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Table of Contents

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 September 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35006 
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13188611&doc=11
SPECTRUM PHARMACEUTICALS INC
(Exact name of registrant as specified in its charter)
 
Delaware
 
93-0979187
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

11500 South Eastern Avenue
Suite 240
Henderson
Nevada
89052
(Address of principal executive offices)
 
 
 
(Zip Code)

(702) 835-6300
(Registrant’s telephone number, including area code)
 
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  
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, $0.001 par value
SPPI
The NASDAQ Global Select Market
As of October 31, 2019, 112,973,294 shares of the registrant’s common stock were outstanding.



Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
Item
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
Items 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

SPECTRUM PHARMACEUTICALS, INC. ®, and ROLONTIS® are registered trademarks of Spectrum Pharmaceuticals, Inc. and its affiliates. QAPZOLA, REDEFINING CANCER CARE™ and the Spectrum Pharmaceuticals’ logos are trademarks owned by Spectrum Pharmaceuticals, Inc. Any other trademarks are the property of their respective owners.



2


Table of Contents

PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)

September 30,
2019

December 31,
2018
ASSETS



Current assets:



Cash and cash equivalents
$
124,598


$
157,480

Restricted cash
4,040



Marketable securities
123,164


46,508

Accounts receivable, net of allowance for doubtful accounts of $67 and $67, respectively
483


29,873

Other receivables
7,752


3,698

Prepaid expenses and other assets
12,680


7,574

Discontinued operations, current assets (Note 11)


5,555

Total current assets
272,717


250,688

Property and equipment, net of accumulated depreciation
8,965


385

Other assets
8,613


7,188

Facility and equipment under lease
3,531



Discontinued operations, non-current assets


132,625

Total assets
$
293,826


$
390,886

LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and other accrued liabilities
$
39,959


$
69,460

Accrued payroll and benefits
6,475


9,853

Contract liabilities
1,360


4,850

Discontinued operations, current liabilities (Note 11)


2,311

Total current liabilities
47,794


86,474

Deferred tax liabilities


1,469

Other long-term liabilities
11,313


5,650

Discontinued operations, non-current liabilities


14,031

Total liabilities
59,107


107,624

Commitments and contingencies (Note 9)



Stockholders’ equity:



Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding



Common stock, $0.001 par value; 300,000,000 shares authorized; 112,988,706 and 110,525,141 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
113


110

Additional paid-in capital
912,558


886,740

Accumulated other comprehensive loss
(4,531
)

(3,702
)
Accumulated deficit
(673,421
)

(599,886
)
Total stockholders’ equity
234,719


283,262

Total liabilities and stockholders’ equity
$
293,826


$
390,886

See accompanying notes to these unaudited condensed consolidated financial statements.

3


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
 
2019

2018

2019

2018
Revenues (Note 1(b))
$


$


$


$

Operating costs and expenses:







Selling, general and administrative
13,126


13,108


46,308


46,115

Research and development
17,167


15,314


56,035


45,274

Total operating costs and expenses
30,293


28,422


102,343


91,389

Loss from continuing operations before other income (expense) and income taxes
(30,293
)

(28,422
)

(102,343
)

(91,389
)
Other income (expense):







Interest income (expense), net
1,521


(12
)

4,076


(484
)
Other income (expense), net
2,015


(40,880
)

(5,547
)

17,583

Total other income (expense)
3,536


(40,892
)

(1,471
)

17,099

Loss from continuing operations before income taxes
(26,757
)

(69,314
)

(103,814
)

(74,290
)
Benefit for income taxes from continuing operations
200


142


8,654


839

Loss from continuing operations
$
(26,557
)

$
(69,172
)

$
(95,160
)

$
(73,451
)
Income from discontinued operations, net of income taxes (Note 11)
572


454


21,625


2,659

Net loss
$
(25,985
)

$
(68,718
)

$
(73,535
)

$
(70,792
)








Basic and diluted loss per share:







Loss per common share from continuing operations
$
(0.24
)

$
(0.66
)

$
(0.86
)

$
(0.72
)
Income per common share from discontinued operations
0.01




0.20


0.03

Net loss per common share
$
(0.23
)

$
(0.66
)

$
(0.67
)

$
(0.69
)








Weighted average shares outstanding:







Basic
111,178,880


104,106,295


110,291,090


102,571,850

Diluted
111,178,880


104,106,295


110,291,090


102,571,850

See accompanying notes to these unaudited condensed consolidated financial statements.


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Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(25,985
)
 
$
(68,718
)
 
$
(73,535
)
 
$
(70,792
)
Other comprehensive loss:

 

 

 

Unrealized (loss) gain on available-for-sale securities, net of income tax expense of ($2) thousand, $0, and $31 thousand, $0 for the three and nine months ended September 30, 2019 and 2018, respectively.
(7
)
 

 
93

 

Foreign currency translation adjustments
(760
)
 
(254
)
 
(922
)
 
(2,130
)
Other comprehensive loss
(767
)
 
(254
)
 
(829
)
 
(2,130
)
Total comprehensive loss
$
(26,752
)
 
$
(68,972
)
 
$
(74,364
)
 
$
(72,922
)
See accompanying notes to these unaudited condensed consolidated financial statements.


