SEC Filing - Spectrum Pharmaceuticals, Inc.

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sppi-20200930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

https://cdn.kscope.io/99eb0581099af9265ab13c06be624a49-sppi-20200930_g1.jpg


☐			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

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)

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

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 October 31, 2020, 145,922,206 shares of the registrant’s common stock were outstanding.

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SPECTRUM PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS


Item		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	8
	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 6.	Exhibits	45
	Signatures	46

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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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, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	77,132	$	64,418
Marketable securities	121,179		159,455
Accounts receivable, net of allowance for credit losses of $43 and $43, respectively	453		441
Other receivables	3,186		9,558

Prepaid expenses and other current assets	10,876		10,148


Total current assets	212,826		244,020
Property and equipment, net	18,456		11,607


Facility and equipment under lease	2,662		3,806
Other assets	3,994		4,000
Total assets	$	237,938	$	263,433
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	52,985	$	54,284
Accrued payroll and benefits	8,113		7,686

Total current liabilities	61,098		61,970




Other long-term liabilities	8,480		11,070
Total liabilities	69,578		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; 145,931,172 and 113,299,612 issued and outstanding at September 30, 2020 and December 31, 2019, respectively	146		113
Additional paid-in capital	1,016,474		918,205
Accumulated other comprehensive loss	(2,724)		(3,498)
Accumulated deficit	(845,536)		(724,427)
Total stockholders’ equity	168,360		190,393
Total liabilities and stockholders’ equity	$	237,938	$	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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019



Revenues	$	—	$	—	$	—	$	—
Operating costs and expenses:


Selling, general and administrative	15,116		13,126		44,654		46,308
Research and development	24,453		17,167		62,192		56,035

Total operating costs and expenses	39,569		30,293		106,846		102,343
Loss from continuing operations before other income (expense) and income taxes	(39,569)		(30,293)		(106,846)		(102,343)
Other income (expense):
Interest income, net	188		1,521		1,217		4,076
Other income (expense), net	(9,131)		2,015		(15,720)		(5,547)
Total other income (expense)	(8,943)		3,536		(14,503)		(1,471)
Loss from continuing operations before income taxes	(48,512)		(26,757)		(121,349)		(103,814)
(Provision) benefit for income taxes from continuing operations	(6)		200		(15)		8,628
Loss from continuing operations	$	(48,518)	$	(26,557)	$	(121,364)	$	(95,186)
Income from discontinued operations, net of income taxes	66		572		255		21,547
Net loss	$	(48,452)	$	(25,985)	$	(121,109)	$	(73,639)

Basic and diluted loss per share:
Loss from continuing operations	$	(0.37)	$	(0.24)	$	(1.02)	$	(0.86)
Income from discontinued operations	$	0.00	$	0.01	$	0.00	$	0.20
Net loss per share, basic and diluted	$	(0.37)	$	(0.23)	$	(1.02)	$	(0.67)
Weighted average shares outstanding, basic and diluted	131,455,727		111,178,880		118,664,914		110,291,090

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(48,452)	$	(25,985)	$	(121,109)	$	(73,639)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities, net of tax	73		(7)		(61)		93
Foreign currency translation adjustments	457		(760)		835		(922)
Other comprehensive income (loss)	530		(767)		774		(829)
Total comprehensive loss	$	(47,922)	$	(26,752)	$	(120,335)	$	(74,468)

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 Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount
Balance as of December 31, 2019	113,299,612	$	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 employees	96,959	—		265		—		—		265
Restricted stock award grants, net of forfeitures	1,377,508	1		—		—		—		1
Balance as of March 31, 2020	114,774,079	$	114	$	923,480	$	(4,827)	$	(764,999)	$	153,768
Net loss	—	—		—		—		(32,085)		(32,085)
Other comprehensive income, net	—	—		—		1,573		—		1,573
Recognition of stock-based compensation expense	—	—		3,988		—		—		3,988
Issuance of common shares pursuant to at-the-market offering	1,024,286	1		3,070		—		—		3,071
Issuance of common stock for employee stock purchase plan	98,362	—		282		—		—		282
Restricted stock award grants, net of forfeitures	1,926,385	3		(3)		—		—		—
Issuance of common stock upon vesting of restricted stock units	861	—		—		—		—		—
Balance as of June 30, 2020	117,823,973	$	118	$	930,817	$	(3,254)	$	(797,084)	$	130,597
Net loss	—	—		—		—		(48,452)		(48,452)
Other comprehensive income, net	—	—		—		530		—		530
Recognition of stock-based compensation expense	—	—		4,108		—		—		4,108
Issuance of common stock from public offering, net	24,916,667	25		69,708		—		—		69,733
Issuance of common shares pursuant to at-the-market offering, net	2,926,112	3		11,828		—		—		11,831
Issuance of common stock upon exercise of stock options	3,542	—		13		—		—		13
Restricted stock award grants, net of forfeitures	260,878	—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units	—	—		—		—		—		—
Balance as of September 30, 2020	145,931,172	$	146	$	1,016,474	$	(2,724)	$	(845,536)	$	168,360

