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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 March 31, 2020

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 
https://cdn.kscope.io/174269b9b8e6a33e2c5d49f21f06c1b3-sppi-20200331_g1.jpg
SPECTRUM PHARMACEUTICALS INC
(Exact name of registrant as specified in its charter)

Delaware93-0979187
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

11500 South Eastern AvenueSuite 240HendersonNevada89052
(Address of principal executive offices)(Zip Code)

(702) 835-6300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueSPPIThe NASDAQ Global Select 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  
As of April 30, 2020, 116,468,472 shares of the registrant’s common stock were outstanding.



Table of Contents
SPECTRUM PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2020
TABLE OF CONTENTS
ItemPage
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. 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.


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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)
March 31,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$70,352  $64,418  
Marketable securities107,441  159,455  
Accounts receivable, net of allowance for credit losses of $43 and $43, respectively
435  441  
Other receivables8,789  9,558  
Prepaid expenses and other assets10,263  10,148  
Total current assets197,280  244,020  
Property and equipment, net of accumulated depreciation12,058  11,607  
Other assets3,187  4,000  
Facility and equipment under lease3,467  3,806  
Total assets$215,992  $263,433  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities$49,130  $54,284  
Accrued payroll and benefits4,568  7,686  
Total current liabilities53,698  61,970  
Other long-term liabilities8,526  11,070  
Total liabilities62,224  73,040  
Commitments and contingencies (Note 8)
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; 114,774,079 and 113,299,612 issued and outstanding at March 31, 2020 and December 31, 2019, respectively
114  113  
Additional paid-in capital923,480  918,205  
Accumulated other comprehensive loss(4,827) (3,498) 
Accumulated deficit(764,999) (724,427) 
Total stockholders’ equity153,768  190,393  
Total liabilities and stockholders’ equity$215,992  $263,433  
See accompanying notes to these unaudited condensed consolidated financial statements.
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SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
 
 Three Months Ended
March 31,
 20202019
Revenues (Note 1(b))
$  $  
Operating costs and expenses:
Selling, general and administrative14,794  15,952  
Research and development15,993  21,886  
Total operating costs and expenses30,787  37,838  
Loss from continuing operations before other expense and income taxes(30,787) (37,838) 
Other (expense) income:
Interest income, net704  1,061  
Other expense, net(10,534) (11,285) 
Total other expense(9,830) (10,224) 
Loss from continuing operations before income taxes(40,617) (48,062) 
Benefit for income taxes from continuing operations  8,216  
Loss from continuing operations$(40,617) $(39,846) 
Income from discontinued operations, net of income taxes (Note 10)
45  20,587  
Net loss$(40,572) $(19,259) 
Basic and diluted loss per share:
Loss per common share from continuing operations$(0.36) $(0.36) 
Income per common share from discontinued operations  0.19  
Net loss per common share$(0.36) $(0.18) 
Weighted average shares outstanding:
Basic111,780,571  109,552,602  
Diluted111,780,571  109,552,602  
See accompanying notes to these unaudited condensed consolidated financial statements.

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SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 Three Months Ended
March 31,
 20202019
Net loss$(40,572) $(19,259) 
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of income tax expense of $0 and $0 for the three months ended March 31, 2020 and 2019, respectively.
(914)   
Foreign currency translation adjustments(415) (390) 
Other comprehensive loss (1,329) (390) 
Total comprehensive loss$(41,901) $(19,649) 
See accompanying notes to these unaudited condensed consolidated financial statements.