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Table of Contents


SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other Comprehensive Loss 
 
Accumulated Deficit
 
Total
Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
Balance as of December 31, 2018
110,525,141

 
$
110

 
$
886,740

 
$
(3,702
)
 
$
(599,886
)
 
$
283,262

Net loss

 

 

 

 
(19,155
)
 
(19,155
)
Other comprehensive loss, net

 

 

 
(390
)
 

 
(390
)
Recognition of stock-based compensation expense

 

 
7,481

 

 

 
7,481

Issuance of common stock to 401(k) plan for employees
47,347

 

 
519

 

 

 
519

Issuance of common stock upon exercise of stock options
146,785

 

 
831

 

 

 
831

Restricted stock award grants, net of forfeitures
259,539

 
1

 

 

 

 
1

Issuance of common stock upon vesting of restricted stock units
233,760

 

 

 

 

 

Balance as of March 31, 2019
111,212,572

 
$
111

 
$
895,571

 
$
(4,092
)
 
$
(619,041
)
 
$
272,549

Net loss

 

 

 

 
(28,395
)
 
(28,395
)
Other comprehensive income, net

 

 

 
328

 

 
328

Recognition of stock-based compensation expense

 

 
4,814

 

 

 
4,814

Issuance of common stock to 401(k) plan for employees
24,382

 

 
205

 

 

 
205

Issuance of common stock for employee stock purchase plan
60,606

 

 
444

 

 

 
444

Issuance of common stock upon exercise of stock options
504,226

 

 
3,023

 

 

 
3,023

Restricted stock award grants, net of forfeitures
651,072

 
1

 

 

 

 
1

Issuance of common stock upon vesting of restricted stock units
10,000

 

 

 

 

 

Issuance of common shares under an at-the-market sales agreement (Note 13)
221,529

 

 
1,814

 

 

 
1,814

Balance as of June 30, 2019
112,684,387


$
112


$
905,871


$
(3,764
)

$
(647,436
)

$
254,783

Net loss








(25,985
)

(25,985
)
Other comprehensive loss, net






(767
)



(767
)
Recognition of stock-based compensation expense




4,021






4,021

Issuance of common stock to 401(k) plan for employees
21,454




165






165

Issuance of common stock upon exercise of stock options
364,358


1


2,498






2,499

Restricted stock award grants, net of forfeitures
(81,493
)










Refund of SEC fees in connection with an at-the-market sales agreement for our common shares




3






3

Balance as of September 30, 2019
112,988,706


$
113


$
912,558


$
(4,531
)

$
(673,421
)

$
234,719

See accompanying notes to these unaudited condensed consolidated financial statements.


6


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other Comprehensive Loss 
 
Accumulated Deficit
 
Total
Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
Balance as of December 31, 2017
100,742,735

 
$
100

 
$
837,347

 
$
15,999

 
$
(502,107
)
 
$
351,339

Net loss

 

 

 

 
(15,816
)
 
(15,816
)
Cumulative-effect adjustment of ASU 2016-01 adoption (Note 3(a))

 

 

 
(17,211
)
 
17,211

 

Cumulative-effect adjustment of Topic 606 adoption (Note 2(i))

 

 

 

 
4,678

 
4,678

Foreign currency adjustment related to adoptions of ASU 2016-01 and Topic 606

 

 

 

 
342

 
342

Other comprehensive income, net

 

 

 
393

 

 
393

Employee stock-based compensation expense

 

 
4,144

 

 

 
4,144

Issuance of common stock to 401(k) plan for employee match
16,834

 

 
334

 

 

 
334

Issuance of common stock upon exercise of stock options
5,793,413

 
6

 
41,417

 

 

 
41,423

RSA grants, net of forfeitures
614,035

 

 

 

 

 

Retirement of RSAs and shares as part of stock option cashless exercises to satisfy employee tax withholdings
(3,463,873
)
 
(3
)
 
(62,541
)
 

 

 
(62,544
)
Issuance of common stock upon vesting of RSUs
200,652

 

 

 

 

 

Issuance of common stock upon exercise of warrants
31,602

 

 

 

 

 

Balance as of March 31, 2018
103,935,398

 
$
103

 
$
820,701

 
$
(819
)
 
$
(495,692
)
 
$
324,293

Net income (loss)

 

 

 

 
13,744

 
13,744

Other comprehensive loss, net

 

 

 
(2,269
)
 

 
(2,269
)
Employee stock-based compensation expense

 

 
4,461

 

 

 
4,461

Issuance of common stock to 401(k) plan for employee match
14,736

 

 
272

 

 

 
272

Issuance of common stock for ESPP
45,543

 

 
734

 

 

 
734

Issuance of common stock upon exercise of stock options
732,694

 

 
2,884

 

 

 
2,884

RSA grants, net of forfeitures
176,954

 