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SPECTRUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONTINUED

(In thousands, except share data)

(Unaudited)


	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)	$	(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 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)	$	(630,997)	$	260,593
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	221,529	—		1,814		—		—		1,814
Balance as of June 30, 2019	112,684,387	$	112	$	905,871	$	(3,764)	$	(659,392)	$	242,827
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)	$	(685,377)	$	222,763

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)


	Nine Months Ended September 30,
	2020		2019
Cash Flows From Operating Activities:
Loss from continuing operations	$	(121,364)	$	(95,186)
Income from discontinued operations, net of income taxes	255		21,547
Net loss	(121,109)		(73,639)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	(105)		1,487
Stock-based compensation	13,371		17,205
Recognized gain on Commercial Product Portfolio Transaction	—		(33,451)
Non-cash lease expense	1,148		1,313
Amortization of discount on investments in debt securities	84		(348)
Realized gain on mutual funds	(136)		—
Income tax recognition on unrealized gain on available-for-sale securities	—		(31)
Realized gain on sale of equity holdings	(542)		(2,674)
Unrealized loss on equity holdings	16,029		9,745
Unrealized loss (gain) from transactions denominated in foreign currency	501		(5)
Change in deferred tax liabilities	—		(1,469)
Change in fair value of contingent consideration	—		1,478

Changes in operating assets and liabilities:
Accounts receivable, net	1		29,359
Other receivables	6,370		(4,068)
Inventories	—		(2,037)
Prepaid expenses and other current assets	(2,663)		(5,005)
Other assets	6		(1,428)
Accounts payable and other accrued liabilities	426		(35,233)
Accrued payroll and benefits	427		(3,378)
FOLOTYN development liability	—		(4)
Contract liabilities	—		(3,490)
Other long-term liabilities	(2,134)		2,234
Net cash used in operating activities	(88,326)		(103,439)
Cash Flows From Investing Activities:
Proceeds from Commercial Product Portfolio Transaction	—		158,765
Proceeds from maturities of marketable securities	92,433		38,540
Proceeds from sale of equity holdings	1,843		5,074
Proceeds from sale of mutual funds	2,496		—
Purchases of marketable securities	(71,671)		(127,584)
Purchases of mutual funds	(1,910)		—
Purchases of property and equipment, net	(6,991)		(8,670)
Net cash provided by investing activities	16,200		66,125
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of offering expenses	69,733		—
Proceeds from issuance of common stock pursuant to at-the-market offering	14,902		1,817
Proceeds from sale of stock under our employee stock purchase plan	283		444
Proceeds from employees for exercises of stock options	13		6,355
Net cash provided by financing activities	84,931		8,616
Effect of exchange rates on cash, cash equivalents and restricted cash	(91)		(144)
Net increase (decrease) in cash, cash equivalents and restricted cash	12,714		(28,842)
Cash, cash equivalents and restricted cash—beginning of period	64,418		157,480
Cash, cash equivalents and restricted cash—end of period	$	77,132	$	128,638
Supplemental disclosure of cash flow information:
Cash paid for facility and equipment under operating leases	$	1,805	$	1,266
Cash paid for income taxes	$	14	$	38

Noncash investing activities:
Additions of property and equipment that remain in accounts payable and other accrued liabilities	$	6,017	$	300

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 continue 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 factor (“G-CSF”) for chemotherapy-induced neutropenia, which is under review by the U.S. Food and Drug Administration (the “FDA”). On October 26, 2020, the Company announced that the FDA had deferred action on the BLA for ROLONTIS due to the inability to conduct an inspection of our third-party manufacturing facility in South Korea as a result of COVID-19 related travel restrictions;

•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 antibody-interferon fusion molecule directed against CD20 that is in Phase 1 development for treating relapsed or refractory non-Hodgkin’s 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, 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 and nine months ended September 30, 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.

