant) than with the bupivacaine 50 mg solution through 96 hours. In addition, 45.5% of HTX-034 patients remained opioid-free through Day 15 with median opioid consumption of 2.5 milligram morphine equivalents (same as one 5 mg oxycodone pill) through 72-hours, a 71% reduction compared to bupivacaine solution. We initiated the expanded Phase 2 portion of the study for HTX-034 in the first quarter of 2021.

HTX-019 is an investigational agent for the prevention of postoperative nausea and vomiting (“PONV”). HTX-019 is an IV injectable emulsion formulation designed to directly deliver aprepitant, the active ingredient in EMEND® (aprepitant) capsules, which is the only NK1 receptor antagonist approved in the U.S. for the prevention of PONV in adults. The FDA-approved dose of oral EMEND is 40 mg for PONV, which is given within 3 hours prior to induction of anesthesia for surgery. An Investigational New Drug application for HTX-019 for PONV was approved by the FDA in late September 2020. In a Phase 1 clinical trial, 32 mg of HTX-019 as a 30-second IV injection was demonstrated to be bioequivalent to oral aprepitant 40 mg. An NDA for HTX-019 is planned in late 2021 for prevention of PONV in adults.

As of March 31, 2021 we had $166.5 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, 2021 are not necessarily indicative of the results that may be expected for other quarters or the year ending December 31, 2021. The condensed consolidated balance sheet as of December 31, 2020 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, 2020, which was filed with the SEC on February 24, 2021.

 


7


 

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). 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 9).

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.

CINVANTI and SUSTOL are distributed in the U.S. through a limited number of specialty distributors and full line wholesalers (collectively, “Customers”) that resell to healthcare providers and hospitals, the end users of CINVANTI and SUSTOL.


8


 

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, 2021

 

 

As of

March 31, 2021

 

Customer A

 

 

47.4

%

 

 

53.6

%

Customer B

 

 

32.7

%

 

 

34.5

%

Customer C

 

 

19.0

%

 

 

11.3

%

Total

 

 

99.1

%

 

 

99.4

%

 

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 launch of CINVANTI in January 2018. In addition, we offered extended payment terms to our Customers in January 2021 when we reinstated the promotion and contracting of SUSTOL. These extended payment terms we offered in anticipation of the timing of reimbursement by government and commercial payers. Effective January 2019, we shortened payment terms to our CINVANTI Customers. As of March 31, 2021, 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, 2021 and December 31, 2020, we determined that an allowance for doubtful accounts was not required. For the three months ended March 31, 2021 and 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

 

We determine if an arrangement is a lease or contains lease components at inception. Operating leases with an initial term greater than 12 months, are recorded as lease liabilities with corresponding right-of-use (“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.

 


9


 

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 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 and SUSTOL are distributed in the U.S. through a limited number of Customers that resell to healthcare providers and hospitals, the end users of CINVANTI and 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 for 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.

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.


10


 

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, 2021 were $20.0 million, compared to $25.4 million for the same period in 2020. For the three months ended March 31, 2021, net products sales of CINVANTI were $18.5 million, compared to $25.2 million for the same period in 2020. For the three months ended March 31, 2021, net product sales of SUSTOL were $1.5 million, compared to $0.2 million for the same period in 2020.

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, 2020

 

$

2,704

 

 

$

3,930

 

 

$

17,937

 

 

$

24,571

 

Provision

 

 

157

 

 

 

4,397

 

 

 

32,296

 

 

 

36,850

 

Payments/credits

 

 

(105

)

 

 

(4,566

)

 

 

(35,861

)

 

 

(40,532

)

Balance at March 31, 2021

 

$

2,756

 

 

$

3,761

 

 

$

14,372

 

 

$

20,889

 

 

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 (loss) 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,

 

 

 

2021

 

 

2020

 

Stock options outstanding

 

 

18,795

 

 

 

16,510

 

Restricted stock units outstanding

 

 

570

 

 

 

 

Warrants outstanding

 

 

220

 

 

 

220

 

Shares of common stock underlying Convertible Notes

   outstanding

 

 

9,653

 

 

 

9,095

 

 

 


11


 

Recent Accounting Pronouncements

Adopted in 2021

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. Adoption of ASU 2019-12 requires certain changes to be made prospectively and other changes to be made retrospectively. In the first quarter of 2021, we adopted the provisions of ASU 2019-12, which did not have a material impact on our results of operations, cash flows, financial condition, internal controls or related disclosures.

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.

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,

2021

 

 

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

 

$

54,720

 

 

$

54,720

 

 

$

 

 

$

 

U.S. treasury bills and government agency obligations

 

 

20,153

 

 

 

20,153

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

24,103

 

 

 

 

 

 

24,103

 

 

 

 

Foreign corporate debt securities

 

 

15,510

 

 

 

 

 

 

15,510

 

 

 

 

U.S. commercial paper

 

 

12,997

 

 

 

 

 

 

12,997

 

 

 

 

Foreign commercial paper

 

 

38,983

 

 

 

 

 

 

38,983

 

 

 

 

Total

 

$

166,466

 

 

$

74,873

 

 

$

91,593

 

 

$

 

12


 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance at

December 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

 

$

49,149

 

 

$

49,149

 

 

$

 

 

$

 

U.S. treasury bills and government agency obligations

 

 

20,276

 

 

 

20,276

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

11,547

 

 

 

 

 

 

11,547

 

 

 

 

Foreign corporate debt securities

 

 

15,557

 

 

 

 

 

 

15,557

 

 

 

 

U.S. commercial paper

 

 

27,996

 

 

 

 

 

 

27,996

 

 

 

 

Foreign commercial paper

 

 

83,966

 

 

 

 

 

 

83,966

 

 

 

 

Total

 

$

208,491

 

 

$

69,425

 

 

$

139,066

 

 

$

 

 

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

As of March 31, 2021, cash equivalents included $5.0 million of available-for-sale securities with contractual maturities of three months or less and short-term investments included $106.7 million of available-for-sale securities with contractual maturities of three months to one year. As of December 31, 2020, cash equivalents included $55.9 million of available-for-sale securities with contractual maturities of three months or less and short-term investments included $103.4 million of available-for-sale securities with contractual maturities of three months to one year. The money market funds as of March 31, 2021 and December 31, 2020 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, 2021 do not have a readily available ascertainable market value, however, the carrying value is considered to approximate its fair value.

 


13


 

5. Short-term Investments

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

 

 

 

March 31, 2021

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. treasury bills and government agency obligations

 

$

20,061

 

 

$

92

 

 

$

 

 

$

20,153

 

U.S. corporate debt securities

 

 

19,064

 

 

 

20

 

 

 

 

 

 

19,084

 

Foreign corporate debt securities

 

 

15,501

 

 

 

9

 

 

 

 

 

 

15,510

 

U.S. commercial paper

 

 

12,997