 

 

 

 

Issuance of common stock upon exercise of warrants
225,278

 

 

 

 

 

Balance as of June 30, 2018
105,130,603


$
103


$
829,052


$
(3,088
)

$
(481,948
)

$
344,119

Net loss








(68,718
)

(68,718
)
Other comprehensive loss, net






(254
)



(254
)
Employee stock-based compensation expense




3,690






3,690

Issuance of common stock to 401(k) plan for employee match
15,010




296






296

Issuance of common stock upon exercise of stock options
428,770


2


3,040






3,042

RSA grants, net of forfeitures
(697
)










Issuance of common stock upon exercise of warrants
35,695











Common stock redeemed on 2018 Convertible Notes (Note 8)
451,300


1


4,603






4,604

Balance as of September 30, 2018
106,060,681


$
106


$
840,681


$
(3,342
)

$
(550,666
)

$
286,779


See accompanying notes to these unaudited condensed consolidated financial statements.

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Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2019

2018
Cash Flows From Operating Activities:
 
 
 
Loss from continuing operations
$
(95,160
)
 
$
(73,451
)
Income from discontinued operations, net of income taxes (Note 11)
21,625

 
2,659

Net loss
(73,535
)
 
(70,792
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,487

 
21,000

Stock-based compensation (Note 4)
17,205

 
13,197

Recognized gain on Commercial Product Portfolio Transaction (Note 11)
(33,451
)
 

Non-cash portion of lease expense (Note 9(a))
1,313

 

Amortization of discount on investments in debt securities, recorded to interest income (Note 3(a))
(348
)


Income tax recognition on unrealized gain on available-for-sale securities
(31
)
 

Realized gain on sale of CASI stock (Note 7)
(2,674
)


Unrealized loss (gain) on CASI stock holdings (Note 3(a) and Note 7)
9,745

 
(17,716
)
Unrealized (gain) loss from transactions denominated in foreign currency
(5
)
 
17

Change in deferred tax liabilities
(1,469
)
 
9

Change in fair value of contingent consideration (Note 9(b))
1,478

 
(717
)
Accretion of discount on 2018 Convertible Notes, recorded to interest expense (Note 8)

 
1,558

Amortization of deferred financing costs on 2018 Convertible Notes, recorded to interest expense (Note 8)

 
178

Change in cash surrender value of corporate-owned life insurance policy

 
(5
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
29,359

 
3,252

Other receivables
(4,068
)
 
(3,002
)
Inventories
(2,037
)
 
2,862

Prepaid expenses and other assets
(5,005
)
 
(2,362
)
Other assets
(1,428
)
 
4,890

Accounts payable and other accrued obligations
(35,337
)
 
(457
)
Accrued payroll and benefits
(3,378
)
 
(1,517
)
FOLOTYN development liability
(4
)
 
(270
)
Contract liabilities (Note 3(h))
(3,490
)
 

Other long-term liabilities
2,234

 
(218
)
Net cash used in operating activities
(103,439
)

(50,093
)
Cash Flows From Investing Activities:
 
 
 
Proceeds from Commercial Product Portfolio Transaction (Note 1(b))
158,765

 

Proceeds from maturities of investment securities
38,540



Proceeds from sale of CASI stock (Note 7)
5,074



Purchase of investment securities available-for-sale (Note 3(a))
(127,584
)


Purchases of property and equipment (Note 3(b))
(8,670
)
 
(46
)
Proceeds from redemption of corporate-owned life insurance policy

 
4,130

Net cash provided by investing activities
66,125

 
4,084

Cash Flows From Financing Activities:
 
 
 
Proceeds from employees for exercises of stock options
6,355

 
7,843

Proceeds from sale of common stock under an at-the-market sales agreement (Note 13)
1,817

 

Proceeds from sale of stock under our employee stock purchase plan
444

 
734

Proceeds from employees, for our remittance to tax authorities, upon vesting of restricted stock and upon exercises of stock options

 
4,645

Payments to tax authorities upon employees' surrender of restricted stock upon vesting and upon exercises of stock options

 
(27,686
)
Net cash provided by (used in) financing activities
8,616

 
(14,464
)
Effect of exchange rates on cash, cash equivalents and restricted cash
(144
)
 
(309
)
Net decrease in cash, cash equivalents and restricted cash
(28,842
)
 
(60,782
)
Cash, cash equivalents and restricted cash—beginning of period
157,480

 
227,323

Cash, cash equivalents and restricted cash—end of period
$
128,638

 
$
166,541

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for facility and equipment under operating leases
$
1,266


$

Cash paid for income taxes
$
38

 
$
38

Cash paid for interest
$

 
$
558

Noncash investing activities:



Additions of property and equipment that remain in accounts payable (Note 3(b))
$
300


$


See accompanying notes to these unaudited condensed consolidated financial statements.

8


Table of Contents

Spectrum Pharmaceuticals, Inc.
 
