rigl_Current_Folio_10Q

Table of Contents 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

 

 

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

OR

 

 

 

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

 

FOR THE TRANSITION PERIOD FROM        TO        

 

Commission File Number 0-29889

 


 

Rigel Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

94-3248524

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification No.)

organization)

 

 

 

 

 

 

1180 Veterans Blvd.

 

 

South San Francisco, CA

 

94080

(Address of principal executive offices)

 

(Zip Code)

 

(650) 624-1100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”  and “emerging growth company”in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ☐

 

 

 

Accelerated filer ☒

Non-accelerated filer ☐

 

 

 

Smaller reporting company ☒

Emerging Growth Company ☐

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of May 1, 2019, there were 167,193,410 shares of the registrant’s Common Stock outstanding.

 

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.001 per share

 

RIGL

 

The Nasdaq Global Market

 

 

 

 


 

Table of Contents 

RIGEL PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

INDEX

 

 

 

 

 

 

 

 

Page

PART I 

FINANCIAL INFORMATION

 

3

Item 1. 

Financial Statements

 

3

 

Condensed Balance Sheets — March 31, 2019 (Unaudited) and December 31, 2018

 

3

 

Condensed Statements of Operations (Unaudited) — three months ended March  31, 2019 and 2018

 

4

 

Condensed Statements of Comprehensive Loss (Unaudited) — three months ended March 31, 2019 and 2018

 

5

 

Condensed Statements of Stockholder’s Equity (Unaudited) — three months ended March 31, 2019 and 2018

 

6

 

Condensed Statements of Cash Flows (Unaudited) — three months ended March 31, 2019 and 2018

 

7

 

Notes to Condensed Financial Statements (Unaudited)

 

8

Item 2. 

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

 

23

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4. 

Controls and Procedures

 

38

PART II 

OTHER INFORMATION

 

38

Item 1. 

Legal Proceedings

 

38

Item 1A. 

Risk Factors

 

38

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 3. 

Defaults Upon Senior Securities

 

70

Item 4. 

Mine Safety Disclosures

 

70

Item 5. 

Other Information

 

70

Item 6. 

Exhibits

 

71

 

 

 

 

Signatures 

 

 

72

 

 

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Table of Contents 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

RIGEL PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

    

2018(1)

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,696

 

$

76,322

 

Short-term investments

 

 

53,227

 

 

52,215

 

Accounts receivable, net

 

 

5,614

 

 

4,077

 

Inventories

 

 

1,130

 

 

894

 

Prepaid and other current assets

 

 

4,652

 

 

3,479

 

Total current assets

 

 

139,319

 

 

136,987

 

Property and equipment, net

 

 

1,600

 

 

1,387

 

Operating lease right-of-use asset

 

 

31,136

 

 

 —

 

Other assets

 

 

729

 

 

735

 

 

 

$

172,784

 

$

139,109

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,179

 

$

6,391

 

Accrued compensation

 

 

4,432

 

 

9,952

 

Accrued research and development

 

 

6,999

 

 

6,763

 

Other accrued liabilities

 

 

5,241

 

 

3,598

 

Lease liabilities, current portion

 

 

6,755

 

 

 —

 

Deferred revenue, current portion

 

 

1,532

 

 

1,030

 

Total current liabilities

 

 

26,138

 

 

27,734

 

 

 

 

 

 

 

 

 

Long-term portion of deferred revenue

 

 

26,381

 

 

1,408

 

Long-term portion of deferred rent

 

 

 —

 

 

90

 

Long-term portion of lease liabilities

 

 

24,950

 

 

 —

 

 

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 —

 

 

 —

 

Common stock

 

 

167

 

 

167

 

Additional paid-in capital

 

 

1,322,070

 

 

1,319,068

 

Accumulated other comprehensive income (loss)

 

 

10

 

 

(24)

 

Accumulated deficit

 

 

(1,226,932)

 

 

(1,209,334)

 

Total stockholders’ equity

 

 

95,315

 

 

109,877

 

 

 

$

172,784

 

$

139,109

 

 


(1)

The balance sheet at December 31, 2018 has been derived from the audited financial statements included in Rigel’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

See Accompanying Notes.

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2019

    

2018

    

 

Revenues:

 

 

 

 

 

 

 

 

Product sales, net

 

$

8,054

 

$

 —

 

 

Contract revenues from collaborations

 

 

4,570

 

 

 —

 

 

Total revenues

 

 

12,624

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of product sales

 

 

107

 

 

 —

 

 

Research and development

 

 

10,949

 

 

11,242

 

 

Selling, general and administrative

 

 

19,946

 

 

13,492

 

 

Total costs and expenses

 

 

31,002

 

 

24,734

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(18,378)

 

 

(24,734)

 

 

Interest income

 

 

780

 

 

349

 

 

Net loss

 

$

(17,598)

 

$

(24,385)

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.11)

 

$

(0.17)

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net loss per share, basic and diluted

 

 

167,173

 

 

147,114

 

 

 

See Accompanying Notes.

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2019

    

2018

    

 

Net loss

 

$

(17,598)

 

$

(24,385)

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on short-term investments

 

 

34

 

 

(5)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(17,564)

 

$

(24,390)

 

 

 

See Accompanying Notes.

