10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2023

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: 001-33221

 

HERON THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

94-2875566

(I.R.S. Employer

Identification No.)

 

 

4242 Campus Point Court, Suite 200

San Diego, CA

92121

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 251-4400

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

HRTX

 

The Nasdaq Capital Market

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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

 

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

 

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of May 1, 2023 was 119,714,575.

 

 


HERON THERAPEUTICS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2023 and 2022 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2023 and 2022 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (Unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

ITEM 2.

 

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

 

17

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

25

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

25

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

26

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

 

ITEM 3.

 

Defaults upon Senior Securities

 

28

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

28

 

 

 

 

 

ITEM 5.

 

Other Information

 

28

 

 

 

 

 

ITEM 6.

 

Exhibits

 

29

 

 

 

 

 

 

 

SIGNATURES

 

30

 

1


PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HERON THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

March 31,
2023

 

 

December 31,
2022

 

 

 

(Unaudited)

 

 

(See Note 2)

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,090

 

 

$

15,364

 

Short-term investments

 

 

32,932

 

 

 

69,488

 

Accounts receivable, net

 

 

51,448

 

 

 

52,049

 

Inventory

 

 

52,059

 

 

 

54,573

 

Prepaid expenses and other current assets

 

 

14,630

 

 

 

13,961

 

Total current assets

 

 

178,159

 

 

 

205,435

 

Property and equipment, net

 

 

21,512

 

 

 

22,160

 

Right-of-use lease assets

 

 

7,071

 

 

 

7,645

 

Other assets

 

 

14,136

 

 

 

15,711

 

Total assets

 

$

220,878

 

 

$

250,951

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

4,065

 

 

$

3,225

 

Accrued clinical and manufacturing liabilities

 

 

21,273

 

 

 

24,468

 

Accrued payroll and employee liabilities

 

 

9,510

 

 

 

13,416

 

Other accrued liabilities

 

 

40,290

 

 

 

38,552

 

Current lease liabilities

 

 

2,762

 

 

 

2,694

 

Total current liabilities

 

 

77,900

 

 

 

82,355

 

Non-current lease liabilities

 

 

4,831

 

 

 

5,499

 

Non-current convertible notes payable, net

 

 

149,335

 

 

 

149,284

 

Other non-current liabilities

 

 

241

 

 

 

241

 

Total liabilities

 

 

232,307

 

 

 

237,379

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

Common stock

 

 

1,193

 

 

 

1,191

 

Additional paid-in capital

 

 

1,815,592

 

 

 

1,807,855

 

Accumulated other comprehensive income (loss)

 

 

9

 

 

 

(19

)

Accumulated deficit

 

 

(1,828,223

)

 

 

(1,795,455

)

Total stockholders’ equity (deficit)

 

 

(11,429

)

 

 

13,572

 

Total liabilities and stockholders’ equity (deficit)

 

$

220,878

 

 

$

250,951

 

 

See accompanying notes.

2


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Revenues:

 

 

 

 

 

 

Net product sales

 

$

29,615

 

 

$

23,457

 

Operating expenses:

 

 

 

 

 

 

Cost of product sales

 

 

16,854

 

 

 

11,355

 

Research and development

 

 

13,817

 

 

 

42,070

 

General and administrative

 

 

10,853

 

 

 

9,533

 

Sales and marketing

 

 

21,154

 

 

 

23,422

 

Total operating expenses

 

 

62,678

 

 

 

86,380

 

Loss from operations

 

 

(33,063

)

 

 

(62,923

)

Other income (expense), net

 

 

295

 

 

 

(965

)

Net loss

 

 

(32,768

)

 

 

(63,888

)

Other comprehensive loss:

 

 

 

 

 

 

Unrealized gains (losses) on short-term investments

 

 

28

 

 

 

(2

)

Comprehensive loss

 

$

(32,740

)

 

$

(63,890

)

Basic and diluted net loss per share

 

$

(0.27

)

 

$

(0.63

)

Shares used in computing basic and diluted net loss per share

 

 

119,246

 

 

 

102,123

 

 

See accompanying notes.