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND OPERATING SEGMENT
(a) Description of Business
Spectrum Pharmaceuticals, Inc. (“Spectrum”, the “Company”, “we”, “our”, or “us”) is a biopharma company, with a primary strategy comprised of acquiring, developing, and commercializing novel and targeted oncology therapies. Our in-house development organization includes clinical development, regulatory, quality and data management, as well as commercial and marketing capabilities upon product launch.
We have two drugs in late-stage development:

Poziotinib, a novel irreversible tyrosine kinase inhibitor under investigation for non-small cell lung cancer (“NSCLC”) tumors with various mutations; and

ROLONTIS, a novel long-acting granulocyte colony-stimulating (“G-CSF”) for chemotherapy-induced neutropenia.
We also have a technology platform that enables the fusion of an interferon-alpha with a monoclonal anti-body:
Anti-CD20-IFNa, the first antibody-interferon fusion molecule directed against CD20 from this platform that is in Phase 1 development for treating relapsed or refractory Non-Hodgkin Lymphoma patients (including diffuse large b-cell lymphoma).
Our business strategy is the development of our late-stage assets through commercialization and the sourcing of additional assets that are synergistic with our existing portfolio (through purchase acquisitions, in-licensing transactions, or co-development and marketing arrangements).
(b) Basis of Presentation
Interim Financial Statements
The interim financial data for the three and nine months ended September 30, 2019 and 2018 is unaudited and is not necessarily indicative of our operating results for a full year. In the opinion of our management, the interim data includes normal and recurring adjustments necessary for a fair presentation of our financial results for the three and nine months ended September 30, 2019 and 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations relating to interim financial statements. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto included within our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (filed with the SEC on February 28, 2019).
Discontinued Operations - Sale of our Commercial Product Portfolio
On March 1, 2019, we completed the sale of our seven then-commercialized drugs, including FUSILEV, KHAPZORY, FOLOTYN, ZEVALIN, MARQIBO, BELEODAQ, and EVOMELA (the “Commercial Product Portfolio”) to Acrotech Biopharma LLC (“Acrotech”) (the “Commercial Product Portfolio Transaction”). Upon closing we received $158.8 million in an upfront cash payment (of which $4 million was held in escrow until November 5, 2019). We are also entitled to receive up to an aggregate of $140 million upon Acrotech's achievement of certain regulatory (totaling $40 million) and sales-based milestones (totaling $100 million) relating to the Commercial Product Portfolio.
These Condensed Consolidated Financial Statements are recast for all periods presented to reflect the sale of the assets and liabilities associated with our Commercial Product Portfolio, as well as the corresponding revenue-deriving activities and allocable expenses of this commercial business within “discontinued operations” - see Note 11. We have presented our face

9


Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


financial statements in general conformity with our historical format, even where presented values are $-0- within continuing operations due to required discontinued operations classification for all periods presented. We believe this format provides increased clarity and comparability with our previously filed financial statements, as well as our expectation that these financial statement captions and associated footnote disclosures will remain relevant to our future business activities.
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the rules and regulations of the SEC. These financial statements include the financial position, results of operations, and cash flows of Spectrum and its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions among these legal entities have been eliminated in consolidation. In May 2019, we dissolved Spectrum Pharma Canada Inc., previously consolidated as a “variable interest entity” (as defined under applicable GAAP).
(c) Operating Segment
We operate one reportable operating segment that is focused exclusively on developing (and eventually marketing) oncology and hematology drug products. For the three and nine months ended September 30, 2019 and 2018, all of our revenue and operating costs and expenses were solely attributable to these activities (and as applicable, currently and retrospectively classified as “discontinued” within the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations - see Note 11). All of our assets are held in the U.S, except for cash held in certain foreign bank accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires our management to make informed estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses. These amounts may materially differ from the amounts ultimately realized and reported due to the inherent uncertainty of any estimate or assumption. On an on-going basis, our management evaluates its most critical estimates and assumptions, including those related to: (i) gross-to-net revenue adjustments; (ii) the timing of revenue recognition; (iii) the collectability of customer accounts; (iv) whether the cost of our inventories can be recovered; (v) the realization of our tax assets and estimates of our tax liabilities; (vi) the fair value of our investments; (vii) the valuation of our stock options and the periodic expense recognition of stock-based compensation; and (viii) the potential outcome of our ongoing or threatened litigation.
Our accounting policies and estimates that most significantly impact the presented amounts within these Condensed Consolidated Financial Statements are further described below:
(i) Revenue Recognition
On March 1, 2019, we completed the Commercial Product Portfolio Transaction -- see Note 1(b). In accordance with applicable GAAP (ASC 205-20, Presentation of Financial Statements), the revenue-deriving activities of our sold commercial operation are separately classified as “discontinued” for all periods presented within the accompanying Condensed Consolidated Statements of Operations -- see Note 11.

