Quarterly Report (10-q)

Date : 11/05/2019 @ 10:12PM
Source : Edgar (US Regulatory)
Stock : Portola Pharmaceuticals Inc (PTLA)
Quote : 13.65  0.17 (1.26%) @ 4:59AM
After Hours
Last Trade
Last $ 13.50 ▼ -0.15 (-1.10%)

Quarterly Report (10-q)

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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 September 30, 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: 001-35935
_______________________________________________
PORTOLA PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Delaware
20-0216859
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
270 E. Grand Avenue, South San Francisco, California 94080
(Address of Principal Executive Offices) (Zip Code)
(650) 246-7000
(Registrant’s Telephone Number, Including Area Code)
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
PTLA
The Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 1, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 77,819,156.
 




PORTOLA PHARMACEUTICALS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019
INDEX
 
 
 
Page
 
 
 
 
F-1
 
 
F-1
 
 
F-2
 
 
F-3
 
 
F-4
 
 
F-5
 
 
F-6
 
 
1
 
 
8
 
 
8
 
 
 
 
9
 
 
9
 
 
32
 
 
32
 
 
32
 
 
32
 
 
33
35




PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
PORTOLA PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
304,265

 
$
138,951

Short-term investments
172,542

 
178,013

Restricted cash
3,201

 
1,062

Trade and other receivables, net
18,236

 
5,849

Unbilled - collaboration and license revenue
3,788

 
9,880

Inventories
2,357

 
7,873

Prepaid and other current assets
10,106

 
11,699

Total current assets
514,495

 
353,327

Property and equipment, net
4,561

 
5,236

Intangible assets
3,699

 
7,279

Operating lease right-of-use asset
11,836

 

Inventories, noncurrent portion
33,296

 
9,645

Prepaid and other long-term assets
9,298

 
10,932

Total assets
$
577,185

 
$
386,419

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,760

 
$
13,215

Accrued research and development
15,629

 
19,831

Accrued and other liabilities
32,852

 
22,310

Deferred revenue, current portion
1,061

 
1,847

Current portion of notes payable and long-term royalty-based debt
24,189

 
11,802

Total current liabilities
87,491

 
69,005

Notes payable, less current portion
41,928

 
48,298

Long term royalty-based debt, less current portion
157,182

 
155,256

Long term debt
57,269

 

Long term obligation to collaborator, less current portion
5,124

 
6,881

Deferred revenue, long-term
4,399

 
4,488

Long-term portion of lease liability
9,464

 

Other long-term liabilities
1,440

 
11,924

Total liabilities
364,297

 
295,852

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value, 150,000 shares authorized at September 30, 2019 and December 31, 2018; 77,784 shares and 66,618 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
79

 
68

Additional paid-in capital
1,932,428

 
1,614,320

Accumulated deficit
(1,719,691
)
 
(1,525,704
)
Accumulated other comprehensive income (loss)
72

 
(283
)
Total Portola stockholders’ equity
212,888

 
88,401

Noncontrolling interest

 
2,166

Total stockholders’ equity
212,888

 
90,567

Total liabilities and stockholders’ equity
$
577,185

 
$
386,419

See accompanying notes to the unaudited condensed consolidated financial statements.

F-1










PORTOLA PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Product revenue, net
$
35,743

 
$
7,176

 
$
83,269

 
$
10,047

Collaboration and license revenue
1,056

 
7,001

 
4,123

 
14,785

Total revenues
36,799


14,177


87,392


24,832

Operating expenses:
 
 
 
 
 
 
 
Cost of sales
2,684

 
4,292

 
14,825

 
5,680

Research and development
25,647

 
40,237

 
94,769

 
166,744

Selling, general and administrative
52,050

 
38,792

 
158,939

 
110,547

Total operating expenses
80,381


83,321


268,533


282,971

Loss from operations
(43,582
)
 
(69,144
)
 
(181,141
)
 
(258,139
)
Interest and other income, net
1,953

 
3,924

 
7,958

 
9,123

Interest expense
(7,998
)
 
(5,957
)
 
(23,017
)
 
(12,642
)
Net loss
(49,627
)

(71,177
)

(196,200
)

(261,658
)
Net (income) loss attributable to noncontrolling interest

 
(126
)
 
2,213

 
(17
)
Net loss attributable to Portola
$
(49,627
)

$
(71,303
)

$
(193,987
)

$
(261,675
)
Net loss per share attributable to Portola common stockholders:
 
 
 
 
 
 
 
Basic and diluted
$
(0.68
)
 
$
(1.08
)
 
$
(2.79
)
 
$
(3.97
)
Shares used to compute net loss per share attributable to Portola common stockholders:
 
 
 
 
 
 
 
Basic and diluted
73,017,609

 
66,165,104

 
69,427,124

 
65,855,672

See accompanying notes to the unaudited condensed consolidated financial statements.

F-2











PORTOLA PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(49,627
)
 
$
(71,177
)
 
$
(196,200
)
 
$
(261,658
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
(6
)
 
237

 
355

 
(28
)
Foreign currency translation adjustment
117

 

 
75

 

Comprehensive loss
(49,516
)

(70,940
)

(195,770
)

(261,686
)
Comprehensive (income) loss attributable to noncontrolling interest

 
(126
)
 
2,213

 
(17
)
Total comprehensive loss attributable to Portola
$
(49,516
)

$
(71,066
)

$
(193,557
)

$
(261,703
)
See accompanying notes to the unaudited condensed consolidated financial statements.

F-3











PORTOLA PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2018
66,618

 
$
68

 
$
1,614,320

 
$
(1,525,704
)
 
$
(283
)
 
$
2,166

 
$
90,567

Issuance of common stock pursuant to equity award plans
1,359

 
2

 
25,660

 

 

 

 
25,662

Stock-based compensation expense

 

 
12,312

 

 

 

 
12,312

Other comprehensive income

 

 

 

 
203

 

 
203

Net (loss) income

 

 

 
(78,156
)
 

 
60

 
(78,096
)
Change in noncontrolling interest

 

 

 

 

 
2

 
2

Balance at March 31, 2019
67,977

 
$
70

 
$
1,652,292

 
$
(1,603,860
)
 
$
(80
)
 
$
2,228

 
$
50,650

Issuance of common stock pursuant to equity award plans
258

 

 
5,966

 

 

 

 
5,966

Stock-based compensation expense

 

 
12,369

 

 

 

 
12,369

Other comprehensive income

 

 

 

 
41

 

 
41

Net loss

 

 

 
(66,204
)
 

 
(2,273
)
 
(68,477
)
Change in noncontrolling interest

 

 

 

 

 
45

 
45

Balance at June 30, 2019
68,235

 
$
70

 
$
1,670,627

 
$
(1,670,064
)
 
$
(39
)
 
$

 
$
594

Issuance of common stock pursuant to equity award plans
308

 

 
6,479

 

 

 

 
6,479

Issuance of common stock pursuant to public offering, net
9,241

 
9

 
243,706

 

 

 

 
243,715

Stock-based compensation expense

 

 
11,616

 

 

 