3


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-In
Capital

 

 

Accumulated Other Comprehensive
Income (Loss)

 

 

Accumulated
Deficit

 

 

Total Stockholders’
Equity (Deficit)

 

Balance as of December 31, 2022

 

 

119,155

 

 

$

1,191

 

 

$

1,807,855

 

 

$

(19

)

 

$

(1,795,455

)

 

$

13,572

 

Issuance of common stock under equity incentive plan

 

 

125

 

 

 

2

 

 

 

(210

)

 

 

 

 

 

 

 

 

(208

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

7,947

 

 

 

 

 

 

 

 

 

7,947

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,768

)

 

 

(32,768

)

Net unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

28

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,740

)

Balance as of March 31, 2023

 

 

119,280

 

 

$

1,193

 

 

$

1,815,592

 

 

$

9

 

 

$

(1,828,223

)

 

$

(11,429

)

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-In
Capital

 

 

Other Comprehensive Loss

 

 

Accumulated
Deficit

 

 

Total Stockholders’
Equity

 

Balance as of December 31, 2021

 

 

102,005

 

 

$

1,020

 

 

$

1,689,987

 

 

$

(6

)

 

$

(1,613,431

)

 

$

77,570

 

Issuance of common stock under equity incentive plan

 

 

138

 

 

 

1

 

 

 

(638

)

 

 

 

 

 

 

 

 

(637

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

10,915

 

 

 

 

 

 

 

 

 

10,915

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63,888

)

 

 

(63,888

)

Net unrealized loss on short-term investments

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63,890

)

Balance as of March 31, 2022

 

 

102,143

 

 

$

1,021

 

 

$

1,700,264

 

 

$

(8

)

 

$

(1,677,319

)

 

$

23,958

 

 

See accompanying notes.

4


HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2023

 

 

2022

 

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(32,768

)

 

$

(63,888

)

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

 

 

 

 

 

 

Stock-based compensation expense

 

 

7,947

 

 

 

10,915

 

Depreciation and amortization

 

 

718

 

 

 

721

 

Amortization of debt issuance costs

 

 

51

 

 

 

50

 

(Accretion of discount) amortization of premium on short-term investments

 

 

(474

)

 

 

104

 

Impairment of property and equipment

 

 

154

 

 

 

47

 

Loss on disposal of property and equipment

 

 

 

 

 

96

 

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

601

 

 

 

(5,604

)

Inventory

 

 

2,514

 

 

 

(8,088

)

Prepaid expenses and other assets

 

 

906

 

 

 

(405

)

Accounts payable

 

 

840

 

 

 

4,423

 

Accrued clinical and manufacturing liabilities

 

 

(3,195

)

 

 

13,561

 

Accrued payroll and employee liabilities

 

 

(3,906

)

 

 

(3,049

)

Other accrued and other non-current liabilities

 

 

1,712

 

 

 

7,178

 

Net cash used in operating activities

 

 

(24,900

)

 

 

(43,939

)

Investing activities:

 

 

 

 

 

 

Purchases of short-term investments

 

 

(13,942

)

 

 

(38,023

)

Maturities and sales of short-term investments

 

 

51,000

 

 

 

49,957

 

Purchases of property and equipment

 

 

(224

)

 

 

(1,044

)

Proceeds from the sale of property and equipment

 

 

 

 

 

56

 

Net cash provided by investing activities

 

 

36,834

 

 

 

10,946

 

Financing activities:

 

 

 

 

 

 

Payments for stock issued under the equity incentive plan

 

 

(208

)

 

 

(637

)

Net cash used in financing activities

 

 

(208

)

 

 

(637

)

Net increase (decrease) in cash and cash equivalents

 

 

11,726

 

 

 

(33,630

)

Cash and cash equivalents at beginning of year

 

 

15,364

 

 

 

90,541

 

Cash and cash equivalents at end of period

 

$

27,090

 

 

$

56,911

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

 

 

$

 

 

See accompanying notes.

5


HERON THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In this Quarterly Report on Form 10-Q, all references to “Heron,” the “Company,” “we,” “us,” “our” and similar terms refer to Heron Therapeutics, Inc. and its wholly-owned subsidiary, Heron Therapeutics B.V. Heron Therapeutics®, the Heron logo, ZYNRELEF®, APONVIE®, CINVANTI®, SUSTOL®, and Biochronomer® are our trademarks. All other trademarks appearing or incorporated by reference into this Quarterly Report on Form 10-Q are the property of their respective owners.