Impact of the Adoption of the New Revenue Recognition Standard: ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), became effective for us on January 1, 2018. Our disclosure within the below sections to this footnote reflects our updated accounting policies that are affected by this new standard. We applied the “modified retrospective” transition method for open contracts for the implementation of Topic 606; this resulted in the recognition of an aggregate $4.7 million, net of tax, decrease to our January 1, 2018 “accumulated deficit” on our accompanying Condensed Consolidated Balance Sheets for the cumulative impact of applying this new standard. We made no adjustments to our previously-reported total revenues, as those periods continue to be presented in accordance with our historical accounting practices under Topic 605, Revenue Recognition (“Topic 605”).
Required Elements of Our Revenue Recognition: Revenue from our (a) product sales, (b) out-license arrangements, and (c) service arrangements is recognized under Topic 606 in a manner that reasonably reflects the delivery of our goods and/or

10


Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


services to customers in return for expected consideration and includes the following elements:
(1)
we ensure that we have an executed contract(s) with our customer that we believe is legally enforceable;
(2)
we identify the “performance obligations” in the respective contract;
(3)
we determine the “transaction price” for each performance obligation in the respective contract;
(4)
we allocate the transaction price to each performance obligation; and
(5)
we recognize revenue only when we satisfy each performance obligation.
    These five elements, as applied to each of our revenue categories, are summarized below:
(a) Product Sales: We sell our products to pharmaceutical wholesalers/distributors or to our product licensees (i.e., our customers). Our wholesalers/distributors in turn sell our products directly to clinics, hospitals, and private oncology-based practices. Revenue from our product sales is recognized as physical delivery of product occurs (when our customer obtains control of the product), in return for agreed-upon consideration.
Our gross product sales (i.e., delivered units multiplied by the contractual price per unit) are reduced by our corresponding gross-to-net (“GTN”) estimates using the “expected value” method, resulting in reported “product sales, net” that reflects the amount we ultimately expect to realize in net cash proceeds, taking into account our current period gross sales and related cash receipts, and the subsequent cash disbursements on these sales that we estimate for the various GTN categories discussed below. These estimates are based upon information received from external sources (such as written or oral information obtained from our customers with respect to their period-end inventory levels and sales to end-users during the period), in combination with management’s informed judgments. Due to the inherent uncertainty of these estimates, the actual amount incurred (of some, or all) of product returns, government chargebacks, prompt pay discounts, commercial rebates, Medicaid rebates, and distribution, data, and GPO administrative fees may be materially above or below the amount estimated, then requiring prospective adjustments to our reported net product sales.
These GTN estimate categories (that comprise our GTN liabilities within Note 3(g)) are each discussed below:
Product Returns Allowances: Our customers are contractually permitted to return certain purchased products within the contractual allowable time before/after its applicable expiration date. Returns outside of this aforementioned criteria are not customarily allowed. We estimate expected product returns using our historical return rates. Returned product is typically destroyed since substantially all are due to its imminent expiry and cannot be resold.
Government Chargebacks: Our products are subject to pricing limits under certain federal government programs (e.g., Medicare and 340B Drug Pricing Program). Qualifying entities (i.e., end-users) purchase products from our customers at their qualifying discounted price. The chargeback amount we incur represents the difference between our contractual sales price to our customer, and the end-user’s applicable discounted purchase price under the government program. There may be significant lag time between our reported net product sales and our receipt of the corresponding government chargeback claims from our customers.
Prompt Pay Discounts: Discounts for prompt payment are estimated at the time of sale, based on our eligible customers’ prompt payment history and the contractual discount percentage.
Commercial Rebates: Commercial rebates are based on (i) our estimates of end-user purchases through a group purchasing organization (“GPO”), (ii) the corresponding contractual rebate percentage tier we expect each GPO to achieve, and (iii) our estimates of the impact of any prospective rebate program changes made by us.
Medicaid Rebates: Our products are subject to state government-managed Medicaid programs, whereby rebates are issued to participating state governments. These rebates arise when a patient treated with our product is covered under Medicaid, resulting in a discounted price for our product under the applicable Medicaid program. Our Medicaid rebate accrual calculations require us to project the magnitude of our sales, by state, that will be subject to these rebates. There is a significant time lag in our receiving rebate notices from each state (generally several months or longer after our sale is recognized). Our estimates are based on our historical claim levels by state, as supplemented by management’s judgment.
Distribution, Data, and GPO Administrative Fees: Distribution, data, and GPO administrative fees are paid to authorized wholesalers/distributors of our products for various commercial services including: contract administration, inventory

11


Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


management, delivery of end-user sales data, and product returns processing. These fees are based on a contractually-determined percentage of our applicable sales.
(b) License Fees: Our out-license arrangements allow licensees to market our product(s) in certain territories for a specific term (representing the out-license of “functional intellectual property”). These arrangements may include one or more of the following forms of consideration: (i) upfront license fees, (ii) sales royalties, (iii) sales milestone-achievement fees, and (iv) regulatory milestone-achievement fees. We recognize revenue for each based on the contractual terms that establish our right to collect payment once the performance obligation is achieved, as follows:
(1) Upfront License Fees: We determine whether upfront license fees are earned at the time of contract execution (i.e., when rights transfer to the customer) or over the actual (or implied) contractual period of the out-license. As part of this determination, we evaluate whether we have any other requirements to provide substantive services that are inseparable from the performance obligation of the license transfer. Our customers’ “distinct” rights to licensed “functional intellectual property” at the time of contract execution results in concurrent revenue recognition of all upfront license fees (assuming that there are no other performance obligations at contract execution that are inseparable from this license transfer).