 
11,616

Other comprehensive income

 

 

 

 
111

 

 
111

Net loss

 

 

 
(49,627
)
 

 

 
(49,627
)
Balance at September 30, 2019
77,784

 
$
79

 
$
1,932,428

 
$
(1,719,691
)
 
$
72

 
$

 
$
212,888


 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
65,297

 
$
66

 
$
1,551,728

 
$
(1,204,519
)
 
$
(409
)
 
$
2,627

 
$
349,493

Adjustment to accumulated deficit due to adoption of ASC 606

 

 

 
29,037

 

 

 
29,037

Issuance of common stock pursuant to equity award plans
514

 
1

 
5,678

 

 

 

 
5,679

Stock-based compensation expense

 

 
10,980

 

 

 

 
10,980

Other comprehensive loss

 

 

 

 
(392
)
 

 
(392
)
Net loss

 

 

 
(84,178
)
 

 
(332
)
 
(84,510
)
Change in noncontrolling interest

 

 

 

 

 
(119
)
 
(119
)
Balance at March 31, 2018
65,811

 
$
67

 
$
1,568,386

 
$
(1,259,660
)
 
$
(801
)
 
$
2,176

 
$
310,168

Issuance of common stock pursuant to equity award plans
143

 

 
2,543

 

 

 

 
2,543

Stock-based compensation expense

 

 
13,214

 

 

 

 
13,214

Other comprehensive income

 

 

 

 
127

 

 
127

Net (loss) income

 

 

 
(106,194
)
 

 
223

 
(105,971
)
Change in noncontrolling interest

 

 

 
 
 

 
(20
)
 
(20
)
Balance at June 30, 2018
65,954

 
$
67

 
$
1,584,143

 
$
(1,365,854
)
 
$
(674
)
 
$
2,379

 
$
220,061

Issuance of common stock pursuant to equity award plans
480

 

 
6,413

 

 

 

 
6,413

Stock-based compensation expense

 

 
11,394

 

 

 

 
11,394

Other comprehensive income

 

 

 

 
237

 

 
237

Net (loss) income

 

 

 
(71,303
)
 

 
126

 
(71,177
)
Balance at September 30, 2018
66,434

 
$
67

 
$
1,601,950

 
$
(1,437,157
)
 
$
(437
)
 
$
2,505

 
$
166,928

See accompanying notes to the unaudited condensed consolidated financial statements.

F-4











PORTOLA PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(196,200
)
 
$
(261,658
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
Depreciation and amortization
2,337

 
2,303

Amortization of right-of-use asset
2,056

 

Accretion of discount on investment securities
(946
)
 
(1,519
)
Non-cash interest expense
21,216

 
12,642

Stock-based compensation expense, net of capitalized labor
41,193

 
35,587

Remeasurement gain on embedded derivatives liabilities
(3,447
)
 
(3,668
)
Provision for excess and obsolete inventories
4,131

 
2,246

Loss on impairment of intangibles
3,151

 

Others
67

 
14

Changes in operating assets and liabilities:
 
 
 
Inventories
2,312

 
(15,597
)
Trade and other receivables, net
(12,387
)
 
(694
)
Unbilled - collaboration and license revenue
6,092

 
(3,178
)
Prepaid expenses and other current assets
1,656

 
(3,253
)
Inventories, noncurrent portion
(23,651
)
 
(8,327
)
Prepaid and other long-term assets
1,636

 
5,475

Accounts payable
(2,967
)
 
4,749

Accrued research and development
(4,202
)
 
(28,298
)
Accrued and other liabilities
3,114

 
1,715

Deferred revenue
(875
)
 
(180
)
Notes payable, long term royalty-based debt and long-term obligation to collaborator
(8,871
)
 
(316
)
Other long-term liabilities

 
(720
)
Net cash used in operating activities
(164,585
)
 
(262,677
)
Investing activities
 
 
 
Capital expenditures, net
(1,085
)
 
(1,577
)
Purchases of investments
(214,534
)
 
(218,330
)
Proceeds from maturities of investments
221,231

 
338,320

Net cash provided by investing activities
5,612

 
118,413

Financing activities
 
 
 
Proceeds from debt issuance, net
59,203

 
95,000

Proceeds from issuance of common stock from public offering, net
244,065

 

Proceeds from issuance of common stock pursuant to equity award plans
23,082

 
14,635

Other

 
(140
)
Net cash provided by financing activities
326,350

 
109,495

Effect of exchange rate changes on cash, cash equivalents and restricted cash
76

 

Net increase (decrease) in cash, cash equivalents and restricted cash
167,453

 
(34,769
)
Cash, cash equivalents and restricted cash at beginning of period
140,013

 
181,741

Cash, cash equivalents and restricted cash at end of period
$
307,466

 
$
146,972

See accompanying notes to the unaudited condensed consolidated financial statements.

F-5










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1. Organization
Portola Pharmaceuticals, Inc.® (the “Company” or “we” or “our” or “us”) is a biopharmaceutical company focused on the development and commercialization of novel therapeutics in the areas of thrombosis, other hematologic diseases and inflammation for patients who currently have limited or no approved treatment options. We were incorporated in September 2003 in Delaware. We have operations in the United States and in select countries in Europe, with headquarters in South San Francisco, California. We operate in one segment.
We refer to our two approved drugs in this report as Andexxa® and Bevyxxa®. If approved outside of the United States, each drug may be marketed under different brand names. For example, andexanet alfa received conditional approval under the brand name Ondexxya® by the European Commission (“EC”) on April 26, 2019. In addition, an international nonproprietary name (“INN”) has been designated for each drug. Our previous INN for Andexxa was andexanet alfa; however, in the United States this INN has been replaced with “coagulation factor Xa (recombinant), inactivated-zhzo.” For the European Union (“EU”) and other parts of the world, andexanet alfa could remain the INN for Andexxa. Our use of Andexxa or Bevyxxa in this document in the context of continued development activities for which we have not yet received regulatory approval should not be read to imply that we have received regulatory approval for any indication or in any jurisdiction not reflected in our product labels.

In August 2019, we completed an underwritten public offering of 9,241,072 shares of our common stock, which included 1,205,357 shares of common stock issued pursuant to the over-allotment option granted to our underwriters, at a public offering price of $28 per share. The total proceeds from the offering and over-allotment, net of underwriting discounts and commissions of approximately $14.2 million, were approximately $244.5 million. After deducting offering expenses accrued of approximately $0.8 million, net proceeds to us will be approximately $243.7 million.

2. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the amounts of Portola, its wholly-owned subsidiaries and a development partner that is a variable interest entity (a “VIE”) for which Portola is deemed, under applicable accounting guidance, to be the primary beneficiary. During the third quarter of 2019, we deconsolidated SRX Cardio, LLC (“SRX Cardio”), a VIE we had consolidated since 2015, and as such, we do not have any consolidated VIE as of September 30, 2019. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP has been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of our financial information. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed on March 1, 2019 with the SEC.
The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses in these condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our significant accounting policies and estimates. Management bases its estimates on

F-6










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
Cash as Reported in Condensed Consolidated Statements of Cash Flows
Cash as reported in these condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash. As of September 30, 2019, restricted cash represents cash restricted for royalty payments to HealthCare Royalty Partners and its Affiliates (“HCR”) and cash held as a security deposit for our office lease in Europe. Cash as reported in these condensed consolidated statements of cash flows consists of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
304,265

 
$
138,951

 
$
146,700

 
$
181,568

Restricted cash (SRX Cardio)

 
30

 
30

 
173

Restricted cash for royalty payments to HealthCare Royalty Partners and its affiliates ("HCR")
3,155

 
1,032

 
242

 

Restricted cash (lease)
46

 

 

 

Total cash balance in condensed consolidated statements of cash flows
$
307,466

 
$
140,013

 
$
146,972

 
$
181,741


Customer Concentration
During the three and nine months ended September 30, 2019, we had four Andexxa specialty distributor customers who each accounted for 10% or more of total net revenues. During the three and nine months ended September 30, 2019, we had no collaboration revenue customers who accounted for more than 10% of total net revenues.
During the three and nine months ended September 30, 2018, we had three Andexxa specialty distributor customers who each accounted for 10% or more of total net revenues. During the three and nine months ended September 30, 2018, we had two collaboration revenue customers who each accounted for more than 10% of total revenues.
Recent Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-2, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use (“ROU”) asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods, with early adoption permitted. We adopted this new standard effective January 1, 2019 using the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit at the date of adoption and apply the new disclosure requirements beginning in the period of adoption. Our adoption of the standard added approximately $2.1 million in ROU assets and $3.3 million in lease liabilities to our condensed consolidated balance sheet upon adoption and did not significantly impact financial results. In addition, our adoption of the standard had no cumulative impact on the accumulated deficit to our condensed consolidated balance sheet as of the adoption date.
The new standard provides a number of optional practical expedients and we elected the following:
Transition Elections. We elected the package of practical expedients that permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We also elected the practical expedient to not separate lease and non-lease components for facility lease classes of underlying assets to new or modified leases beginning on or after the adoption date. That is, we will account for each separate lease component of a contract and its associated non-lease components as a single lease component.
Ongoing Accounting Policy Elections. We elected the short-term lease recognition exemption whereby ROU assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year.

F-7










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In September 2018, the FASB issued ASU No. 2018-7, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. We adopted this new standard effective January 1, 2019.
Adoption of this standard did not result in an adjustment to our beginning accumulated deficit upon the adoption, and did not significantly impact our financial results.
Recent Accounting Pronouncements Not Yet Adopted 
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU implements an impairment model, known as the current expected credit loss model that is based on expected losses rather than incurred losses. For trade receivables, entities will be required to estimate lifetime expected credit losses. This could result in the earlier recognition of credit losses. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than an other-than-temporary impairment that reduces the cost basis of the investment. Further, an entity will recognize any improvements in estimated credit losses immediately in earnings. Under the current guidance, a recovery of an impairment loss on an available-for-sale debt security is recognized prospectively as interest income. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are in the process of assessing the impact of ASU 2016-13 on our condensed consolidated financial statements. 
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, this ASU requires a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU is effective for us for all interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. We are in the process of assessing the impact of ASU 2018-15 on our condensed consolidated financial statements.
3. Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following tables present our revenues disaggregated by timing of transfer of goods or services (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
Product Revenue, net
 
Collaboration and License Revenue
 
Total
 
Product Revenue, net
 
Collaboration and License Revenue
 
Total
Timing of revenue recognition:
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point in time
$
35,743

 
$

 
$
35,743

 
$
83,269

 
$

 
$
83,269

Transferred over time

 
1,056

 
1,056

 

 
4,123

 
4,123

Total
$
35,743

 
$
1,056

 
$
36,799

 
$
83,269

 
$
4,123

 
$
87,392

 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Product Revenue, net
 
Collaboration and License Revenue
 
Total
 
Product Revenue, net
 
Collaboration and License Revenue
 
Total
Timing of revenue recognition:
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point in time
$
7,176

 
$

 
$
7,176

 
$
10,047

 
$

 
$
10,047

Transferred over time

 
7,001

 
7,001

 

 
14,785

 
14,785

Total
$
7,176

 
$
7,001

 
$
14,177

 
$
10,047

 
$
14,785

 
$
24,832



F-8










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table presents our net product revenues disaggregated by geographic region (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
United States
$
32,968

 
$
7,176

 
$
80,494

 
$
10,047

Europe
2,775

 

 
2,775

 

Total revenues
$
35,743

 
$
7,176

 
$
83,269

 
$
10,047


Net product revenues are attributed to geographic region based on the bill-to location.
Collaboration and license revenues are all attributed to the United States based on the location of our collaboration partners’ headquarters.
The following table presents changes in our contract assets and liabilities for the nine months ended September 30, 2019 (in thousands):
 
Balance at
Beginning of
Period
 
Addition
 
Deduction
 
Balance at End
of Period
Contract assets:
 
 
 
 
 
 
 
Unbilled - collaboration and license revenue
$
9,880

 
$
3,461

 
$
(9,553
)
 
$
3,788

Total contract assets
$
9,880

 
$
3,461

 
$
(9,553
)
 
$
3,788

 
 
 
 
 
 
 
 
Contract liabilities:
 
 
 
 
 
 
 
Deferred revenue
$
6,335

 
$
1,402

 
$
(2,277
)
 
$
5,460

Total contract liabilities
$
6,335

 
$
1,402

 
$
(2,277
)
 
$
5,460

Significant changes in the contract liabilities balances during the period are as follows (in thousands):
 
Three Months
Ended as of
September 30, 2019
 
Nine Months Ended September 30, 2019
Revenue recognized according to the current period performance that was included in the contract liability at the beginning of the period
$
47

 
$
662


The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of September 30, 2019 (in thousands):
Collaborator
Transaction Price
Allocated to the
Remaining
Performance
Obligation as of
September 30, 2019
 
Expected Year
By Which Revenue
Recognition Will
Be Completed
 
Percentage of
Revenue
Recognized
BMS and Pfizer - 2016 agreement
$
450

 
2021
 
96
%
Daiichi Sankyo - 2014 agreement
772

 
2020
 
98
%
Daiichi Sankyo - 2016 agreement
2,485

 
2023
 
84
%
Bayer - 2016 agreement
2,018

 
2023
 
87
%
Total
$
5,725

 
 
 
 
 
Milestone payments or refundable advance payments that are not considered probable of being achieved are excluded from the transaction price until they are probable.