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SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

Common StockAdditional Paid-In CapitalAccumulated
Other Comprehensive Loss 
Accumulated DeficitTotal
Stockholders' Equity
SharesAmount
Balance as of December 31, 2019113,299,612  $113  $918,205  $(3,498) $(724,427) $190,393  
Net loss—  —  —  —  (40,572) (40,572) 
Other comprehensive loss, net—  —  —  (1,329) —  (1,329) 
Recognition of stock-based compensation expense—  —  5,010  —  —  5,010  
Issuance of common stock to 401(k) plan for employees96,959  —  265  —  —  265  
Restricted stock award grants, net of forfeitures1,377,508  1  —  —  —  1  
Balance as of March 31, 2020114,774,079  $114  $923,480  $(4,827) $(764,999) $153,768  

Common StockAdditional Paid-In CapitalAccumulated
Other Comprehensive Loss 
Accumulated DeficitTotal
Stockholders' Equity
SharesAmount
Balance as of December 31, 2018110,525,141  $110  $886,740  $(3,702) $(611,738) $271,410  
Net loss—  —  —  —  (19,259) (19,259) 
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 employees47,347  —  519  —  —  519  
Issuance of common stock upon exercise of stock options146,785  —  831  —  —  831  
Restricted stock award grants, net of forfeitures259,539  1  —  —  —  1  
Issuance of common stock upon vesting of restricted stock units233,760  —  —  —  —    
Balance as of March 31, 2019111,212,572  $111  $895,571  $(4,092) $(630,997) $260,593  

See accompanying notes to these unaudited condensed consolidated financial statements.
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SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months Ended
March 31,
 20202019
Cash Flows From Operating Activities:
Loss from continuing operations$(40,617) $(39,846) 
Income from discontinued operations, net of income taxes (Note 10)
45  20,587  
Net loss(40,572) (19,259) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization140  1,331  
Stock-based compensation (Note 4)
5,275  8,000  
Recognized gain on Commercial Product Portfolio Transaction (Note 10)
  (33,644) 
Amortization of operating leases (Note 8(a))
381  509  
Amortization of discount on investments in debt securities, recorded to interest income (Note 3(a))
(29)   
Realized gain on mutual funds(189)   
Unrealized loss on CASI stock holdings (Note 3(a) and Note 7)
10,238  12,183  
Unrealized gain from transactions denominated in foreign currency (22) (1) 
Change in deferred tax liabilities  (1,469) 
Change in fair value of contingent consideration (Note 8(b))
  1,478  
Changes in operating assets and liabilities:
Accounts receivable, net  14,914  
Other receivables762  (3,776) 
Inventories  (2,037) 
Prepaid expenses and other assets(960) 512  
Other assets823  (980) 
Accounts payable and other accrued liabilities(3,919) (14,151) 
Accrued payroll and benefits(3,118) (4,685) 
FOLOTYN development liability  (4) 
Other long-term liabilities(2,153) 1,024  
Net cash used in operating activities(33,343) (40,055) 
Cash Flows From Investing Activities:
Proceeds from Commercial Product Portfolio Transaction (Note 1(b))
  158,765  
Proceeds from maturities of marketable securities50,133    
Proceeds from sale of mutual funds833    
Purchases of investment securities available-for-sale (Note 3(a))
(8,998)   
Purchases of mutual funds(1,210)   
Purchases of property and equipment (Note 3(b))
(1,395) (314) 
Net cash provided by investing activities39,363  158,451  
Cash Flows From Financing Activities:
Proceeds from employees for exercises of stock options  831  
Net cash provided by financing activities  831  
Effect of exchange rates on cash, cash equivalents and restricted cash(86) (55) 
Net increase in cash, cash equivalents and restricted cash5,934  119,172  
Cash, cash equivalents and restricted cash—beginning of period64,418  157,480  
Cash, cash equivalents and restricted cash—end of period$70,352  $276,652  
Supplemental disclosure of cash flow information:
Cash paid for facility and equipment under operating leases$593  $471  
Cash paid for income taxes$  $33  
Noncash investing activities:
Additions of property and equipment that remain in accounts payable and other accrued liabilities (Note 3(b))
$2,772  $  

See accompanying notes to these unaudited condensed consolidated financial statements.
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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. We plan to build out our commercial and marketing capabilities in the second half of 2020 to prepare for the launch of ROLONTIS.
We have three drugs in development:

ROLONTIS, a novel long-acting granulocyte colony-stimulating (“G-CSF”) for chemotherapy-induced neutropenia which has been filed with the FDA and has a Prescription Drug User Fee Act (“PDUFA”) date of October 24, 2020;
Poziotinib, a novel irreversible tyrosine kinase inhibitor under investigation for non-small cell lung cancer (“NSCLC”) tumors with various mutations; and
Anti-CD20-IFNα, an interferon fusion molecule directed against CD20 that is in Phase 1 development for treating relapsed or refractory non-Hodgkin’s lymphoma (“NHL”) 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 months ended March 31, 2020 and 2019 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 months ended March 31, 2020 and 2019. 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, 2019 (filed with the SEC on March 2, 2020).
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 2019). We are also entitled to receive up to an aggregate of $140 million upon Acrotech's future achievement of certain regulatory milestones (totaling $40 million) and sales-based milestones (totaling $100 million) relating to the Commercial Product Portfolio.
These Condensed Consolidated Financial Statements reflect the corresponding revenue-deriving activities and allocable expenses of this commercial business within “discontinued operations” - see Note 10. We have presented our face financial
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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)

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 months ended March 31, 2020 and 2019, all of our revenue and operating costs and expenses were solely attributable to these activities (and as applicable, classified as “discontinued” within the accompanying Condensed Consolidated Statements of Operations - see Note 10). 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 (as applicable) 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 10.
Required Elements of Our Revenue Recognition: Revenue from our (a) product sales, (b) out-license arrangements, and (c) service arrangements is recognized under Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) in a manner that reasonably reflects the delivery of our goods and/or 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:
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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)

(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 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
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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)

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.
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.
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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)

(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.
(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 expense, net” on the accompanying Condensed Consolidated Statements of Operations, or (2) depending on the nature of the marketable securities recognized in “accumulated other comprehensive loss” as a separate component of stockholder’s equity on the accompanying Condensed Consolidated Statements of Stockholders’ Equity, or in “other expense, net” on the accompanying Condensed Consolidated Statements of Operations.
(iv) Accounts Receivable
Our accounts receivable, net of allowance for credit losses are derived from our product sales and license fees, and do not bear interest. The allowance for credit losses is management’s best estimate of the amount of expected credit losses in our existing accounts receivable and any anticipated discounts. The allowance for credit losses is adjusted each period through earnings to reflect expected credit losses over the remaining life of the asset. Account balances are written off against the allowance after appropriate collection efforts are exhausted.
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13 ("ASU 2016-13") "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This new ASU replaces the existing incurred loss impairment model with a current expected credit loss model (“CECL”), which requires the use of forward-looking information to calculate credit loss estimates. The new CECL model requires recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired, in which the expected credit losses are adjusted each period for changes in expected lifetime credit losses. The new standard also applies to receivables arising from revenue transactions such as contract assets and accounts receivables and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We adopted ASU 2016-13 as of January 1, 2020, which had no material effect on our accompanying Condensed Consolidated Financial Statements.
(v) Property and Equipment
Our property and equipment is stated at historical cost, and is depreciated on a straight-line basis over an estimated useful life that corresponds with its designated asset category. We evaluate the recoverability of “long-lived assets” (which includes property and equipment) whenever events or changes in circumstances in our business indicate that the asset’s carrying amount may not be recoverable through our on-going 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 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.
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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)

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 8(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.
3. BALANCE SHEET ACCOUNT DETAIL
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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)

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 March 31, 2020 and December 31, 2019, our “cash and cash equivalents” were held with major financial institutions. As of March 31, 2020 and December 31, 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 an out-license 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 March 31, 2020, 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 CostForeign Currency Translation
Unrealized
Gains
Unrealized
Losses

