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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 JUNE 30, 2020

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)

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 Stock Market LLC

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 August 1, 2020, there were 168,928,904 shares of the registrant’s Common Stock outstanding.

Table of Contents 

RIGEL PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

INDEX

Page

PART I

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Condensed Balance Sheets — June 30, 2020 (Unaudited) and December 31, 2019

3

Condensed Statements of Operations (Unaudited) — three and six months ended June 30, 2020 and 2019

4

Condensed Statements of Comprehensive Loss (Unaudited) — three and six months ended June 30, 2020 and 2019

5

Condensed Statements of Stockholder’s Equity (Unaudited) — three and six months ended June 30, 2020 and 2019

6

Condensed Statements of Cash Flows (Unaudited) — six months ended June 30, 2020 and 2019

7

Notes to Condensed Financial Statements (Unaudited)

8

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

49

PART II

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

88

Item 3.

Defaults Upon Senior Securities

88

Item 4.

Mine Safety Disclosures

88

Item 5.

Other Information

88

Item 6.

Exhibits

89

Signatures

91

2

Table of Contents 

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

RIGEL PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(In thousands)

June 30, 

December 31, 

2020

    

2019(1)

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

36,469

$

22,521

Short-term investments

 

56,028

 

75,557

Accounts receivable, net

 

11,727

 

10,111

Inventories

1,684

 

1,354

Prepaid and other current assets

 

7,182

 

9,462

Total current assets

 

113,090

 

119,005

Property and equipment, net

 

2,381

 

2,159

Operating lease right-of-use asset

21,911

25,709

Other assets

 

653

 

696

$

138,035

$

147,569

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

3,414

$

4,152

Accrued compensation

 

7,293

 

8,819

Accrued research and development

 

5,147

 

5,960

Other accrued liabilities

 

7,637

 

6,721

Lease liabilities, current portion

8,054

7,272

Deferred revenue, current portion

3,215

25,288

Total current liabilities

 

34,760

 

58,212

Long-term portion of deferred revenue

1,404

Long-term portion of lease liabilities

 

15,249

 

19,230

Loans payable, net of discount

19,816

9,810

Other long-term liabilities

 

5,000

 

5,098

Commitments

Stockholders’ equity:

Preferred stock

 

 

Common stock

 

169

 

168

Additional paid-in capital

 

1,335,556

 

1,329,852

Accumulated other comprehensive income

 

46

 

23

Accumulated deficit

 

(1,272,561)

 

(1,276,228)

Total stockholders’ equity

 

63,210

 

53,815

$

138,035

$

147,569

(1)The balance sheet at December 31, 2019 has been derived from the audited financial statements included in Rigel’s Annual Report on Form 10-K for the year ended December 31, 2019.

See Accompanying Notes.

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

 

Revenues:

Product sales, net

$

14,974

$

10,173

$

27,654

$

18,227

Contract revenues from collaborations

1,047

234

44,128

4,804

Total revenues

16,021

10,407

71,782

23,031

Costs and expenses:

Cost of product sales

279

311

434

418

Research and development

 

14,214

 

13,226

30,363

 

24,175

Selling, general and administrative

 

18,920

 

18,209

37,350

 

38,155

Total costs and expenses

 

33,413

 

31,746

 

68,147

 

62,748

Income (loss) from operations

 

(17,392)

 

(21,339)

 

3,635

 

(39,717)

Interest income

 

169

 

733

 

527

 

1,513

Interest expense

(353)

(495)

Net income (loss)

$

(17,576)

$

(20,606)

$

3,667

$

(38,204)

Net income (loss) per share, basic and diluted

$

(0.10)

$

(0.12)

$

0.02

$

(0.23)

Weighted average shares used in computing net income (loss) per share

Basic

 

168,570

 

167,191

 

168,519

 

167,182

Diluted

 

168,570

 

167,191

 

168,525

 

167,182

See Accompanying Notes.

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

 

Net income (loss)

$

(17,576)

$

(20,606)

$

3,667

$

(38,204)

Other comprehensive income (loss):

Net unrealized gain (loss) on short-term investments

 

(32)

 

33

 

23

 

67

Comprehensive income (loss)

$

(17,608)

$

(20,573)

$

3,690

$

(38,137)

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

    

Deficit

    

Equity

Balance at December 31, 2019

 

167,987,850

$

168

$

1,329,852

$

23

$

(1,276,228)

$

53,815

Net income

 

21,243

 

21,243

Net unrealized gain on short-term investments

 

55

 

55

Issuance of common stock upon exercise of options

 

581,675

1

1,335

 

1,336

Stock compensation expense

 

2,050

 

2,050

Balance at March 31, 2020

 

168,569,525

$

169

$

1,333,237

$

78

$

(1,254,985)

$

78,499

Net loss

 

(17,576)

(17,576)

Net unrealized loss on short-term investments

 

(32)

(32)

Issuance of common stock upon participation in Purchase Plan

 