(2) Royalties: Under the “sales-or-usage-based royalty exception” we recognize revenue in the same period that our
licensees complete product sales in their territory for which we are contractually entitled to a percentage-based royalty receipt.

(3) Sales Milestones: Under the “sales-or-usage-based royalty exception” we recognize revenue in full within the period that our licensees achieve annual or aggregate product sales levels in their territories for which we are contractually entitled to a specified lump-sum receipt.

(4) Regulatory Milestones: Under the terms of the respective out-license, regulatory achievements may either be our responsibility, or that of our licensee.

When our licensee is responsible for the achievement of the regulatory milestone, we recognize revenue in full (for the contractual amount due from our licensee) in the period that the approval occurs (i.e., when the “performance obligation” is satisfied by our customer) under the “most likely amount” method. This revenue recognition remains “constrained” (i.e., not recognized) until regulatory approval occurs, given its inherent uncertainty and the requirement of a significant revenue reversal not being probable if achievement does not occur. At each reporting period, we re-evaluate the probability of milestone achievement and the associated revenue constraint; any resulting adjustments would be recorded on a cumulative catch-up basis, thus reflected in our financial statements in the period of adjustment.

When we are responsible for the achievement of a regulatory milestone, the “relative selling price method” is applied for purposes of allocating the transaction price to our performance obligations. In such case, we consider (i) the extent of our effort to achieve the milestone and/or the enhancement of the value of the delivered item(s) as a result of milestone achievement and (ii) if the milestone payment is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. We have historically assessed the contractual value of these milestones upon their achievement to be identical to the allocation of value of our performance obligations and thus representing the “transaction price” for each milestone at contract inception. We recognize this revenue in the period that the regulatory approval occurs (i.e., when we complete the “performance obligation”) under the “most likely amount” method, and revenue recognition is otherwise “constrained” until regulatory approval occurs, given its inherent uncertainty and the requirement of a significant revenue reversal not being probable if achievement does not occur. At each reporting period, we re-evaluate the probability of milestone achievement and the associated revenue constraint; any resulting adjustments would be recorded on a cumulative catch-up basis, thus reflected in our financial statements in the period of adjustment.
(c) Service Revenue: We receive fees under certain arrangements for (i) sales and marketing services, (ii) supply chain services, (iii) research and development services, and (iv) clinical trial management services.

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Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


Our rights to receive payment for these services may be established by (1) a fixed-fee schedule that covers the term of the arrangement, so long as we meet ongoing performance obligations, (2) our completion of product delivery in our capacity as a procurement agent, (3) the successful completion of a phase of drug development, (4) favorable results from a clinical trial, and/or (5) regulatory approval events.
We consider whether revenue associated with these service arrangements is reportable each period, based on our completed services or deliverables (i.e., satisfied “performance obligations”) during the reporting period, and the terms of the arrangement that contractually result in fixed payments due to us. The promised service(s) within these arrangements are distinct and explicitly stated within each contract, and our customer benefits from the separable service(s) delivery/completion. Further, the nature of the promise to our customer as stated within the respective contract is to deliver each named service individually (not a transfer of combined items to which the promised goods or services are inputs), and thus are separable for revenue recognition.
(ii) Cash and Cash Equivalents
Cash and cash equivalents consist of bank deposits and highly liquid investments with maturities of three months or less from the purchase date. Our restricted cash is currently held in an escrow account as part of our completed Commercial Product Portfolio Transaction (see Note 1(b)).
(iii) Marketable Securities
Marketable securities consist of our holdings in equity securities, mutual funds, bank certificates of deposit (“Bank CDs”), government-related debt securities, and corporate debt securities. Since we classify these investments as “available-for-sale” any (1) realized gains (losses) or (2) unrealized gains (losses) on these securities are respectively recognized in (1) “other income (expense), net” on the accompanying Condensed Consolidated Statements of Operations, or recognized in (2) “accumulated other comprehensive loss” as a separate component of stockholder’s equity on the accompanying Condensed Consolidated Statements of Stockholders’ Equity.
(iv) Accounts Receivable
Our accounts receivable are derived from our product sales and license fees, and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in our existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.
(v) Inventories
We value our inventory at the lower of (i) the actual cost of its purchase or manufacture, or (ii) its net realizable value. Inventory cost is determined on the first-in, first-out method. We regularly review our inventory quantities in process of manufacture and on hand. When appropriate, we record a provision for obsolete and excess inventory to derive its new cost basis, which takes into account our sales forecast by product and corresponding expiry dates of each product lot.
Manufacturing costs of drug products that are pending U.S. Food and Drug Administration (“FDA”) approval are exclusively recognized through “research and development” expense on the accompanying Condensed Consolidated Statements of Operations.
(vi) Stock-Based Compensation
Stock-based compensation expense for equity awards granted to our employees and members of our Board of Directors is recognized on a straight-line basis over each award’s vesting period. Recognized compensation expense is net of an estimated forfeiture rate, representing the percentage of awards that are expected to be forfeited prior to vesting, though is ultimately adjusted for actual forfeitures. We use the Black-Scholes option pricing model to determine the fair value of stock options (as of the date of grant) that have service conditions for vesting. We use the Monte Carlo valuation model to value equity awards (as of the date of grant) that have combined market conditions and service conditions for vesting.
The recognition of stock-based compensation expense and the initial calculation of stock option fair value requires uncertain assumptions, including (a) the pre-vesting forfeiture rate of the award, (b) the expected term that the stock option will