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands,  except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balance at January 1, 2019

 

167,171,505

 

$

167

 

$

1,319,068

 

$

(24)

 

$

(1,209,334)

 

$

109,877

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,598)

 

 

(17,598)

Net change in unrealized gain on short-term investments

 

 —

 

 

 —

 

 

 —

 

 

34

 

 

 —

 

 

34

Issuance of common stock upon exercise of options and participation in Purchase Plan

 

7,583

 

 

 —

 

 

16

 

 

 —

 

 

 —

 

 

16

Stock compensation expense

 

 —

 

 

 —

 

 

2,986

 

 

 —

 

 

 —

 

 

2,986

Balance at March 31, 2019

 

167,179,088

 

$

167

 

$

1,322,070

 

$

10

 

$

(1,226,932)

 

$

95,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Equity

Balance at January 1, 2018

 

146,814,906

 

$

147

 

$

1,239,435

 

$

(82)

 

$

(1,138,854)

 

$

100,646

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(24,385)

 

 

(24,385)

Net change in unrealized loss on short-term investments

 

 —

 

 

 —

 

 

 —

 

 

(5)

 

 

 —

 

 

(5)

Issuance of common stock upon exercise of options and participation in Purchase Plan

 

652,891

 

 

 1

 

 

2,010

 

 

 —

 

 

 —

 

 

2,011

Stock compensation expense

 

 —

 

 

 —

 

 

1,540

 

 

 —

 

 

 —

 

 

1,540

Balance at March 31, 2018

 

147,467,797

 

$

148

 

$

1,242,985

 

$

(87)

 

$

(1,163,239)

 

$

79,807

 

 

 

 

 

 

 

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2019

    

2018

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(17,598)

 

$

(24,385)

 

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,953

 

 

1,540

 

Depreciation and amortization

 

 

164

 

 

113

 

Non-cash operating lease expense

 

 

1,691

 

 

 —

 

Net amortization of discount on short-term investment

 

 

(282)

 

 

(134)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,537)

 

 

 —

 

Inventories

 

 

(203)

 

 

 —

 

Prepaid and other current assets

 

 

(863)

 

 

(638)

 

Other assets

 

 

6

 

 

533

 

Accounts payable

 

 

(5,212)

 

 

(493)

 

Accrued compensation

 

 

(5,520)

 

 

(2,313)

 

Accrued research and development

 

 

236

 

 

844

 

Other accrued liabilities

 

 

1,642

 

 

2,184

 

Lease liability

 

 

(1,522)

 

 

 —

 

Deferred revenue

 

 

25,476

 

 

 —

 

Deferred rent and other long term liabilities

 

 

 —

 

 

(645)

 

Net cash used in operating activities

 

 

(569)

 

 

(23,394)

 

Investing activities

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(19,871)

 

 

(5,235)

 

Maturities of short-term investments

 

 

19,175

 

 

28,650

 

Capital expenditures

 

 

(377)

 

 

(197)

 

Net cash (used in) provided by investing activities

 

 

(1,073)

 

 

23,218

 

Financing activities

 

 

 

 

 

 

 

Net proceeds from issuances of common stock upon exercise of options and participation in employee stock purchase plan

 

 

16

 

 

2,011

 

Net cash provided by financing activities

 

 

16

 

 

2,011

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,626)

 

 

1,835

 

Cash and cash equivalents at beginning of period

 

 

76,322

 

 

38,290

 

Cash and cash equivalents at end of period

 

$

74,696

 

$

40,125

 

 

 

 

 

 

 

 

 

 

 

See Accompanying Notes.

 

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Table of Contents 

Rigel Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(unaudited)

 

In this report, “Rigel,” “we,” “us” and “our” refer to Rigel Pharmaceuticals, Inc.

 

1.Nature of Operations

 

We were incorporated in the state of Delaware on June 14, 1996. We are a biotechnology company dedicated to discovering, developing and providing novel small molecule drugs that significantly improve the lives of patients with immune and hematologic disorders, cancer and rare diseases. Our pioneering research focuses on signaling pathways that are critical to disease mechanisms.

 

Our first U.S. Food and Drug Administration (FDA) approved product, TAVALISSE® (fostamatinib disodium hexahydrate), an oral spleen tyrosine kinase (SYK) inhibitor, for the treatment of adult patients with chronic immune thrombocytopenia (ITP) who have had an insufficient response to a previous treatment, was approved by the FDA in April 2018, which we launched in May 2018.

 

Our current clinical programs include an upcoming Phase 3 study of fostamatinib in autoimmune hemolytic anemia (AIHA) and an ongoing Phase 1 study for our interleukin receptor associated kinase (IRAK) program.  In addition, we have product candidates in development with partners BerGenBio ASA (BerGenBio), Daiichi Sankyo (Daiichi), Aclaris Therapeutics (Aclaris), and AstraZeneca AB (AZ).  

 

2.Basis of Presentation

 

Our accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Act of 1933, as amended (Securities Act). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed financial statements include only normal and recurring adjustments that we believe are necessary to fairly state our financial position and the results of our operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full-year or any subsequent interim period. The balance sheet at December 31, 2018 has been derived from audited financial statements at that date, but does not include all disclosures required by U.S. GAAP for complete financial statements. Because certain disclosures required by U.S. GAAP for complete financial statements are not included herein, these interim unaudited condensed financial statements and the notes accompanying them should be read in conjunction with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from these estimates.