348,098

541

541

Stock compensation expense

 

1,778

1,778

Balance at June 30, 2020

168,917,623

$

169

$

1,335,556

$

46

$

(1,272,561)

$

63,210

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balance at December 31, 2018

 

167,171,505

$

167

$

1,319,068

$

(24)

$

(1,209,334)

$

109,877

Net loss

 

(17,598)

 

(17,598)

Net unrealized gain on short-term investments

 

34

 

34

Issuance of common stock upon exercise of options

 

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

Net loss

 

(20,606)

 

(20,606)

Net unrealized gain on short-term investments

 

33

 

33

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

 

425,331

1

855

 

856

Stock compensation expense

 

2,693

 

2,693

Balance at June 30, 2019

167,604,419

$

168

$

1,325,618

$

43

$

(1,247,538)

$

78,291

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RIGEL PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Six Months Ended June 30, 

2020

    

2019

Operating activities

Net income (loss)

$

3,667

$

(38,204)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Stock-based compensation expense

 

3,781

 

5,606

Depreciation and amortization

 

335

 

337

Non-cash operating lease expense

3,798

3,418

Net amortization and accretion of discount on short-term investments and term loan

(207)

(613)

Changes in assets and liabilities:

Accounts receivable, net

 

(1,616)

 

(2,856)

Inventories

(277)

 

(245)

Prepaid and other current assets

 

2,280

 

(183)

Other assets

 

43

 

22

Accounts payable

 

(738)

 

(2,614)

Accrued compensation

 

(1,526)

 

(4,089)

Accrued research and development

 

(813)

 

(1,316)

Other accrued liabilities

 

818

 

1,330

Lease liability

(3,199)

(3,139)

Deferred revenue

(23,477)

25,326

Net cash used in operating activities

 

(17,131)

 

(17,220)

Investing activities

Purchases of short-term investments

 

(42,980)

 

(59,878)

Maturities of short-term investments

 

62,770

 

44,625

Capital expenditures

 

(563)

 

(492)

Net cash provided by (used in) investing activities

 

19,227

 

(15,745)

Financing activities

Net proceeds from term loan financing

9,975

Net proceeds from issuances of common stock upon exercise of options and participation in Purchase Plan

 

1,877

 

872

Net cash provided by financing activities

 

11,852

 

872

Net increase (decrease) in cash and cash equivalents

 

13,948

 

(32,093)

Cash and cash equivalents at beginning of period

 

22,521

 

76,322

Cash and cash equivalents at end of period

$

36,469

$

44,229

Supplemental disclosure of cash flow information

Interest paid

$

448

$

See Accompanying Notes.

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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 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 is TAVALISSE® (fostamatinib disodium hexahydrate), the only 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. The marketing authorization application (MAA) for fostamatinib was approved by the European Commission (EC) in Europe in January 2020 for the treatment of chronic ITP in adult patients who are refractory to other treatments and is marketed in Europe under the name TAVLESSE® (fostamatinib). Our clinical programs include a Phase 3 study of fostamatinib in warm autoimmune hemolytic anemia (AIHA); a completed Phase 1 study of R835, a proprietary molecule from our interleukin receptor associated kinase (IRAK 1/4) inhibitor program; and an ongoing Phase 1 study of R552, a proprietary molecule from our receptor-interacting protein kinase (RIP1) inhibitor program. In addition, we have product candidates in clinical 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 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, 2019 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, 2019.

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 June 2016, the FASB issued ASU 2016-13—Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance is effective for annual reporting

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periods beginning after December 15, 2019, including interim periods within those annual reporting periods. We adopted this new standard on January 1, 2020 with no material impact on our financial statements and related disclosures.

 

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. We adopted this new standard on January 1, 2020 with no material impact on our financial statements and 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. We adopted this new standard on January 1, 2020 with no material impact on our financial statements and related disclosures.

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 first-in, first out 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 June 30, 2020 and December 31, 2019, 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.

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

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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 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 consideration is 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 consideration 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.

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

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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 on 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 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).

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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.

All of our leases outstanding as of June 30, 2020 continued to be classified as operating leases. 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.

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 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.

Income Taxes

Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it is more likely than not that such assets will not be realized.

We account for uncertain tax positions consistent with authoritative guidance. The guidance prescribes a “more likely than not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We do not expect any material change in our unrecognized tax benefits over the next twelve months. We recognize interest and penalties related to unrecognized tax benefits as a component of income taxes.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We are currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet

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available. While we continue to evaluate the impact of the CARES Act, we do not currently believe it will have a material impact on our financial statements or related disclosures.

On June 29, 2020, Assembly Bill 85 (A.B. 85) was signed into California law. A.B. 85 provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5.0 million of California state tax per year. A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for certain taxpayers with taxable income of $1.0 million or more. The carryover period for any net operating losses that are suspended under this provision will be extended. A.B. 85 also requires that business incentive tax credits including carryovers may not reduce the applicable tax by more than $5.0 million for taxable years 2020, 2021 and 2022. We are currently evaluating the impact of A.B. 85 on our financial statements and related disclosures.