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Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


remain outstanding, (c) our stock price volatility over the expected term (and that of our designated peer group with respect to certain market-based awards), and (d) the prevailing risk-free interest rate for the period matching the expected term.
With regard to (a)-(d) above: we estimate forfeiture rates based on our employees’ overall forfeiture history, which we believe will be representative of future results. We estimate the expected term of stock options granted based on our employees’ historical exercise patterns, which we believe will be representative of their future behavior. We estimate the volatility of our common stock on the date of grant based on the historical volatility of our common stock for a look-back period that corresponds with the expected term. We estimate the risk-free interest rate based upon the U.S. Department of the Treasury yields in effect at award grant, for a period equaling the expected term of the stock option.
(vii) Basic and Diluted Net Loss per Share
We calculate basic and diluted net loss per share using the weighted average number of common shares outstanding during the periods presented. In periods of a net loss, basic and diluted loss per share are the same. For the diluted earnings per share calculation, we adjust the weighted average number of common shares outstanding to include only dilutive stock options, warrants, and other common stock equivalents outstanding during the period.
(viii) Income Taxes
Deferred tax assets and liabilities are recorded based on the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the financial statements, as well as operating losses and tax credit carry forwards using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
We have recorded a valuation allowance to reduce our deferred tax assets, because we believe that, based upon a weighting of positive and negative factors, it is more likely than not that these deferred tax assets will not be realized. If/when we were to determine that our deferred tax assets are realizable, an adjustment to the corresponding valuation allowance would increase our net income in the period that such determination was made.
In the event that we are assessed interest and/or penalties from taxing authorities that have not been previously accrued, such amounts would be included in “benefit for income taxes from continuing operations” within the accompanying Condensed Consolidated Statements of Operations for the period in which we received the notice.
(ix) Research and Development Costs
Our research and development costs are expensed as incurred (see Note 9(c)) or as certain milestone payments become contractually due to our licensors, as triggered by the achievement of clinical or regulatory events.
(x) Fair Value Measurements
We determine measurement-date fair value based on the proceeds that would be received through the sale of the asset, or that we would pay to settle or transfer the liability, in an orderly transaction between market participants. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include the following:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are publicly accessible at the measurement date.
Level 2: Observable prices that are based on inputs not quoted on active markets, but that are corroborated by market data. These inputs may include quoted prices for similar assets or liabilities or quoted market prices in markets that are not active to the general public.
Level 3: Unobservable inputs are used when little or no market data is available.

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Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


3. BALANCE SHEET ACCOUNT DETAIL
The composition of selected financial statement captions that comprise the accompanying Condensed Consolidated Balance Sheets are summarized below:
(a) Cash and Cash Equivalents and Marketable Securities
As of September 30, 2019 and December 31, 2018, our “cash and cash equivalents” were held with major financial institutions. As of September 30, 2019, our “marketable securities” include our equity holdings in CASI Pharmaceuticals, Inc. (“CASI”), mutual funds, government-related debt securities, corporate debt securities, and bank certificates of deposits (“bank CDs”).
We maintain cash balances with select financial institutions. The Federal Deposit Insurance Corporation (FDIC) and other third parties insure a fraction of these deposits. Accordingly, these cash deposits are not insured against the possibility of a substantial or complete loss of principal and are inherently subject to the credit risk of the corresponding financial institution.
Our investment policy requires that purchased investments may only be in highly-rated and liquid financial instruments and limits our holdings of any single issuer (excluding any debt or equity securities that may be received from our strategic partners in connection with licensing arrangements, as discussed in Note 7).
 