Fair
Value
Cash and Cash
Equivalents
Marketable Securities
March 31, 2020
Equity securities (see Note 7)
$6,310  $(2,789) $16,976  $  $20,497  $  $20,497  
Money market funds54,282  —      54,282  54,282    
Government-related debt securities*50,113  —  324    50,437  10,000  40,437  
Corporate debt securities*33,888  —  15  (159) 33,744    33,744  
Bank deposits6,070  —      $6,070  6,070    
Mutual funds4,941  —    (298) 4,643    4,643  
Bank CDs8,088  —  32    8,120    8,120  
Total cash and cash equivalents and marketable securities$163,692  $(2,789) $17,347  $(457) $177,793  $70,352  $107,441  
December 31, 2019
Equity securities (see Note 7)
$6,310  $(2,477) $27,214  $  $31,047  $  $31,047  
Money market funds54,199  —      54,199  54,199    
Government-related debt securities*62,617  —  19  (10) 62,626    62,626  
Corporate debt securities*58,235  —  38  (25) 58,248  5,000  53,248  
Bank deposits5,219  —      5,219  5,219    
Mutual funds4,375  —  783    5,158    5,158  
Bank CDs7,354  —  22    7,376    7,376  
Total cash and cash equivalents and marketable securities$198,309  $(2,477) $28,076  $(35) $223,873  $64,418  $159,455  
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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)

* Beginning in the second quarter of 2019, we purchased certain government-related 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 months ended March 31, 2020.
(b) Property and Equipment, net of Accumulated Depreciation
“Property and equipment, net of accumulated depreciation” consists of the following: 
March 31, 2020December 31, 2019
Manufacturing equipment*$10,815  $10,355  
Computer hardware and software3,734  3,606  
Laboratory equipment36  36  
Leasehold improvements3,374  3,374  
Office furniture248  248  
Property and equipment, at cost18,207  17,619  
(Less): Accumulated depreciation(6,149) (6,012) 
Property and equipment, net of accumulated depreciation$12,058  $11,607  
* This account is comprised of our owned ROLONTIS production equipment on location at our contract manufacturer. This equipment has
alternative future use for the general production of various biologic agents. Accordingly, we have capitalized these purchases, rather than
recording it as “research and development” expense in full, despite its current designation for the manufacture of pre-FDA approved product. The majority of this manufacturing equipment was not in use and therefore not being depreciated as of March 31, 2020. Depreciation for installed and ready-for-use equipment is recorded to “research and development” expense prior to FDA approval and will be prospectively recorded to “cost of sales” upon FDA approval of ROLONTIS.
Depreciation expense (included within “total operating costs and expenses” in the accompanying Condensed Consolidated Statements of Operations) for the three months ended March 31, 2020 and 2019 was $0.1 million and $0.1 million, respectively.
(c) Prepaid Expenses and Other Assets
“Prepaid expenses and other assets” consists of the following:
March 31, 2020December 31, 2019
Vendor deposits$9,285  $8,740  
Prepaid insurance978  1,408  
Prepaid expenses and other assets$10,263  $10,148  
(d) Other Receivables
“Other receivables” consists of the following:
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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)

March 31, 2020December 31, 2019
Insurance receivable*$3,337  $4,015  
CASI other receivables2,135  2,393  
Other miscellaneous receivables 1,385  1,490  
Income tax receivable - current portion 1,306  973  
Interest receivable from marketable securities (see Note 3(a))
497  561  
Reimbursements due from development partners for incurred research and development expenses129  126  
Other receivables$8,789  $9,558  
* This insurance receivable balance represents our incurred legal fees and pending and completed settlements that are expected to be reimbursed by our insurance carriers.

(e) Other Assets
“Other assets” consists of the following: 
March 31, 2020December 31, 2019
Key employee life insurance – cash surrender value (associated with deferred compensation plan - see Note 6)
$3,073  $3,547  
Income tax receivable - non-current portion*  334  
Research & development supplies and other114  119  
Other assets$3,187  $4,000  
* This value was moved to “other receivables” within “total current assets” as the “Coronavirus Aid, Relief and Economic Security (CARES) Act” now allows the immediate refund of alternative minimum tax payments. Previously this amount was expected to be collected over several years (see Note 9).
(f) Facility and Equipment Under Lease
“Facility and equipment under lease” consists of the following:
March 31, 2020December 31, 2019
Office and research facilities$3,077  $