 

3.Summary of Significant Accounting Policies

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02—Leases, (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, or ASU No. 2018-11. In issuing ASU No. 2018-11, the FASB is permitting another transition method for ASU 2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

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We adopted this new standard on January 1, 2019 using a modified retrospective approach and elected the transition method and the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification and our assessment on whether a contract is or contains a lease. We also elected to combine lease and non-lease components, such as common area maintenance charges, as single lease, and elected to use the short-term lease exception permitted by the standard.  

 

As a result of the adoption of Topic 842 on January 1, 2019, we recognized $32.8 million in operating right-of-use asset and $33.2 million in lease liability, and derecognized $399,000 of deferred rent in the balance sheet at adoption date.  These were calculated using the present value of our remaining lease payments using an estimated incremental borrowing rate of 9%. There was no cumulative-effect adjustment on our accumulated deficit as of January 1, 2019.

 

For our sublease agreement wherein we are the lessor, the same practical expedients apply to both lessor and lessee. Therefore, the sublease is classified as an operating lease under Topic 842. Further, the adoption of Topic 842 did not have an impact on our sublease on the date of adoption as all the expected sublease income is equal to the expected lease costs for the head leases over the remaining period of the lease term, and therefore, no impairment of the operating right-of-use asset is needed upon the adoption of Topic 842.  

 

In June 2018, the FASB issued ASU 2018-07—Compensation-Stock Compensation Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). This standard substantially aligns accounting for share-based payments to employees and non-employees. This standard is effective for annual periods beginning after December 15, 2018, including interim periods within that period, and early adoption is permitted. We adopted this new standard on January 1, 2019 and our adoption did not have a material effect on our financial statements.

 

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which modifies the disclosure requirements on fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. We are currently evaluating the impact of adoption of this new standard on our related disclosures.

 

In November 2018, the FASB issued ASU 2018-18—Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard provides guidance on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) by aligning the unit of account guidance between the two topics and clarifying whether certain transactions between collaborative participants should be accounted for as revenue under Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new standard on January 1, 2020. We are currently evaluating the impact ASU 2018-18 will have on our financial statements and related disclosures, but do not expect it to have a material impact on our financial statements.

 

Inventories

 

Inventories are stated at the lower of cost or estimated net realizable value. We determine the cost of inventories using the standard cost method, which approximates actual cost based on a FIFO basis. Inventories consist primarily of third-party manufacturing costs and allocated internal overhead costs. We began capitalizing inventory costs associated with our product upon regulatory approval when, based on management’s judgment, future commercialization was considered probable and the future economic benefit was expected to be realized.

 

Prior to FDA approval of TAVALISSE, all manufacturing costs were charged to research and development expense in the period incurred. At March 31, 2019 and December 31, 2018, our physical inventory included active pharmaceutical product of which costs have been previously charged to research and development expense. However, manufacturing of drug product, finished bottling and other labeling activities that occurred post FDA approval are included in the inventory value at each balance sheet date.

 

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We provide reserves for potential excess, dated or obsolete inventories based on an analysis of forecasted demand compared to quantities on hand and any firm purchase orders, as well as product shelf life. 

 

Cost of Product Sales

 

Cost of product sales consists of third-party manufacturing costs, transportation and freight, and indirect overhead costs associated with the manufacture and distribution of TAVALISSE. A portion of the cost of producing the product sold to date was expensed as research and development prior to the Company’s New Drug Application (NDA) approval for TAVALISSE and therefore is not included in the cost of product sales during this period.

 

Accounts Receivable

 

Accounts receivable are recorded net of customer allowances for prompt payment discounts and any allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of our customers and individual customer circumstances. To date, we have  determined that an allowance for doubtful accounts is not required.    

 

Revenue Recognition

 

We recognize revenue in accordance with ASC Topic 606, Revenue From Contracts with Customers (ASC 606),  when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine whether arrangements are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation. We apply the five-step model to contracts when it is probable that the we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of this new guidance, we assess the goods or services promised within each contract and identify, as a performance obligation, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Product Sales

 

Revenues from product sales are recognized when the specialty distributors (SDs), who are our customers, obtain control of our product, which occurs at a point in time, upon delivery to such SDs. These SDs subsequently resell our products to specialty pharmacy providers, health care providers, hospitals and clinics. In addition to distribution agreements with these SDs, we also enter into arrangements with specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products.

 

Under ASC 606, we are required to estimate the transaction price, including variable consideration that is subject to a constraint, in our contracts with our customers. Variable considerations are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Revenue from product sales are recorded net of certain variable considerations which includes estimated government-mandated rebates and chargebacks, distribution fees, estimated product returns and other deductions.

 

Provisions for returns and other adjustments are provided for in the period the related revenue is recorded. Actual amounts of consideration ultimately received may differ from our estimates.  If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. 

 

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The following are our significant categories of sales discounts and allowances:

 

Sales Discounts. We provide our customers prompt payment discounts that are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. 