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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)

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 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).

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, 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).

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. 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.

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.

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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)

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 group purchasing organization (“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) 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 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:

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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)

(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.

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

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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)

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.

(iii) Marketable Securities

Marketable securities consist of our holdings in equity securities, mutual funds, 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 income (expense), net” on the accompanying Condensed Consolidated Statements of Operations.

(iv) Accounts Receivable, Net of Allowance for Credit Losses

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 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, Net

Our property and equipment, net 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.

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles – Goodwill and other – Internal-Use Software (Subtopic 350-40), which amended its guidance for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and to expense such capitalized implementation costs over the term of the hosting arrangement. The guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard on a prospective basis for applicable implementation costs, which did not have a material impact on the Company’s consolidated financial statements.

(vi) Stock-Based Compensation

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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)

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 and stock appreciation rights (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.

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 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.

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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)

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. FAIR VALUE MEASUREMENTS

The table below summarizes certain asset and liability fair values that are included within our accompanying Condensed Consolidated Balance Sheets, and their designations among the three fair value measurement categories:


	September 30, 2020 Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	59,923	$	—	$	—	$	59,923
Equity securities	14,129		—		—		14,129
Government-related debt securities	90,337		—		—		90,337
Corporate debt securities	—		16,485		—		16,485
Bank CDs	—		3,174		—		3,174
Mutual funds	4,553		9		—		4,562
Key employee life insurance, cash surrender value(1)	—		3,651		—		3,651
	$	168,942	$	23,319	$	—	$	192,261
Liabilities:
Deferred executive compensation liability(2)	$	—	$	8,376	$	—	$	8,376
	$	—	$	8,376	$	—	$	8,376

(1) Included within other assets on our Condensed Consolidated Balance Sheets, and the amount is based on the stated cash surrender value of life insurance policies of named current and former employees at each period-end.

(2) Included within other liabilities on our Condensed Consolidated Balance Sheets, and the amount is based on the period-end market value of mutual fund investments selected by employee participants of the deferred compensation plan.


	December 31, 2019 Fair Value Measurements
	Level 1		Level 2		Level 3		Total
Assets:
Government-related debt securities	$	47,636	$	14,990	$	—	$	62,626
Corporate debt securities	—		58,248		—		58,248
Money market funds	54,199		—		—		54,199
Equity securities	31,047		—		—		31,047
Bank CDs	—		7,376		—		7,376
Mutual funds	5,158		11		—		5,169
Key employee life insurance, cash surrender value(1)	—		3,547		—		3,547
	$	138,040	$	84,172	$	—	$	222,212
Liabilities:
Deferred executive compensation liability(2)	$	—	$	8,746	$	—	$	8,746
	$	—	$	8,746	$	—	$	8,746

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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)

We did not have any transfers between “Level 1” and “Level 2” measurement categories for any periods presented.

Our carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid expenses, accounts payable, and other accrued liabilities approximate their fair values due to their short-term nature of settlement.

4. 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

We maintain cash balances with select major 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 arrangement).

The carrying amount of our equity securities, money market funds, and bank CDs approximates their fair value (utilizing “Level 1” or “Level 2” inputs) because of our ability to immediately convert these instruments into cash with minimal expected change in value. As of September 30, 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 Cost		Foreign Currency Translation		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities
September 30, 2020
Money market funds	$	59,923	$	—	$	—	$	—	$	59,923	$	59,923	$	—
Equity securities	5,008		(2,065)		11,186		—		14,129		—		14,129
Government-related debt securities	90,232		—		105		—		90,337		7,499		82,838
Corporate debt securities	16,470		—		15				16,485		—		16,485
Mutual funds	3,925		—		628		—		4,553		—		4,553
Bank CDs	3,156		—		18		—		3,174		—		3,174
Bank deposits	9,710		—		—		—		9,710		9,710		—
Total cash and cash equivalents and marketable securities	$	188,424	$	(2,065)	$	11,952	$	—	$	198,311	$	77,132	$	121,179
December 31, 2019
Money market funds	$	54,199	$	—	$	—	$	—	$	54,199	$	54,199	$	—
Equity securities	6,310		(2,477)		27,214		—		31,047		—		31,047
Government-related debt securities	62,617		—		19		(10)		62,626		—		62,626
Corporate debt securities	58,235		—		38		(25)		58,248		5,000