F-9










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Sales-based royalties, including milestone payments based on the level of sales, related to license arrangements are excluded from variable consideration and will be recognized at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.
Product Revenue, Net
To date, our sources of product revenue have been from the U.S. sales of Andexxa and Bevyxxa, which we began shipping to customers in May 2018 and January 2018, respectively, and from the EU sales of Ondexxya, which we began shipping to customers in July 2019. No costs to obtain or fulfill the contracts have been capitalized. For the three and nine months ended September 30, 2019, we recorded a total of $5.6 million and $11.7 million, respectively, as a reduction to revenue consisting primarily of distribution fees and reserves for chargebacks and product returns.
Collaboration and License Revenue
BMS and Pfizer
Agreement Terms
In January 2014, we entered into an agreement with BMS and Pfizer to further study Andexxa as a reversal agent for their jointly-owned, U.S. Food and Drug Administration (“FDA”)-approved oral Factor Xa inhibitor, apixaban, through Phase 3 studies (the “2014 BMS and Pfizer Agreement”). We are responsible for the cost of conducting this clinical study.
In February 2016, we entered into a collaboration and license agreement with BMS and Pfizer whereby BMS and Pfizer obtained exclusive rights to develop and commercialize Andexxa in Japan (the “2016 BMS and Pfizer Agreement”). BMS and Pfizer are responsible for all development, regulatory and commercial activities in Japan and we will reimburse BMS and Pfizer for expenses they incur for research and development activities specific to Factor Xa inhibitors other than apixaban. Pursuant to this agreement, we are obligated to provide certain research and development activities outside of Japan, provide clinical drug supply and related manufacturing services and to participate on various committees in exchange for a non-refundable upfront fee of $15.0 million. We are also eligible to receive, contingent payments totaling up to $20.0 million which may be earned upon achievement of certain regulatory events and up to $70.0 million which may be earned upon achievement of specified annual net sales volumes in Japan. We are also entitled to receive royalties ranging from 5% to 15% on net sales of Andexxa in Japan.
Revenue Recognition
We assessed the 2014 BMS and Pfizer Agreement and the 2016 BMS and Pfizer Agreement in accordance with ASC 606 and concluded that BMS and Pfizer are customers.
For the 2014 BMS and Pfizer Agreement, we determined that the duration of the contract began on the effective date in January 2014 and ends upon Andexxa approval in the United States and Europe, which was achieved in 2019. All the performance obligations under this agreement were delivered and we recognized all related revenues by the first quarter of 2019. For the nine months ended September 30, 2019, we recognized less than $0.1 million as license and collaboration revenue under the 2014 BMS and Pfizer Agreement.
For the 2016 BMS and Pfizer Agreement, we determined that the duration of the contract begins on the effective date in February 2016 and ends upon estimated completion of the Andexxa Phase 4 expansion clinical trial in Japan.
We determined that the transaction price of the 2016 BMS and Pfizer Agreement was $12.0 million as of September 30, 2019 which includes routine updates for estimated costs that BMS and Pfizer will incur in developing Andexxa in Japan. In determining the transaction price, we evaluated all the payments to be received during the duration of the contract. As of September 30, 2019, the transaction price included a $15.0 million upfront payment, $5.0 million for acceptance of the Japan New Drug Application (“JNDA”) in Japan, as management expects it to be probable of achievement, $4.2 million of estimated variable consideration for cost-sharing payments from BMS and Pfizer for agreed upon research and development services for clinical trials outside of Japan, and $0.6 million for the cost of Andexxa clinical supply provided to BMS and Pfizer for Andexxa Phase 4 expansion clinical trial in Japan. Our transaction price is reduced by $12.8 million for estimated payments to be made to BMS and Pfizer for costs they will incur in developing Andexxa in Japan. Regulatory approval milestones were

F-10










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

fully constrained and therefore are not included in the transaction price, as the receipts of such milestones are outside of our control. In determining whether to constrain other milestones, we considered numerous factors, including whether receipt of the milestones is within our control, contingent upon success in future clinical trials and/or the licensee’s efforts. Any consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to BMS and Pfizer and therefore have also been excluded from the transaction price. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
For the three and nine months ended September 30, 2019, we recognized a $0.1 million reversal and $0.3 million of license and collaboration revenue, respectively, under the 2016 BMS and Pfizer Agreement and recorded $4.4 million as deferred revenue under contract liabilities as of September 30, 2019 on the condensed consolidated balance sheets.
Daiichi Sankyo, Inc. (“Daiichi Sankyo”)
Agreement Terms 
In July 2014, we entered into an agreement with Daiichi Sankyo to study the safety and efficacy of Andexxa as a reversal agent to edoxaban, in our Phase 3 and Phase 4 studies (the “2014 Daiichi Sankyo Agreement”). We are responsible for the cost of conducting these clinical studies. Pursuant to our agreement with Daiichi Sankyo we are obligated to provide research, development and regulatory services and to manufacture and supply Andexxa in exchange for an upfront nonrefundable fee of $15.0 million, up to two contingent payments totaling $5.0 million which are payable upon the initiation of our Phase 3 study and achievement of certain events associated with scaling up our manufacturing process to support a commercial launch, and up to four payments totaling $20.0 million which are payable upon acceptance of filing and regulatory approval of Andexxa as a reversal agent to edoxaban by the FDA and the European Medicines Agency (“EMA”). 
In October 2016, we amended this agreement to expedite the expansion of our Phase 4 trial in exchange for an upfront fee of $15.0 million, $8.0 million of which is payable back to Daiichi Sanko based solely on quarterly royalty payments of 1% of world-wide net sales of Andexxa. We are also eligible to receive up to three contingent payments totaling $10.0 million payable upon achieving specified clinical site activation and patient enrollment targets. Additionally, the $2.5 million contingent payment associated with scaling up our manufacturing process from the original agreement has been removed by this amendment.
In March 2016, we entered into an agreement with Daiichi Sankyo to perform an ESS-Study of Japanese ethnicity, perform any further studies requested by the Japanese regulatory authorities and to deliver services in connection with our collaboration agreement to commercialize Andexxa in Japan with BMS and Pfizer (the “2016 Daiichi Sankyo Agreement”). Daiichi Sankyo will reimburse us for 33% of our costs and expenses incurred to conduct the ESS-Study and between 33% and 100% of costs and expenses we incur for other studies that involve edoxaban under the terms of the arrangement.
Revenue Recognition
We assessed the 2014 Daiichi Sankyo Agreement as amended in October 2016 and the 2016 Daiichi Sankyo Agreement in accordance with ASC 606 and concluded that Daiichi Sankyo is a customer.
For the 2014 Daiichi Sankyo Agreement, we determined that the duration of the contract begins on the effective date in July 2014 and ends upon Andexxa approval as a reversal agent to edoxaban in the United States and Europe, which we expect to be achieved in 2020. The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. We analyzed the impact of Daiichi Sankyo’s terminating the agreement prior to Andexxa approval and determined that there were substantive non-monetary penalties to Daiichi Sankyo for doing so. We considered quantitative and qualitative factors to reach this conclusion.
We determined that the transaction price of the 2014 Daiichi Sankyo Agreement and October 2016 amendment of this agreement was $34.0 million as of September 30, 2019. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of September 30, 2019, the transaction price included $22.0 million of upfront payments and $12.0 million in milestones already received upon achievement of specified events. As of September 30, 2019, we had $5.5 million of further milestone payments eligible to be included in the transaction price but have determined they are not probable of achievement and therefore constrained. As part of our evaluation of the constraint, we