1. Business

We are a commercial-stage biotechnology company focused on improving the lives of patients by developing and commercializing therapeutic innovations that improve medical care. Our advanced science, patented technologies, and innovative approach to drug discovery and development have allowed us to create and commercialize a portfolio of products that aim to advance the standard of care for acute care and oncology patients.

ZYNRELEF (bupivacaine and meloxicam) extended-release solution (“ZYNRELEF”) is approved in the U.S., 31 European countries and Canada for the management of postoperative pain. APONVIE (aprepitant) injectable emulsion (“APONVIE”) is approved in the U.S. for the prevention of postoperative nausea and vomiting and became commercially available in March 2023. CINVANTI (aprepitant) injectable emulsion (“CINVANTI”) and SUSTOL (granisetron) extended-release injection (“SUSTOL”) are both approved in the United States (“U.S.”) for the prevention of chemotherapy-induced nausea and vomiting. HTX-034, an investigational agent, is our next-generation product candidate which has been evaluated for the management of postoperative pain. We paused the development of HTX-034 to focus on the efficacy supplement to further expand the ZYNRELEF indication to broadly include soft tissue and orthopedic surgical procedures.

We have incurred significant operating losses and negative cash flows from operations. As of March 31, 2023 we had an accumulated deficit of $1.8 billion and cash, cash equivalents and short-term investments of $60.0 million. In addition, our net loss for the three months ended March 31, 2023 was $32.8 million. These factors raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (“SEC”).

In order to meet our cash requirements, we may be required to obtain additional funds and if we are not able to obtain adequate funds, we may be required to delay, reduce the scope of, or eliminate activities to support our Products and reduce personnel and related costs, which could have a material adverse effect on our business. Our capital requirements and liquidity for the next twelve months will depend on numerous factors, including but not limited to: the degree of commercial success of our Products; the impact of competitive products; the timing and cost to manufacture our Products; the costs associated with the U.S. commercial launch of ZYNRELEF and APONVIE; the time, cost and outcome involved in seeking a further expanded label for ZYNRELEF in the U.S.; our ability to establish and maintain strategic collaborations or partnerships for research, development, clinical testing, manufacturing and marketing of our Products and product candidates; and general market conditions. Management’s view of our liquidity relies on estimates and assumptions about the market opportunity for the expanded U.S. label of ZYNRELEF, which estimates and assumptions are subject to significant uncertainty.

We may not be able to raise sufficient additional capital when needed on favorable terms, or at all. If we are unable to obtain adequate funds, we may be required to curtail significantly or cease our operations. If we issue additional equity securities or securities convertible into equity securities to raise funds, our stockholders will suffer dilution of their investment, and such issuance may adversely affect the market price of our common stock.

Any new debt financing we enter into may involve covenants that restrict our operations. These restrictive covenants may include, among other things, limitations on borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem capital stock or make investments. In the event that additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or Products on terms that are not favorable to us or require us to enter into a collaboration arrangement that we would otherwise seek to develop and commercialize ourselves. If adequate funds are not available, we may default on our indebtedness, which could have a material adverse effect on our business.

6


The accompanying condensed consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not reflect any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may results from uncertainty related to its ability to continue as a going concern.

2. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for other quarters or the year ending December 31, 2022. The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements as of that date, but does not include all of the information and disclosures required by GAAP. For more complete financial information, these condensed consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 29, 2023.

3. Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Heron Therapeutics, Inc. and its wholly-owned subsidiary, Heron Therapeutics B.V., which was organized in the Netherlands in March 2015. Heron Therapeutics B.V. has no operations and no material assets or liabilities, and there have been no significant transactions related to Heron Therapeutics B.V. since its inception.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Our significant accounting policies that involve significant judgment and estimates include revenue recognition, investments, inventory and the related reserves, accrued clinical liabilities, income taxes and stock-based compensation. Actual results could differ materially from those estimates.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and highly liquid investments with contractual maturities of three months or less from the original purchase date.