The carrying amount of our equity securities, money market funds, and Bank CDs approximates their fair value (utilizing “Level 1” or “Level 2” inputs – see Note 2(x)) because of our ability to immediately convert these instruments into cash with minimal expected change in value. As of September 30, 2019, our held securities that remain in an unrealized loss position for less than one year were insignificant and are presented in the table below.
The following is a summary of our presented composition of “cash and cash equivalents” and “marketable securities”:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Historical or Amortized Cost
 
Foreign Currency Translation
 

Unrealized
Gains
 
Unrealized
Losses
 

Fair
Value
 
Cash and Cash
Equivalents
 
Marketable Securities
September 30, 2019
 
 

 
 
 
 
 
 
 
 
 
 
Equity securities* (see Note 7)
$
8,710

 
$
(5,285
)
 
$
30,134

 
$

 
$
33,559

 
$

 
$
33,559

Money market funds
89,041

 

 

 

 
89,041

 
89,041

 

Government-related debt securities**
60,087

 

 
55

 


60,142

 

 
60,142

Corporate debt securities**
44,182

 

 
47

 
(5
)

44,224

 
20,913

 
23,311

Bank deposits
14,644

 

 

 

 
14,644

 
14,644

 

Bank CDs
6,126

 

 
26

 

 
6,152

 

 
6,152

Total cash and cash equivalents and marketable securities
$
222,790

 
$
(5,285
)
 
$
30,262

 
$
(5
)
 
$
247,762

 
$
124,598

 
$
123,164

December 31, 2018
 
 

 
 
 
 
 
 
 
 
 
 
Equity securities* (see Note 7)
$
8,710

 
$
(2,168
)
 
$
39,880

 
$

 
$
46,422

 
$

 
$
46,422

Money market funds
142,745

 

 

 

 
142,745

 
142,745

 

Bank deposits
14,735

 

 

 

 
14,735

 
14,735

 

Bank CDs
86

 

 

 

 
86

 

 
86

Total cash and cash equivalents and marketable securities
$
166,276

 
$
(2,168
)
 
$
39,880

 
$

 
$
203,988

 
$
157,480

 
$
46,508


* Beginning January 1, 2018, under the requirements of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, the unrealized gain (loss) on our CASI equity securities are recognized as an increase (decrease) to “other income (expense), net” on the Condensed Consolidated Statements of Operations (rather than through “other comprehensive loss”) on the Condensed Consolidated Statements of Comprehensive Loss). Our adoption of ASU 2016-01 on January 1, 2018 resulted in a $17.2 million cumulative-effect adjustment, net of income tax, reported as a decrease to “accumulated other comprehensive loss” and a decrease to “accumulated deficit” on the accompanying Condensed Consolidated Balance Sheets. Our unrealized gains (losses) on these equity securities for the three and nine months ended September 30, 2019 was $2.0 million and ($9.7) million, respectively, as reported in “other income (expense), net” on the accompanying Condensed Consolidated Statements of Operations.

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Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


** Beginning in the second quarter of 2019, we purchased certain government and corporate debt securities. We have classified these as “available-for-sale” since we may redeem or sell these investments before their stated maturity to fund our operations. Under the requirements of ASC 320, Investments - Debt and Equity Securities: (i) we recorded these securities at initial “book value” and then amortize, through maturity, the determined “discount” or “premium” within “interest income” on the accompanying Condensed Consolidated Statements of Operations, and (ii) we recognize the “unrealized gains (loss)” of these securities (i.e., fair value versus amortized book value) as a separate component of “other comprehensive loss” on the accompanying Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019.
(b) Property and Equipment, net of Accumulated Depreciation
“Property and equipment, net of accumulated depreciation” consists of the following: 
 
September 30, 2019
 
December 31, 2018
Manufacturing equipment*
$
7,601

 
$

Computer hardware and software
3,589

 
3,079

Laboratory equipment
669

 
635

Leasehold improvements
3,389

 
2,957

Office furniture
335

 
212

Property and equipment, at cost
15,583

 
6,883

(Less): Accumulated depreciation
(6,618
)
 
(6,498
)
Property and equipment, net of accumulated depreciation
$
8,965

 
$
385


* This represents owned ROLONTIS production equipment on location at our contract manufacturer.
Depreciation expense (included within “total operating costs and expenses” in the accompanying Condensed Consolidated Statements of Operations) for the three and nine months ended September 30, 2019 and 2018 was $0.1 million, $0.1 million, $0.2 million, and $0.2 million, respectively.
(c) Prepaid Expenses and Other Assets
“Prepaid expenses and other assets” consists of the following:
 
September 30, 2019
 
December 31, 2018
Vendor deposits
$
12,628

 
$
6,792

Prepaid insurance
52

 
782

Prepaid expenses and other assets
$
12,680

 
$
7,574


(d) Other Receivables
“Other receivables” consists of the following:
 
September 30, 2019
 
December 31, 2018
Insurance receivable*
$
4,781

 
$
206

Other miscellaneous receivables (including Medicaid rebate credits and royalty receivables from licensees)
1,549

 
1,189

Secured promissory note (see Note 7)

 
1,525

Income tax receivable - current portion
632

 
643

Interest receivable from marketable securities (see Note 3(a))
627



Reimbursements due from development partners for incurred research and development expenses
163

 
135

Other receivables
$
7,752

 
$
3,698


* This insurance receivable balance represents our incurred legal fees and pending and completed settlements that are expected to be reimbursed by our insurance carriers.

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Table of Contents
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, interest rate, and number of years)
(Unaudited)


(e) Other Assets
“Other asset