F-11










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

considered numerous factors, including whether receipt of the milestones is outside of our control and/or contingent upon success in a future clinical trial. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
For the three and nine months ended September 30, 2019, we recognized $0.2 million and $0.9 million, respectively, as license and collaboration revenue under the combined 2014 Daiichi Sankyo Agreement and October 2016 amendment and recorded $0.8 million as deferred revenue under contract liabilities as of September 30, 2019 on the condensed consolidated balance sheets. There were no costs incurred to obtain or fulfill the contract.
For the 2016 Daiichi Sankyo Agreement, we determined that the transaction price of the 2016 Daiichi Sankyo Agreement was $15.6 million as of September 30, 2019 which includes routine updates for estimated reimbursable costs to be incurred in future periods. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of September 30, 2019, the transaction price included $5.0 million of upfront payment and $4.3 million of estimated variable consideration for cost-sharing payments from Daiichi Sankyo for agreed upon research and development services incurred and to be incurred outside of Japan including the ESS-study, and $6.3 million of estimated variable consideration for cost-sharing payments from Daiichi Sankyo associated with the development of Andexxa in Japan. As of September 30, 2019, we had $10.0 million of further regulatory milestone payments eligible for achievement, however, regulatory milestones have been fully constrained and thus are not included in the transaction price. In determining whether to constrain these milestones, we considered numerous factors, including whether receipt of the milestones is within our control and/or contingent upon success in future clinical trials. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
For the three and nine months ended September 30, 2019, we recognized $0.6 million and $1.4 million, respectively, as license and collaboration revenue under the 2016 Daiichi Sankyo Agreement and recorded $1.7 million as Unbilled - collaboration and license revenue as of September 30, 2019 on the condensed consolidated balance sheets. None of the costs to obtain or fulfill the contract were capitalized.
Bayer Pharma, AG (“Bayer”) and Janssen Pharmaceuticals, Inc. (“Janssen”) 
Agreement Terms
In January 2014, we entered into an agreement with Bayer and Janssen to study Andexxa as a reversal agent to rivaroxaban in our Phase 3 studies and to seek regulatory approval in the United States and Europe (the “2014 Bayer and Janssen Agreement”). We are responsible for the costs associated with this agreement.
Revenue Recognition
We assessed the 2014 Bayer and Janssen Agreement in accordance with ASC 606 and concluded that Bayer and Janssen are customers.
For the 2014 Bayer and Janssen Agreement, we determined that the duration of the contract begins on the effective date of the 2014 Bayer and Janssen Agreement and ends upon Andexxa approval in the United States and Europe for rivaroxaban, which was achieved in 2019. All the performance obligations under this agreement were delivered and we recognized all related revenues by the first quarter of 2019. For the nine months ended September 30, 2019, we recognized less than $0.1 million as license and collaboration revenue under the 2014 Bayer and Janssen Agreement. None of the costs to obtain or fulfill the contract were capitalized.
Bayer Pharma, AG (“Bayer”)
Agreement Terms 
In February 2016, we entered into an agreement with Bayer to perform an ESS-Study of Japanese ethnicity, perform any further studies requested by the Japanese regulatory authorities and to deliver services, in connection with our collaboration agreement to commercialize Andexxa in Japan with BMS and Pfizer (the “2016 Bayer Agreement”). Bayer will reimburse us 33% of our costs and expenses incurred to conduct the ESS-Study and between 33% and 100% of costs and expenses we incur for other studies that involve rivaroxaban under the terms of the arrangement.

F-12










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

We are obligated to provide research and development services, to provide clinical drug supply and related manufacturing services and to provide regulatory approval services in exchange for an upfront nonrefundable fee of $5.0 million. We are also eligible to receive, one payment of $10.0 million which is payable upon the initial regulatory approval for Andexxa for rivaroxaban in Japan.  The $10.0 million payment will be reduced to $7.0 million if Japanese regulatory approval is attained based only upon the ESS Study results.
Revenue Recognition
We assessed the 2016 Bayer Agreement in accordance with ASC 606 and concluded that Bayer is a customer.
We determined that the transaction price of the 2016 Bayer Agreement was $15.6 million as of September 30, 2019 which includes routine updates for estimated reimbursable costs to be incurred in future periods. In order to determine the transaction price, we evaluated all the payments to be received during the duration of the contract. As of September 30, 2019, the transaction price included a $5.0 million upfront payment, $4.3 million of estimated variable consideration for cost-sharing payments from Bayer for agreed upon research and development services incurred and to be incurred outside of Japan including the ESS-study and $6.3 million of estimated variable consideration for cost-sharing payments from Bayer associated with the development of Andexxa in Japan. As of September 30, 2019, we had $10.0 million of further regulatory milestone payments eligible for achievement, however, regulatory milestones have been fully constrained and thus are not included in the transaction price. In determining whether to constrain these milestones, we considered numerous factors, including whether receipt of the milestones is within our control and/or contingent upon success in future clinical trials. We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
For the three months and nine months ended September 30, 2019, we recognized $0.4 million and $1.5 million, respectively, as license and collaboration revenue under the 2016 Bayer Agreement and recorded $2.1 million as Unbilled - collaboration and license revenue as of September 30, 2019 on the condensed consolidated balance sheet. There were no costs incurred to obtain or fulfill the contract.
4. Fair Value Measurements
Financial assets and liabilities are recorded at fair value. The carrying amounts of our receivables from collaborations, prepaid and other current assets, accounts payable, accrued research and development and accrued and other liabilities approximate their fair value due to their short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 -Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 -Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 -Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. Our embedded derivative liabilities are measured at fair value using a Monte Carlo simulation model or a discounted cash flow model and are included as a component of other long-term liabilities on the condensed consolidated balance sheets. The embedded derivative liabilities are subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of interest and other income, net, in our condensed consolidated statements of operations, and as remeasurement gain or loss on embedded derivatives liabilities in our condensed consolidated statements of cash flows. The assumptions used in the Monte Carlo simulation model or the discounted cash flow model include: (1) our estimates of both the probability and timing of manufacturing regulatory approval of Andexxa and other related events; (2) the probability-weighted net sales of Andexxa; (3) our risk-adjusted discount rate that includes a company specific risk premium; (4) our cost of debt; (5) volatility; and (6) the probability of a change in control occurring during the term of the note.