 

Product Returns. We offer our SDs a right to return product purchased directly from us, which is principally based upon the product’s expiration date. Product return allowances are estimated and recorded at the time of sale.

 

Government Rebates: We are subject to discount obligations under the state Medicaid programs and Medicare prescription drug coverage gap program.  We estimate our Medicaid and Medicare prescription drug coverage gap rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included as part of Other Accrued Liabilities account in the Balance Sheet. Our liability for these rebates consists primarily of estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

 

Chargebacks and Discounts: Chargebacks for fees and discounts represent the estimated obligations resulting from contractual commitments to sell products to certain specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities at prices lower than the list prices charged to our SDs who directly purchase the product from us.  These SDs charge us for the difference between what they pay for the product and our contracted selling price to these specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities.  These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue. Actual chargeback amounts are generally determined at the time of resale to the specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities by our SDs. The estimated obligations arising from these chargebacks and discounts are included as part of Other Accrued Liabilities in the balance sheet.

 

Co-Payment Assistance: We offer co-payment assistance to commercially insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue. 

 

Contract Revenues from Collaborations

 

In the normal course of business, we conduct research and development programs independently and in connection with our corporate collaborators, pursuant to which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payment to us for a combination of one or more of the following: upfront license fees; development, regulatory and commercial milestone payments; product supply services; and royalties on net sales of licensed products.

 

Upfront License Fees: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from upfront license fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, we use judgment in determining the appropriate method of measuring progress for purposes of recognizing revenue from the up-front license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

 

Development, Regulatory or Commercial Milestone Payments: At the inception of each arrangement that includes payments based the achievement of certain development, regulatory and commercial or launch events, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or

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the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development and regulatory milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, and recorded as part of contract revenues from collaborations during the period of adjustment.

 

Product Supply Services: Arrangements that include a promise for future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.

 

Sales-based Milestone Payments and Royalties: For arrangements that include sales-based royalties, including milestone payments based on the volume of sales, we determine whether the license is deemed to be the predominant item to which the royalties or sales-based milestones relate to and if such is the case, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). 

 

Leases

 

We currently lease our research and office space under a noncancelable lease agreement with our landlord through January 2023. In December 2014, we entered into a sublease agreement with an unrelated third party to occupy a portion of our research and office space through January 2023.

 

As described above, we adopted the Topic 842 as of January 1, 2019. Pursuant to Topic 842, all of our leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of Topic 842, we recorded an operating lease right-of-use asset and an operating lease liability on our balance sheet. Right-of-use lease assets represent our right to use the underlying asset for the lease term and the lease obligation represents our commitment to make the lease payments arising from the lease. Right-of-use lease assets and obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term. As our lease does not provide an implicit rate, we have used an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease right-of-use asset includes any lease payments made prior to commencement. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

 

For our sublease agreement wherein we are the lessor, sublease income will be recognized on a straight-line basis over the term of the sublease. The difference between the cash received, and the straight-line lease income recognized, if any, will be recorded as part of prepaid and other current assets in the balance sheet. 

 

Prior to our adoption of Topic 842, we recorded a deferred rent asset or liability equal to the difference between the rent expense and the future minimum lease payments due. We recorded lease expense on a straight‑line basis for our lease, net of sublease income, wherein such arrangements contain scheduled rent increases over the term of the lease and sublease, respectively. 

 

Research and Development Accruals

 

We have various contracts with third parties related to our research and development activities. Costs that are incurred but not billed to us as of the end of the period are accrued. We make estimates of the amounts incurred in each period based on the information available to us and our knowledge of the nature of the contractual activities generating such costs. Clinical trial contract expenses are accrued based on units of activity. Expenses related to other research and

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development contracts, such as research contracts, toxicology study contracts and manufacturing contracts are estimated to be incurred generally on a straight-line basis over the duration of the contracts. Raw materials and study materials not related to our approved drug, purchased for us by third parties are expensed at the time of purchase.

 

4. Stock Award Plans

 

On May 16, 2018, our stockholders approved the adoption of the Company’s 2018 Equity Incentive Plan (2018 Plan). The 2018 Plan is the successor plan to the 2011 Equity Incentive Plan, the 2000 Equity Incentive Plan, and the 2000 Non-Employee Directors' Stock Option Plan.    

 

To date, we have two stock option plans, our 2018 Plan and the Inducement Plan (collectively, the Equity Incentive Plans), that provide for granting to our officers, directors and all other employees and consultants options to purchase shares of our common stock. We also have our Employee Stock Purchase Plan (Purchase Plan), wherein eligible employees can purchase shares of our common stock at a price per share equal to the lesser of 85% of the fair market value on the first day of the offering period or 85% of the fair market value on the purchase date. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model which considered our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, volatility, expected term, risk-free interest rate and dividends. We estimate volatility over the expected term of the option using historical share price performance. For expected term, we take into consideration our historical data of options exercised, cancelled and expired. The risk-free rate is based on the U.S. Treasury constant maturity rate. We have not paid and do not expect to pay dividends in the foreseeable future. We use the straight-line attribution method over the requisite employee service period for the entire award in recognizing stock-based compensation expense. We account for forfeitures as they occur.