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.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (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 Purchase Plan. The dilutive effect of

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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.

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2020 and 2019 (in thousands except per share amounts):

Three Months Ended 

Six Months Ended 

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

    

EPS Numerator:

Net income (loss)

$

(17,576)

$

(20,606)

$

3,667

$

(38,204)

EPS Denominator—Basic:

Weighted-average common shares outstanding

 

168,570

 

167,191

 

168,519

 

167,182

EPS Denominator—Diluted:

Weighted-average common shares outstanding

 

168,570

 

167,191

 

168,519

 

167,182

Dilutive effect of stock options and shares under ESPP

 

 

 

6

 

Weighted-average shares outstanding and common stock equivalents

 

168,570

 

167,191

 

168,525

 

167,182

Net income (loss) per common share, basic and diluted

$

(0.10)

$

(0.12)

$

0.02

$

(0.23)

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

Three Months Ended 

Six Months Ended 

 

June 30, 

June 30, 

2020

    

2019

2020

    

2019

 

Outstanding stock options

27,598

25,050

26,536

25,050

Purchase Plan

344

332

201

Total

27,942

25,382

26,536

25,251

6.

Stock-Based Compensation

Total stock-based compensation related to all of our share-based payments that we recognized for the three and six months ended June 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended 

Six Months Ended

June 30, 

June 30, 

2020

    

2019

2020

    

2019

Selling, general and administrative

$

1,299

$

1,742

$

2,629

$

3,908

Research and development

458

911

1,152

1,698

Total stock-based compensation expense

$

1,757

$

2,653

$

3,781

$

5,606

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.

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Table of Contents 

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.

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 and six months ended June 30, 2020 and 2019:

Three Months Ended 

Six Months Ended 

June 30, 

June 30, 

    

2020

    

2019

    

    

2020

    

2019

 

    

Risk-free interest rate

1.1

%  

2.2

%  

1.3

%  

2.5

%

Expected term (in years)

6.3

6.7

6.4

6.6

Dividend yield

0.0

%  

0.0

%  

0.0

%  

0.0

%

Expected volatility

65.8

%  

65.0

%  

65.4

%  

66.2

%

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 7,374,090 shares of common stock during the six months ended June 30, 2020 with a grant-date weighted-average fair value of $1.39 per share. As of June 30, 2020, we had 776,250 shares of outstanding performance-based stock options wherein the achievement of the corresponding corporate-based milestones was not considered as probable. Accordingly, none of the stock-based compensation expense of $1.2 million has been recognized as expense as of June 30, 2020.

As of June 30, 2020, there were approximately $14.3 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.

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Table of Contents 

At June 30, 2020, there were 11,013,055 shares of common stock available for future grant under our equity incentive plans and 581,675 options to purchase shares were exercised during the six months ended June 30, 2020.

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 a “reset” on January 2, 2020 because the fair market value of our stock on December 31, 2019 was lower than the fair market value of our stock on January 1, 2019, 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 $753,000 and is being recognized as expense from January 1, 2020 to December 31, 2021. We also had another “reset” on July 1, 2020 because the fair market value of our stock on June 30, 2020 was lower than the fair market value of our stock on January 1, 2020, 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 $535,000 and is being amortized to expenses from July 1, 2020 to June 30, 2022.

As of June 30, 2020, there were 235,795 shares reserved for future issuance under the Purchase Plan and there was $1.2 million of unrecognized stock-based compensation cost related to our Purchase Plan. The following table summarizes the weighted-average assumptions related to our Purchase Plan for the six months ended June 30, 2020 and 2019. 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.

Six Months Ended 

June 30, 

    

2020

    

2019

    

Risk-free interest rate

1.6

%  

2.7

%

Expected term (in years)

1.6

1.5

Dividend yield

0.0

%  

0.0

%

Expected volatility

57.7

%  

62.6

%

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Table of Contents 

7.

Revenues

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

Three Months Ended 

Six Months Ended 

June 30, 

June 30, 

2020

    

2019

2020

    

2019

Product sales:

Gross product sales

$

18,353

$

12,481

$

33,724

$

22,397

Discounts and allowances

(3,379)

(2,308)

(6,070)

(4,170)

Product sales, net

$

14,974

$

10,173

$

27,654

$

18,227

Revenues from collaborations:

License revenues

39,858

4,499

Research and development services and others

1,047

234

4,270

305

Total revenues from collaborations

1,047

234

44,128

4,804

Total revenues

$

16,021

$

10,407

$

71,782

$

23,031

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 

Six Months Ended 

June 30, 

June 30, 

2020

    

2019

2020

    

2019

ASD Healthcare and Oncology Supply

47%

48%

20%

40%

McKesson Specialty Care Distribution Corporation

41%

40%

16%

31%

Cardinal Healthcare