F-13










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Our liability-classified Lonza AG (“Lonza”) award was measured at fair value using a Black-Scholes model until the settlement date during the first quarter of 2019. Changes in the fair value of the liability-classified Lonza award was recognized as research and development expense in our condensed consolidated statements of operations. The assumptions used in the Black-Scholes model include: (1) expected risk free rate; (2) expected volatility; and (3) expected dividend yield rate. See Note 6, "Contract Manufacturing Agreements", to these condensed consolidated financial statements for further information.
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3.
The following table sets forth the fair value of our financial assets and liabilities (excluding restricted cash) allocated into Level 1 and Level 2 that were measured on a recurring basis (in thousands):
 
 
 
September 30, 2019
 
December 31, 2018
 
Fair Value
Hierarchy
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Estimated
Fair
Value
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Estimated
Fair
Value
Money market funds
Level 1
 
$
88,619

 
$

 
$

 
$
88,619

 
$
19,500

 
$

 
$

 
$
19,500

Corporate notes and commercial paper
Level 2
 
228,354

 
2

 
(8
)
 
228,348

 
166,363

 
1

 
(205
)
 
166,159

U.S. Treasury bills and government agency securities
Level 2
 
98,432

 
10

 
(7
)
 
98,435

 
110,270

 
1

 
(81
)
 
110,190

 
 
 
$
415,405

 
$
12

 
$
(15
)
 
$
415,402

 
$
296,133

 
$
2

 
$
(286
)
 
$
295,849

Classified as:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
$
242,860

 
 
 
 
 
 
 
$
117,836

Short-term investments
 
 
 
 
 
 
 
 
172,542

 
 
 
 
 
 
 
178,013

Total cash equivalents and investments
 
 
 
 
 
 
 
 
$
415,402

 
 
 
 
 
 
 
$
295,849

 
At September 30, 2019, the remaining contractual maturities of available-for-sale securities were less than one year. There have been no significant realized losses on available-for-sale securities for the periods presented. We do not intend to sell the investments with unrealized losses at September 30, 2019, and it is not more likely than not that we will be required to sell those investments with unrealized losses before recovery of their amortized cost bases, which may be maturity. Available-for-sale debt securities that were in a continuous loss position but were not deemed to be other than temporarily impaired were immaterial at both September 30, 2019 and December 31, 2018.
Level 3 liabilities are comprised of embedded derivative liabilities as described in Note 8, “Long Term Obligations”, to these condensed consolidated financial statements and includes a liability-classified Lonza award that was settled in the first quarter of 2019. The estimated fair value of the Notes, long term royalty-based debt and long term debt are discussed in Note 8. The following table sets forth a summary of the changes in the estimated fair value of our embedded derivative liabilities and Lonza award during the nine-month period ended September 30, 2019 (in thousands):
 
Embedded derivative liabilities
 
Lonza award
 
Total
Balance as of December 31, 2018
$
2,497

 
$
9,201

 
$
11,698

Net change in the fair value
(3,447
)
 
5,824

 
2,377

Addition of derivative related to 2019 Secured Term Loan
2,372

 

 
2,372

Settlement of Lonza award

 
(15,025
)
 
(15,025
)
Balance as of September 30, 2019
$
1,422

 
$

 
$
1,422



F-14










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

5. Balance Sheet Components
Inventories
Inventories consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Raw materials
$
13,716

 
$
279

Work in process
21,118

 
14,395

Finished goods
819

 
2,844

Total inventories
$
35,653

 
$
17,518

 
 
 
 
Balance Sheet Classification
 
 
 
Inventories
$
2,357

 
$
7,873

Inventories, noncurrent portion
33,296

 
9,645

Total inventories
$
35,653

 
$
17,518


We began capitalizing inventory for costs associated with Andexxa Gen 1 and Gen 2 supply upon FDA approval on May 3, 2018 and December 31, 2018, respectively. We began capitalizing inventory for costs associated with Bevyxxa during the fourth quarter of 2017 when it was determined that the inventory had a probable future economic benefit. As of September 30, 2019 and December 31, 2018, long-term inventories of $33.3 million and $9.6 million, respectively, are classified as inventories, noncurrent portion, as these inventories are not expected to be sold within the next twelve months, and the amount is deemed recoverable.
As of September 30, 2019 and December 31, 2018, we have made prepayments to manufacturers for the purchase of inventories. We classify prepayments to manufacturers as short or long-term assets based on whether the related inventories are expected to be utilized in the manufacturing process and/or sold within the next twelve months. As of September 30, 2019 and December 31, 2018, long-term prepaid manufacturing of $9.1 million and $10.9 million, respectively, are classified as prepaid and other long-term assets.
We recorded an excess and obsolescence inventory charge to cost of sales of $4.1 million during the nine months ended September 30, 2019. In developing the estimate for inventory reserve, we used estimates of demand compared to shelf life. If it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required.
Accrued and Other Liabilities
Accrued and other liabilities consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Manufacturing related
$
6,349

 
$
5,465

Compensation and employee benefits
13,480

 
10,794

Current portion of lease liability
3,566

 

Others
9,457

 
6,051

Total accrued and other liabilities
$
32,852

 
$
22,310



F-15










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

6. Contract Manufacturing Agreements
Lonza Manufacturing Services Agreement
In August 2017, we executed a Manufacturing Services Agreement with Lonza to develop our Gen 2 manufacturing process for Andexxa bulk drug substance. The manufacturing commitments included therein were contingent upon marketing approval by either the FDA or the EMA of Andexxa manufactured under the Gen 2 process and will remain in effect for a period of ten years. Additionally, the agreement provides Lonza with two separate rights to purchase shares of our common stock at a purchase price of $1.00 per share, contingent upon certain events. The first purchase right was earned by Lonza in the first quarter of 2019 upon the approval of the Gen 2 process and the commencement of process transfer activities to an additional new facility. The second purchase right will be earned by Lonza upon the approval of the drug substance manufactured at the new facility and the number of shares will be determined based on the achievement of specified performance metrics at the new facility. The number of shares subject to each of the first and the second purchase rights will be capped at the lesser of either: (1) the number of shares with an aggregate market value of $15.0 million based on a 20 day trailing market value average from the date such purchase right is earned by Lonza, or (2) 500,000 shares.
The first purchase right was earned by Lonza during the quarter ended March 31, 2019. The FDA approved Andexxa Gen 2 on December 31, 2018 and, in February 2019, Lonza commenced process transfer activities to an additional new facility. During the first quarter of 2019, Lonza exercised their right to purchase 500,000 shares of our common stock at $1.00 per share. We marked to market the liability-classified award up to the settlement date using the valuation assumptions described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements and recognized $5.8 million of non-employee stock based compensation expense classified as research and development expense during the nine months ended September 30, 2019.
As of September 30, 2019, we have not recognized any expense for the second tranche award because the related performance conditions were not considered probable.
7. Asset Acquisition and License Agreements
SRX Cardio, LLC
In December 2015, we entered into an option agreement with SRX Cardio to explore a novel approach to develop a drug in the field of hypercholesterolemia. This agreement provided us an option to enter into an exclusive license agreement as well as responsibility to lead and fund the development effort during the option period. We made an upfront payment of $0.5 million.
In September 2016, we exercised our right to enter into an exclusive license agreement.
During the second quarter of 2019, we made a decision to discontinue the clinical development of the intellectual property asset that was licensed from SRX Cardio, and a notice was provided to terminate the SRX Cardio relationship. As a result, in the second quarter of 2019, we recorded (1) a full impairment charge of $3.2 million related to the in-process research and development intangible asset, which was recorded in research and development expense, and (2) a gain of $2.3 million for the de-recognition of the contingent milestone payable to SRX Cardio associated with the licensed hypercholesterolemia program, which was recorded in net loss attributable to noncontrolling interest in these condensed consolidated financial statements.
During the third quarter of 2019, the exclusive license agreement signed in September 2016 was formally terminated, and SRX Cardio was deconsolidated from our condensed consolidated financial statements as of September 30, 2019. We recorded a loss of $76 thousand upon deconsolidation which was measured as a difference between the carrying amount of noncontrolling interest in SRX and the carrying amount of the SRX’s net assets. There was no fair value associated with consideration received or any retained noncontrolling interest in SRX upon the deconsolidation. In addition, our discontinuance of the hypercholesterolemia program from SRX was not a development that represented a significant strategic shift that has a material impact on our operations and financial results. As such, the deconsolidation of SRX was not presented as a discontinued operation in our condensed consolidated financial statements as of September 30, 2019. 