 

We granted performance-based stock options to purchase shares of our common stock which will vest upon the achievement of certain corporate performance-based milestones. We determined the fair values of these performance-based stock options using the Black-Scholes option pricing model at the date of grant. For the portion of the performance-based stock options of which the performance condition is considered probable of achievement, we recognize stock-based compensation expense on the related estimated grant date fair values of such options on a straight-line basis from the date of grant up to the date when we expect the performance condition will be achieved. For the performance conditions that are not considered probable of achievement at the grant date or upon quarterly re-evaluation, prior to the event actually occurring, we recognize the related stock-based compensation expense when the event occurs or when we can determine that the performance condition is probable of achievement. In those cases, we recognize the change in estimate at the time we determine the condition is probable of achievement (by recognizing stock-based compensation expense as cumulative catch-up adjustment as if we had estimated at the grant date that the performance condition would have been achieved) and recognize the remaining compensation cost up to the date when we expect the performance condition will be achieved, if any.

 

5.Net Loss Per Share

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period and the number of additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued. Potentially dilutive securities include stock options and shares issuable under our stock award plans. The dilutive effect of these potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of our common stock can result in a greater dilutive effect from potentially dilutive securities.

 

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We had securities which could potentially dilute basic loss per share, but were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive. These securities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

 

March 31, 

 

 

 

 

2019

    

2018

 

 

Outstanding stock options

 

 

25,126

 

 

20,985

 

 

Purchase Plan

 

 

130

 

 

94

 

 

Total

 

 

25,256

 

 

21,079

 

 

 

 

 

6.Stock-Based Compensation

 

Total stock-based compensation related to all of our share-based payments that we recognized for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

 

March 31, 

 

 

 

 

2019

    

2018

 

 

Selling, general and administrative

 

$

2,166

 

$

940

 

 

Research and development

 

 

787

 

 

600

 

 

Total stock-based compensation expense

 

$

2,953

 

$

1,540

 

 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. We have segregated option awards into the following three homogenous groups for the purposes of determining fair values of options: officers and directors, all other employees, and consultants. We account for forfeitures as they occur.

 

We determined weighted-average valuation assumptions separately for each of these groups as follows:

 

·

Volatility—We estimated volatility using our historical share price performance over the expected life of the option. We also considered other factors, such as implied volatility, our current clinical trials and other company activities that may affect the volatility of our stock in the future. We determined that at this time historical volatility is more indicative of our expected future stock performance than implied volatility.

 

·

Expected term—For options granted to consultants, we use the contractual term of the option, which is generally ten years, for the initial valuation of the option and the remaining contractual term of the option for the succeeding periods. We analyzed various historical data to determine the applicable expected term for each of the other option groups. This data included: (1) for exercised options, the term of the options from option grant date to exercise date; (2) for cancelled options, the term of the options from option grant date to cancellation date, excluding non-vested option forfeitures; and (3) for options that remained outstanding at the balance sheet date, the term of the options from option grant date to the end of the reporting period and the estimated remaining term of the options. The consideration and calculation of the above data gave us reasonable estimates of the expected term for each employee group. We also considered the vesting schedules of the options granted and factors surrounding exercise behavior of the option groups, our current market price and company activity that may affect our market price. In addition, we considered the optionee type (i.e., officers and directors or all other employees) and other factors that may affect the expected term of the options.

 

·

Risk-free interest rate—The risk-free interest rate is based on U.S. Treasury constant maturity rates with similar terms to the expected term of the options for each option group.

 

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·

Dividend yield—The expected dividend yield is 0% as we have not paid and do not expect to pay dividends in the future.

 

The following table summarizes the weighted-average assumptions relating to options granted pursuant to our equity incentive plans for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

 

 

March 31, 

 

 

 

 

    

2019

    

2018

    

    

    

Risk-free interest rate

 

2.6

%  

2.7

%  

 

 

Expected term (in years)

 

6.6

 

6.7

 

 

 

Dividend yield

 

0.0

%  

0.0

%  

 

 

Expected volatility

 

65.9

%  

64.6

%  

 

 

 

The exercise price of stock options granted under our stock plans is equal to the fair market value of the underlying shares on the date of grant.  Options become exercisable at varying dates and generally expire 10 years from the date of grant.

 

We granted options to purchase 5,675,525 shares of common stock during the three months ended March 31, 2019 with a grant-date weighted-average fair value of $1.27 per share. As of March 31, 2019, we had 1,012,500 shares of outstanding performance-based stock option wherein the achievement of the corresponding corporate-based milestones were not considered as probable.  Accordingly, none of the stock-based compensation expense of $1.4 million has been recognized as expense as of March 31, 2019.

 

As of March 31, 2019, there were approximately $14.2 million of unrecognized stock-based compensation cost related to time-based stock options and performance-based stock options, wherein achievement of the corresponding corporate-based milestones was considered as probable.

 

At March 31, 2019, there were 10,641,901 shares of common stock available for future grant under our equity incentive plan and 7,583 options to purchase shares were exercised during the three months ended March 31, 2019.

 

Employee Stock Purchase Plan

 

Our Purchase Plan permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lesser of 85% of the fair market value of our common stock on the first day of the offering or 85% of the fair market value of our common stock on the purchase date. The initial offering period commenced on the effective date of our initial public offering.