Short-term investments consist of securities with contractual maturities of greater than three months from the original purchase date. Securities with contractual maturities greater than one year are classified as short-term investments on the condensed consolidated balance sheets, as we have the ability, if necessary, to liquidate these securities to meet our liquidity needs in the next 12 months. We have classified our short-term investments as available-for-sale securities in the accompanying condensed consolidated financial statements. Available-for-sale securities are stated at fair market value, with net changes in unrealized gains and losses reported in other comprehensive loss and realized gains and losses included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Concentration of Credit Risk

Cash, cash equivalents and short-term investments are financial instruments that potentially subject us to concentrations of credit risk. We deposit our cash in financial institutions. At times, such deposits may be in excess of insured limits. We have not experienced any losses in such accounts and believe we are not exposed to significant risk with respect to our cash, cash equivalents and short-term investments.

We may also invest our excess cash in money market funds, U.S. government and agencies, corporate debt securities and commercial paper. We have established guidelines relative to our diversification of our cash investments and their maturities in an

7


effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.

ZYNRELEF, APONVIE, CINVANTI and SUSTOL (collectively, our “Products”) are distributed in the U.S. through a limited number of specialty distributors and full line wholesalers (collectively, “Customers”) that resell to healthcare providers and hospitals, the end users of our Products.

The following table includes the percentage of net product sales and accounts receivable balances for our three major Customers, each of which comprised 10% or more of our net product sales:

 

 

 

Net Product Sales

 

 

Accounts
Receivable

 

 

 

Three Months Ended
March 31, 2023

 

 

As of
March 31, 2023

 

Customer A

 

 

41.3

%

 

 

47.7

%

Customer B

 

 

39.5

%

 

 

37.1

%

Customer C

 

 

17.9

%

 

 

14.4

%

Total

 

 

98.7

%

 

 

99.2

%

 

Accounts Receivable, Net

Accounts receivable are recorded at the invoice amount, net of an allowance for credit losses. The allowance for credit losses reflects accounts receivable balances that are believed to be uncollectible. In estimating the allowance for credit losses, we consider: (1) our historical experience with collections and write-offs; (2) the credit quality of our Customers and any recent or anticipated changes thereto; (3) the outstanding balances and past due amounts from our Customers; and (4) reasonable and supportable forecast of economic conditions expected to exist throughout the contractual term of the receivable.

We offered extended payment terms to our Customers in connection with our product launch of APONVIE in March 2023. As of March 31, 2023 and December 31, 2022, we determined that an allowance for credit losses was not required. For the three months ended March 31, 2023 and 2022, we did not have any material write-offs of accounts receivable balances.

Inventory

Inventory is stated at the lower of cost or estimated net realizable value on a first-in, first-out, or FIFO, basis. We periodically analyze our inventory levels and write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory quantities that are in excess of expected sales requirements as cost of product sales. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required, which would be recorded as cost of product sales.

Leases

 

We determine if an arrangement is a lease or contains lease components at inception. Operating leases with an initial term greater than 12 months are recorded as lease liabilities with corresponding right-of-use (“ROU”) lease assets on the condensed consolidated balance sheets. ROU lease assets represent our right to use the underlying assets over the lease term, and lease liabilities represent the present value of our obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU lease assets equal the lease liabilities, less unamortized lease incentives, unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease. The lease term includes any option to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with both lease and non-lease components, which are generally accounted for separately.

 

8


Revenue Recognition

Revenue is recognized in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). Topic 606 is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Product Sales

Our Products are distributed in the U.S. through a limited number of Customers that resell to healthcare providers and hospitals, the end users of our Products.

Revenue is recognized in an amount that reflects the consideration we expect to receive in exchange for our Products. To determine revenue recognition for contracts with customers within the scope of Topic 606, we perform the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations of the contract(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract(s); and (v) recognize revenue when (or as) we satisfy the performance obligations. We recognize revenue from product sales when there is a transfer of control of the product to our Customers. We typically determine transfer of control based on when the product is delivered, and title passes to our Customers.

Product Sales Allowances

We recognize product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. Such variable consideration includes estimates that take into consideration the terms of our agreements with Customers, historical product returns, rebates or discounts taken, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, we may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Our product sales allowances include:

Product Returns—We allow our Customers to return product for credit for up to 12 months after its product expiration date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.
Distributor Fees—We pay distribution service fees to our Customers based on a contractually fixed percentage of the wholesale acquisition costs and fees for data. These fees are paid no later than two months after the quarter in which product was shipped.
Group Purchasing Organization (“GPO”) Discounts and Rebates—We offer cash discounts to GPO members. These discounts are taken when the GPO members purchase product from our Customers, who then charge back to us the discount amount. Additionally, we offer volume and contract-tier rebates to GPO members. Rebates are based on actual purchase levels during the quarterly rebate purchase period.
GPO Administrative Fees—We pay administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the GPOs’ members.
Medicaid Rebates—We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which the product was sold.