F-16










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

8. Long Term Obligations
BMS and Pfizer Promissory Notes
In December 2016, we entered into a supplemental funding support agreement with BMS and Pfizer whereby we received $50.0 million in exchange for two promissory notes totaling $65.0 million that become due in December 2024 (“Notes”). We may reduce the repayment amount to $62.5 million if such amount is paid by December 31, 2023. The use of funds is restricted to development activities needed for regulatory approval of Andexxa by the FDA and the EMA as provided in the agreement. Pursuant to the terms of the agreement, we are required to pay down the Notes each quarter in an amount equal to 5% of net sales of Andexxa in the United States and the EU.
The upfront cash receipt of $50.0 million is recorded as Notes payable at issuance. We are accruing for interest over the term of the Notes. The carrying values of the Notes payable includes accrued interest of $10.0 million and $7.6 million at September 30, 2019 and December 31, 2018, respectively.
Our payment obligations for BMS and Pfizer Promissory Notes are as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
Total repayment obligations
$
62,500

 
$
62,500

Less: interests to be accreted in future periods
(6,191
)
 
(8,643
)
Less: payments made
(3,564
)
 
(497
)
Carrying value of notes payable
52,745

 
53,360

Less: current portion of royalties
(10,817
)
 
(5,062
)
Non-current portion of notes payable
$
41,928

 
$
48,298


We evaluated the features of the Notes and determined that certain features require acceleration of payments such as pursuant to a change of control. We determined that these features (embedded derivatives) require bifurcation and fair value recognition. We determined the fair value of each derivative using a Monte Carlo simulation model taking into account the probability of these events occurring and potential repayment amounts and timing of such payments that would result under various scenarios (see Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements). We will remeasure the embedded derivatives to fair value each reporting period until the repayment, termination or maturity of the Notes. For the three and nine months ended September 30, 2019, we recognized a gain of $0.2 million and a gain of $1.4 million, respectively, upon remeasurement of the embedded derivatives. For the three and nine months ended September 30, 2018, we recognized a gain of $0.2 million and a loss of $0.6 million, respectively, upon remeasurement of the embedded derivatives.
The estimated fair value of the Notes at September 30, 2019 and December 31, 2018 was $50.7 million and $53.2 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements.
Royalty-based Financing
In February 2017, we entered into a purchase and sale agreement (the “Royalty Sales Agreement”) with HCR whereby HCR acquired a term royalty interest in future worldwide net sales of Andexxa. We received $50.0 million upon closing and received an additional $100.0 million following the U.S. regulatory approval of Andexxa in May 2018. We are required to pay royalties to HCR based on tiered net worldwide sales of Andexxa in a range of 8.46% to 4.19%. The applicable rate decreases starting at worldwide net annual sales levels above $150.0 million. Total royalty payments are capped at 195% of the funding received less certain transaction expenses, or $290.6 million.
Upon the closing of the Royalty Sales Agreement in February 2017, we incurred a fee to HCR of $2.0 million and paid additional debt issuance costs totaling $0.6 million, which included expenses that we paid on behalf of HCR and expenses incurred directly by us. Upon the subsequent funding of $100.0 million in May 2018, we incurred fees to HCR of $5.0 million. Fees and debt issuance costs have been netted against the debt and are being amortized over the estimated term of the debt using the effective interest method.

F-17










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The effective interest rate as of September 30, 2019 was 14.0%. We are accruing for interest over the term of the royalty-based debt. The carrying value of the royalty-based debt includes accrued interest of $39.7 million and $22.9 million, net of unamortized debt discount of $6.1 million and $6.8 million, at September 30, 2019 and December 31, 2018, respectively.
Our payment obligations for HCR royalty-based debt are as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
Total repayment obligations
$
290,550

 
$
290,550

Less: interests to be accreted in future periods
(109,060
)
 
(125,851
)
Less: payments made
(6,006
)
 
(816
)
Carrying value of long term royalty-based debt
175,484

 
163,883

Less: current portion of royalties
(18,302
)
 
(8,627
)
Non-current portion of long term royalty-based debt
$
157,182

 
$
155,256


We determined that certain features, such as the variability in the royalty payments based upon the timing of regulatory approval, were embedded derivatives that required bifurcation from the royalty-based debt instrument. Upon the Andexxa Gen 2 FDA approval on December 31, 2018, it was determined that there was no longer a derivative associated with the debt contract. For the three months and nine months ended September 30, 2018, we recognized gains of $1.9 million and $4.3 million, respectively, upon remeasurement of the embedded derivative.
The estimated fair value of royalty-based debt at September 30, 2019 and December 31, 2018 was $170.6 million and $154.2 million, respectively, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a Monte Carlo simulation model with inputs as described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements.
Secured Term Loan
In February 2019, we entered into a credit agreement (the “Credit Agreement”) with HCR and Athyrium Opportunities III Acquisition LP (“Athyrium”) whereby we received the first tranche of $62.5 million (“Secured Term Loan”) in March 2019 and we have access to the second tranche of $62.5 million at our option. We have until November 15, 2019 to exercise our option to access the second tranche.
All obligations under the Credit Agreement are due on February 28, 2025 with certain scheduled payments of the principal starting from March 31, 2022. The outstanding principal balance of the loan bears interest at 9.75% per annum. The loan is secured by substantially all of our assets. The Credit Agreement contains certain covenants that, among others, require us to deliver financial reports at designated times of the year and limit or restrict our ability to incur additional indebtedness or liens, acquire, own or make any investments, pay cash dividends or enter into certain corporate transactions, including mergers and changes of control, and require us to maintain $31.3 million of cash, such amount to be increased if we draw on the second tranche of funding. Violating covenants would put us in default and that the lenders would then have the option to demand repayment plus certain penalties or allow us to continue to service the loan but at the default interest rate of 12.75%. As of September 30, 2019, we were not in violation of any covenants.
For the three and nine months ended September 30, 2019, we accrued interest of $1.8 million and $3.8 million, respectively. Upon the closing of the Credit Agreement, we incurred fees of $2.8 million to HCR and Athyrium and other debt issuance cost of $0.5 million. Loan origination fees and debt issuance costs are netted against the loan balance and are amortized over the contractual term of the loan using the effective interest method. The effective interest rate as of September 30, 2019 was 12.3%.
As of September 30, 2019, the future principal maturities of our Secured Term Loan for each of the next five years are as follows (in thousands):