 

The fair value of awards granted under our Purchase Plan is estimated on the date of grant using the Black-Scholes option pricing model, which uses weighted-average assumptions. Our Purchase Plan provides for a twenty-four month offering period comprised of four six-month purchase periods with a look-back option. A look-back option is a provision in our Purchase Plan under which eligible employees can purchase shares of our common stock at a price per share equal to the lesser of 85% of the fair market value on the first day of the offering period or 85% of the fair market value on the purchase date. Our Purchase Plan also includes a feature that provides for a new offering period to begin when the fair market value of our common stock on any purchase date during an offering period falls below the fair market value of our common stock on the first day of such offering period. This feature is called a “reset.” Participants are automatically enrolled in the new offering period. We had “reset” on January 2, 2019 because the fair market value of our stock on December 31, 2018 was lower than the fair market value of our stock on July 1, 2018, the first day of the offering period. We applied modification accounting in accordance with the relevant accounting guidance. The total incremental fair value associated with this Purchase Plan “reset” was approximately $879,000 and is being recognized as expense from the period from January 1, 2019 to December 31, 2020.

 

As of March 31, 2019, there were 1,331,584 shares reserved for future issuance under the Purchase Plan and there was $1.5 million of unrecognized stock-based compensation cost related to our Purchase Plan.  The following table

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summarizes the weighted-average assumptions related to our Purchase Plan for the three months ended March 31, 2019 and 2018. Expected volatilities for our Purchase Plan are based on the historical volatility of our stock. Expected term represents the weighted-average of the purchase periods within the offering period. The risk-free interest rate for periods within the expected term is based on U.S. Treasury constant maturity rates.

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

 

March 31, 

 

 

 

    

2019

    

2018

 

    

Risk-free interest rate

 

2.7

%  

0.6

%

 

Expected term (in years)

 

1.5

 

2.0

 

 

Dividend yield

 

0.0

%  

0.0

%

 

Expected volatility

 

62.6

%  

63.8

%

 

 

 

7.Revenues

 

Revenues disaggregated by category were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

 

March 31, 

 

 

 

 

2019

    

2018

 

 

Product sales:

 

 

 

 

 

 

 

 

Gross product sales

 

$

9,916

 

$

 —

 

 

Discounts and allowances

 

 

(1,862)

 

 

 —

 

 

Product sales, net

 

$

8,054

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

Revenues from collaborations:

 

 

 

 

 

 

 

 

License revenues

 

 

4,499

 

 

 —

 

 

Research and development services

 

 

71

 

 

 —

 

 

Total revenues from collaborations

 

 

4,570

 

 

 —

 

 

Total revenues

 

$

12,624

 

$

 —

 

 

 

The following table summarizes revenues from each of our customers who individually accounted for 10% or more of our total revenues (as a percentage of total revenues):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

 

March 31, 

 

 

 

 

2019

    

2018

 

 

Grifols

 

 

36%

 

 

 —

 

 

ASD Healthcare and Oncology Supply

 

 

33%

 

 

 —

 

 

McKesson Specialty Care Distribution Corporation

 

 

24%

 

 

 —

 

 

 

Our first and only FDA approved product, TAVALISSE®, was approved by the U.S. FDA in April 2018. We commenced commercial sale of TAVALISSE in the U.S. in May 2018.

 

In addition to the distribution agreements with our customers, the SDs, we also enter into arrangements with specialty pharmacy providers, in-office dispensing providers, group purchasing organizations, and government entities that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of our products which reduced our gross product sales. Also refer to Revenue Recognition policy discussion in Note 3.

 

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The following tables summarize activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chargebacks,

 

Government

 

 

 

 

 

 

Discounts and

 

and Other

 

 

 

 

 

 

Fees

 

Rebates

 

Returns

 

Total

Balance at January 1, 2019

    

$

622

 

$

843

 

$

170

 

$

1,635

Provision related to current period sales

 

 

855

 

 

706

 

 

99

 

 

1,660

Credit or payments made during the period

 

 

(735)

 

 

(323)

 

 

 —

 

 

(1,058)

Balance at March 31, 2019

 

$

742

 

$

1,226

 

$

269

 

$

2,237

 

The above provisions, which included the provision for current period sales of $1.7 million, are included as part of Other Accrued Liabilities in the balance sheet. The remaining $202,000 in provision related to current period sales is recorded as reduction of accounts receivable and prepaid and other current assets in the balance sheet.

 

8.Sponsored Research and License Agreements

 

We conduct research and development programs independently and in connection with our corporate collaborators. As of March 31, 2019, we are a party to collaboration agreements with ongoing performance obligations, with Kissei Pharmaceutical Co., Ltd. (Kissei) for the development and commercialization of fostamatinib in Japan, China, Taiwan and the Republic of Korea and with Grifols, S.A. (Grifols) to commercialize fostamatinib in all indications, including chronic ITP, AIHA, and IgAN, in Europe and Turkey.  As of March 31, 2019, we are also a party to collaboration agreements, but do not have ongoing performance obligations with Aclaris for the development and commercialization of JAK inhibitors for the treatment of alopecia areata and other dermatological conditions, AZ for the development and commercialization of R256, an inhaled JAK inhibitor, BerGenBio for the development and commercialization of AXL inhibitors in oncology, and Daiichi to pursue research related to MDM2 inhibitors, a novel class of drug targets called ligases.