We believe our estimated allowance for product returns requires a high degree of judgment and is subject to change based on our experience and certain quantitative and qualitative factors. We believe our estimated allowances for distributor fees, GPO discounts, rebates and administrative fees and Medicaid rebates do not require a high degree of judgment because the amounts are settled within a relatively short period of time.

Our product sales allowances and related accruals are evaluated each reporting period and adjusted when trends or significant events indicate that a change in estimate is appropriate. Changes in product sales allowance estimates could materially affect our results of operations and financial position.

 

9


The following table provides disaggregated net product sales (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

CINVANTI net product sales

 

$

22,855

 

 

$

20,343

 

SUSTOL net product sales

 

 

2,983

 

 

 

2,061

 

ZYNRELEF net product sales

 

 

3,533

 

 

 

1,053

 

APONVIE net product sales

 

 

244

 

 

 

 

Total net product sales

 

$

29,615

 

 

$

23,457

 

The following table provides a summary of activity with respect to our product returns, distributor fees and discounts, rebates and administrative fees, which are included in other accrued liabilities on the condensed consolidated balance sheets (in thousands):

 

 

 

Product
Returns

 

 

Distributor
Fees

 

 

Discounts,
Rebates and
Administrative Fees

 

 

Total

 

Balance at December 31, 2022

 

$

3,336

 

 

$

4,180

 

 

$

25,801

 

 

$

33,317

 

Provision

 

 

565

 

 

 

5,371

 

 

 

40,380

 

 

 

46,316

 

Payments/credits

 

 

(339

)

 

 

(4,451

)

 

 

(40,234

)

 

 

(45,024

)

Balance at March 31, 2023

 

$

3,562

 

 

$

5,100

 

 

$

25,947

 

 

$

34,609

 

 

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net changes in unrealized gains and losses on available-for-sale securities are included in other comprehensive income (loss) and represent the difference between our net loss and comprehensive loss for both periods presented.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, restricted stock units, warrants and shares of common stock underlying convertible notes are considered to be common stock equivalents and are included in the calculation of diluted net loss per share only when their effect is dilutive.

Because we have incurred a net loss for both periods presented in the unaudited condensed consolidated statements of operations and comprehensive loss, the following common stock equivalents were not included in the computation of net loss per share because their effect would be anti-dilutive (in thousands):

 

 

 

March 31,

 

 

 

2023

 

 

2022

 

Stock options outstanding

 

 

21,376

 

 

 

18,705

 

Restricted stock units outstanding

 

 

3,851

 

 

 

2,530

 

Warrants outstanding

 

 

8,548

 

 

 

 

Shares of common stock underlying convertible notes
   outstanding

 

 

9,819

 

 

 

9,819

 

 

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that we adopt as of the specified effective date. We have evaluated recently issued accounting pronouncements and do not believe any will have a material impact on our consolidated financial statements or related financial statement disclosures.

 

10


 

4. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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.

We measure cash, cash equivalents and short-term investments at fair value on a recurring basis. The fair values of such assets were as follows (in thousands):

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance at
March 31,
2023

 

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash and money market funds

 

$

25,095

 

 

$

25,095

 

 

$

 

 

$

 

U.S. treasury bills and government agency obligations

 

 

22,734

 

 

 

22,734

 

 

 

 

 

 

 

U.S. commercial paper

 

 

1,995

 

 

 

 

 

 

1,995

 

 

 

 

Foreign commercial paper

 

 

10,198

 

 

 

 

 

 

10,198

 

 

 

 

Total

 

$

60,022

 

 

$

47,829

 

 

$

12,193

 

 

$

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance at
December 31,
2022

 

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash and money market funds

 

$

13,867

 

 

$

13,867

 

 

$

 

 

$

 

U.S. treasury bills and government agency obligations

 

 

35,715

 

 

 

35,715

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

1,497

 

 

 

 

 

 

1,