F-18










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Year ended December 31,
 
2022
$
9,615

2023
9,615

2024
9,615

Thereafter
33,655

Total
$
62,500


We evaluated the terms of the loan and determined that one feature could require acceleration of payments and a prepayment penalty (make-whole provision) upon a change of control if it occurs prior to the 30-month anniversary period from the funding date in March 2019. We determined that this feature (embedded derivative) requires bifurcation from the debt instrument and fair value recognition. We determined the fair value of the derivative using a discounted cash flow model taking into account the probability of a change of control occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements. We will remeasure the embedded derivative to fair value each reporting period until the feature with make-whole provision lapses after 30 months from the funding date in March 2019. For the three and nine months ended September 30, 2019, we recognized a gain of $0.4 million and $2.1 million, respectively, upon remeasurement of the embedded derivatives.
The estimated fair value of long-term debt at September 30, 2019 was $71.2 million, and the fair value was measured using Level 3 inputs. The estimated fair market value was calculated using a discounted cash flow model with inputs consistent with those used in determining the embedded derivative values as described in Note 4, “Fair Value Measurements”, to these condensed consolidated financial statements.
9. Stock Based Compensation
Stock Options
The following table summarizes stock option activity under our 2013 Equity Incentive Plan (the “2013 Plan”) and an Inducement Plan, and related information during the nine months ended September 30, 2019:
 
Shares
Subject to
Outstanding
Options
 
Weighted-
Average Exercise
Price Per Share
Balance at December 31, 2018
7,507,690

 
$
33.25

Options granted
1,962,744

 
27.65

Options exercised
(821,489
)
 
21.68

Options canceled
(996,552
)
 
38.69

Balance at September 30, 2019
7,652,393

 
$
32.35


Performance Stock Options (“PSOs”)
In March 2019, the Compensation Committee of our Board of Directors approved a program to award up to 490,986 PSOs to the management team based on the achievement of certain net revenue goals. The following table summarizes PSO activities under our 2013 Plan and related information during the nine months ended September 30, 2019:
 
Shares
Subject to
Outstanding
PSOs
 
Weighted-
Average Exercise
Price Per Share
Balance at December 31, 2018
143,335

 
$
23.76

Options granted
490,986

 
33.29

Options exercised
(31,667
)
 
23.76

Options canceled
(24,187
)
 
33.29

Balance at September 30, 2019
578,467

 
$
31.45



F-19










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Restricted Stock Units (“RSUs”)
The following table summarizes RSU activity under our 2013 Plan and Inducement Plan, and related information during the nine months ended September 30, 2019:
 
Shares
Subject to
Outstanding
RSUs
 
Weighted-
Average Grant Date
Fair Value Per Share
Balance at December 31, 2018
979,278

 
$
34.00

RSUs granted
767,143

 
27.75

RSUs released
(359,726
)
 
35.24

RSUs canceled
(133,114
)
 
34.88

Balance at September 30, 2019
1,253,581

 
$
29.73


Performance Stock Units (“PSUs”)
The following table summarizes PSU activity under our 2013 Plan and related information during the nine months ended September 30, 2019:
 
Subject to
Outstanding
PSUs
 
Weighted-
Average Grant Date
Fair Value Per Share
Balance at December 31, 2018
153,503

 
$
29.85

PSUs granted

 

PSUs released
(52,670
)
 
28.29

PSUs canceled
(87,708
)
 
30.36

Balance at September 30, 2019
13,125

 
$
32.66

 
The table below sets forth the functional classification of stock-based compensation expense for the periods presented (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
3,731

 
$
4,379

 
$
17,437

 
$
14,151

Selling, general and administrative
7,315

 
7,014

 
23,756

 
21,436

Stock-based compensation expense included in total expenses
$
11,046

 
$
11,393

 
$
41,193

 
$
35,587

 
 
 
 
 
 
 
 
Capitalized stock-based compensation costs
$
(569
)
 
$

 
$
(927
)
 
$


10. Net Loss per Share Attributable to Portola Common Stockholders
Basic net loss per share attributable to Portola Common Stockholders has been computed by dividing the net loss attributable to Portola Common Stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per share attributable to Portola Common Stockholders is calculated by dividing net loss attributable to Portola Common Stockholders by the weighted average number of shares of Common Stock and potential dilutive securities outstanding during the period. Since we were in a loss position for all periods presented, basic net loss per share attributable to Portola Common Stockholders is the same as diluted net loss per share attributable to Portola Common Stockholders as the inclusion of all potentially dilutive common shares would have been anti-dilutive.

F-20










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to Portola Common Stockholders for the periods presented because including them would have been antidilutive:
 
Nine Months Ended September 30,
 
2019
 
2018
Stock options to purchase common stock
7,652,393

 
7,200,427

Performance stock options
578,467

 
147,335

Common stock warrants
1,500

 
1,500

Restricted stock units
1,253,581

 
809,014

Performance stock units
13,125

 
160,378

Employee stock purchase plan
18,754

 
19,062


Up to 500,000 shares of our common stock may be contingently issued, if certain regulatory and performance conditions are met under an agreement with a contract manufacturer, as described in Note 6, “Contract Manufacturing Agreements”, to these condensed consolidated financial statements.
11. Leases
We have operating leases for our office facilities. We renewed one operating lease for our office facilities in June 2019. Upon adoption of ASC 842, we did not elect to apply the hindsight expedient in evaluating our renewal option, and as such, we did not include the renewal period in our lease term because at the inception we were not reasonably certain that we would exercise the renewal option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Our operating lease right-of-use asset and liability were recognized at the adoption date of ASC 842 based on the present value of lease payments over the remaining lease term at the adoption date. In determining the net present value of lease payments, we used our incremental borrowing rate based on the information available, including remaining lease term, at the adoption date of ASC 842.
Upon the renewal of the operating lease in June 2019, we remeasured the lease liability to reflect the changes to the lease term and the lease payments using a discount rate at the date of remeasurement on the basis of the remaining lease term and the remaining lease payments. We recognized the remeasurement amount of the lease liability as an adjustment to the lease right-of-use asset. This resulted in an $11.1 million increase to the lease liability and the lease right-of-use asset at the remeasurement date in June 2019.
The components of lease expense are as follows (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease costs
$
975

 
$
2,056

Short-term lease cost
89

 
267

Total
$
1,064

 
$
2,323


Cash flow information related to leases are as follows (in thousands):

F-21










PORTOLA PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
2,093

Supplemental non-cash information:
 
Right-of-use asset obtained in exchange for lease obligation due to remeasurement
$
11,103

Right-of-use asset obtained in exchange for a new operating lease liability
$
270


Supplemental balance sheet information related to leases are as follows (in thousands):
 
Classification
 
As of September 30, 2019
Operating lease
 
 
 
Lease right-of-use assets
 
 
 
Non-current
Operating lease right-of-use asset
 
$
11,836

Lease liabilities
 
 
 
Current
Accrued and other liabilities
 
$
3,566

Non-current
Long-term portion of lease liability
 
$
9,464