 

Grifols License Agreement

 

In January 2019, we entered into an exclusive license agreement with Grifols to commercialize fostamatinib in all indications, including chronic ITP, AIHA, and IgAN, in Europe and Turkey. Under the agreement, we received an upfront payment of $30.0 million, with the potential for $297.5 million in total regulatory and commercial milestones, which included a $20 million payment upon approval from the European Medicines Agency (EMA) for fostamatinib in chronic ITP. We will also receive stepped double-digit royalty payments based on tiered net sales which may reach 30% of net sales. In return, Grifols will receive exclusive rights to fostamatinib in human diseases, including chronic ITP, AIHA, and IgAN, in Europe and Turkey. In the event that, in 2021, after the second anniversary of the agreement, fostamatinib has not been approved by the EMA for the treatment of ITP in Europe, Grifols will have the option during a six-month time-frame to terminate the entire agreement which would terminate all their rights to ITP, AIHA, and all other indications.  In this limited circumstance, we will pay Grifols $25.0 million and regain all rights to fostamatinib in Europe and other territories.  The agreement also requires us to continue to conduct our long term open-label extension study on patients with ITP through EMA approval of ITP in Europe as well as conduct the Phase 3 trial in AIHA in the U.S.

 

We accounted for this agreement under ASC 606 and identified the following distinct performance obligations at inception of the agreement namely: (a) granting of the license, (b) performance of research and regulatory services related to our ongoing long-term open-label extension study on patients with ITP, and (c) performance of research services related to our Phase 3 study in AIHA. In addition, we will enter into a commercial supply agreement for the licensed territories. We concluded each of these performance obligations is distinct.  We based our assessment on the following: (i) our assessment that Grifols can benefit from the license on its own by developing and commercializing the underlying product using its own resources, and (ii) the fact that the manufacturing services are not highly specialized in nature and can be performed by other vendors. Moreover, we determined that the upfront fee of $5.0 million represented the transaction price, which represent the non-refundable portion of the $30.0 million upfront fee, and was allocated to the performance obligations based on our best estimate of the relative standalone selling price as follows: (a) for the

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license, we estimated the standalone selling price using the adjusted market assessment approach to estimate its standalone selling price in the licensed territories; (b) for the research and regulatory services, we estimated the standalone selling price using the cost plus expected margin approach.

 

The remaining $25 million of the upfront payment which is potentially refundable and the future variable considerations of $297.5 million related to future regulatory and commercial milestones were fully constrained due to the fact that it was probable that a significant reversal of cumulative revenue would occur, given the inherent uncertainty of success with these future milestones. We will recognize revenues related the research and regulatory services throughout the term of the respective clinincal programs using the input method. For sales-based milestones and royalties, we determined that the license is the predominant item to which the royalties or sales-based milestones relate to. Accordingly, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

 

As of March 31, 2019, we had granted Grifols the license rights over fostamatinib.  Accordingly, we recognized $4.4 million of the $30.0 million upfront fee as allocated revenue for the delivered license during the three months ended March 31, 2019.  Additionally, during the three months ended March 31, 2019, we recognized $71,000 in revenues related to the research and regulatory services performed.  Deferred revenues as of March 31, 2019 was $25.5 million.

 

Kissei License Agreement

 

In October 2018, we entered into an exclusive license and supply agreement with Kissei to develop and commercialize fostamatinib in all current and potential indications in Japan, China, Taiwan and the Republic of Korea. Kissei is responsible for performing and funding all development activities for fostamatinib in the above-mentioned territories. We received an upfront cash payment of $33.0 million with the potential for up to an additional $147.0 million in development, regulatory and commercial milestone payments, and will receive mid to upper twenty percent, tiered, escalated net sales-based payments for the supply of fostamatinib. Under the agreement, we granted Kissei the license rights on fostamatinib on the territories above and are obligated to supply Kissei with drug product for use in clinical trials and pre-commercialization activities. We are also responsible for the manufacture and supply of fostamatinib for all future development and commercialization activities under the agreement. 

 

We accounted for this agreement under ASC 606 and identified the following distinct performance obligations at inception of the agreement namely: (a) granting of the license, (b) supply of fostamatinib for clinical use and (c) material right associated with discounted fostamatinib that are supplied for use other than clinical or commercial. In addition, we will provide commercial product supply if the product is approved in the licensed territory. We concluded that each of these performance obligations is distinct. We based our assessment on the following: (i)  our assessment that Kissei can benefit from the license on its own by developing and commercializing the underlying product using its own resources and (ii) the fact that the manufacturing services are not highly specialized in nature and can be performed by other vendors. Moreover, we determined that the upfront fee of $33.0 million represented the transaction price and was allocated to the performance obligations based on our best estimate of the relative standalone selling price as follows: (a) for the license, we estimated the standalone selling price using the adjusted market assessment approach to estimate its standalone selling price in the licensed territories; (b) for the supply of fostamatinib and the material right associated with discounted fostamatinib, we estimated the standalone selling price using the cost plus expected margin approach. Variable considerations of $147.0 million related to future development and regulatory milestones was fully constrained due to the fact that it was probable that a significant reversal of cumulative revenue would occur, given the inherent uncertainty of success with these future milestones. We will recognize revenues related to the supply of fostamatinib and material right upon delivery of fostamatinib to Kissei. For sales-based milestones and royalties, we determined that the license is the predominant item to which the royalties or sales-based milestones relate to. Accordingly, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

 

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As of December 31, 2018, we had granted Kissei the license rights over fostamatinib.  Accordingly, we recognized $30.6 million of the $33.0 million upfront fee as allocated revenue for the delivered license during the fourth quarter of 2018. During the three months ended March 31, 2019,  we recognized $27,000 as revenue related to the material right associated with discounted fostamatinib. At March 31, 2019, deferred revenues related to the unsatisfied performance obligations relate to related to the supply of fostamatinib and material right associated with discounted fostamatinib supply was $2.4 million. 

 

 

 

 

9.Inventories

 

The following table summarizes inventories as of March  31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

    

2018

 

Finished goods

 

$

300

 

$

364

 

Work in process

 

 

830

 

 

530

 

Total

 

$

1,130

 

$

894

 

 

 

10.Cash, Cash Equivalents and Short-Term Investments

 

Cash, cash equivalents and short-term investments consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

    

2018

 

Cash

 

$

1,296

 

$

2,626

 

Money market funds

 

 

10,334

 

 

9,106

 

U.S. treasury bills

 

 

2,293

 

 

 —

 

Government-sponsored enterprise securities

 

 

2,486

 

 

7,872

 

Corporate bonds and commercial paper

 

 

111,514

 

 

108,933

 

 

 

$

127,923

 

$

128,537

 

Reported as:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,696

 

$

76,322

 

Short-term investments

 

 

53,227

 

 

52,215

 

 

 

$

127,923

 

$

128,537

 

 

Cash equivalents and short-term investments include the following securities with gross unrealized gains and losses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

March 31, 2019

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. treasury bills

 

$

2,293

 

$

 —

 

$

 —

 

$

2,293

 

Government-sponsored enterprise securities

 

 

2,484

 

 

 2

 

 

 —

 

 

2,486

 

Corporate bonds and commercial paper

 

 

111,506

 

 

20

 

 

(12)

 

 

111,514

 

Total

 

$

116,283

 

$

22

 

$

(12)

 

$

116,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

December 31, 2018

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Government-sponsored enterprise securities

 

$

7,873

 

$

 —

 

$

(1)

 

 

7,872

 

Corporate bonds and commercial paper

 

 

108,957

 

 

 2

 

 

(26)

 

 

108,933

 

Total

 

$

116,830

 

$

 2

 

$

(27)

 

$

116,805

 

 

As of March  31, 2019, our cash equivalents and short-term investments, which have contractual maturities within one year, had a weighted-average time to maturity of approximately 61 days. We view our short-term investments

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portfolio as available for use in current operations. We have the ability to hold all investments as of March  31, 2019 through their respective maturity dates. At March 31, 2019, we had no investments that had been in a continuous unrealized loss position for more than 12 months.  As of March  31, 2019, a total of 32 individual securities had been in an unrealized loss position for 12 months or less, and the losses were determined to be temporary. The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any significant deterioration in the creditworthiness of the issuers of the securities held by us. Based on our review of these securities, including the assessment of the duration and severity of the unrealized losses and our ability and intent to hold the investments until maturity, there were no other-than-temporary impairments for these securities at March 31, 2019.

 

The following table shows the fair value and gross unrealized losses of our investments in individual securities that are in an unrealized loss position, aggregated by investment category (in thousands):

 

 

 

 

 

 

 

 

 

March 31, 2019

    

Fair Value

    

Unrealized Losses

 

Corporate bonds and commercial paper

 

$

69,359

 

$

(12)

 

 

 

 

11.Fair Value

 

Under FASB ASC 820, Fair Value Measurements and Disclosures, fair value is defined as the price at which an asset could be exchanged or a liability transferred in a transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.

 

Assets and liabilities recorded at fair value in our financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

The fair valued assets we hold that are generally included under this Level 1 are money market securities where fair value is based on publicly quoted prices.

 

Level 2—Inputs, other than quoted prices included in Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument’s anticipated life.

 

The fair valued assets we hold that are generally assessed under Level 2 included government-sponsored enterprise securities, U.S. treasury bills and corporate bonds and commercial paper. We utilize third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. We use quotes from external pricing service providers and other on-line quotation systems to verify the fair value of investments provided by our third party pricing service providers. We review independent auditor’s reports from our third party pricing service providers particularly regarding the controls over pricing and valuation of financial instruments and ensure that our internal controls address certain control deficiencies, if any, and complementary user entity controls are in place.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

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We do not have fair valued assets and liabilities classified under Level 3.

 

Fair Value on a Recurring Basis

 

Financial assets measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets at Fair Value as of March 31, 2019

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Money market funds

 

$

10,334

 

$

 —

 

$

 —

 

$

10,334

 

U.S. treasury bills

 

 

 —

 

 

2,293

 

 

 —

 

 

2,293

 

Government-sponsored enterprise securities

 

 

 —

 

 

2,486

 

 

 —

 

 

2,486