RIGEL PHARMACEUTICALS INC (RIGL) FY 2021 MD&A

Overview

We are a biotechnology company dedicated to discovering, developing and providing novel small molecule drugs that significantly improve the lives of patients with hematologic disorders, cancer and rare immune diseases. Our pioneering research focuses on signaling pathways that are critical to disease mechanisms. Our first product approved by the FDA is TAVALISSE® (fostamatinib disodium hexahydrate) tablets, the only oral SYK inhibitor, for the treatment of adult patients with chronic ITP who have had an insufficient response to a previous treatment. The product is also commercially available in Europe, the UK (TAVLESSE) and Canada (TAVALISSE) for the treatment of chronic ITP in adult patients.

Fostamatinib is currently being studied in a Phase 3 trial for the treatment wAIHA; a Phase 3 clinical trial for the treatment of hospitalized high-risk patients with COVID-19; a NIH/NHLBI sponsored Phase 3 trial (ACTIV-4 Host Tissue Trial) for the treatment of COVID-19 in hospitalized patients; and a Phase 2 trial for the treatment of COVID-19 being conducted by Imperial College London.

Our other clinical programs include our IRAK inhibitor program and a RIPK1 inhibitor program in clinical development with partner Lilly. In addition, we have product candidates in clinical development with partners BerGenBio and Daiichi.

Business Update

For discussions of recent business updates, please refer to “Part I, Item 1, Business – Business Update” of this Annual Report on Form 10-K.

Product Development Programs

Our product portfolio features multiple novel, targeted drug candidates in the therapeutic areas of immunology, hematology, cancer and rare diseases. Please refer to “Part I, Item 1, Business - Product Portfolio” herein for a detailed discussion of our multiple product candidates in development.

Corporate Collaborations

For discussions of our Corporate Collaborations, see “Note 4 - Sponsored Research and License Agreements and Government Contract” to our “Notes to Financial Statements” contained in “Part II, Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Critical Accounting Estimates

The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, 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 these estimates under different assumptions or conditions.

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Our significant accounting policies are more fully described in “Note 1- Description of Business and Summary of Significant Accounting Policies”, in the “Notes to Financial Statements” contained in “Part II, Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. We believe our critical accounting estimates which require subjective and complex judgments include estimates around our product sales allowances and discounts; estimates around accounting for collaboration arrangements; estimates around the fair value of our stock option awards and the probability of achievement of corporate performance-based milestones for our performance-based stock option awards; and estimates around research and development accruals.

Product Sales Allowances and Discounts

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Our revenues from product sales are recognized at net sales price when our customers, the specialty distributors (SDs), obtain control of our product, which occurs at a point in time, upon delivery to such SDs. Under the revenue recognition guidance, we are required to estimate the transaction price, including variable consideration that is subject to a constraint, in our contracts with our customers. Variable considerations are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Revenue from product sales is recorded net of certain variable considerations which includes estimated government-mandated rebates and chargebacks, pharmacy benefit manager (PBM) rebates, distribution fees, estimated product returns and other deductions.

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Provisions for sales discounts, returns and allowances are provided for in the period the related revenue is recorded. Our estimates are based on available customer and payer data received from the specialty pharmacies and distributors, as well as third-party market research data. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

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Contract Revenues from Collaborations

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

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

For arrangements that require us to share in the development costs but to which we do not participate in the co-development work, the portion of the upfront fee attributed to our share in the future development costs is excluded from the transaction price. If such share in the development costs is payable beyond 12 months from the delivery of the corresponding license, a significant financing component is deemed to exist. If a significant financing component is identified, we adjust the transaction price by reducing the upfront fee by the net present value of our share in future development costs over the expected commitment period. Such discounted amount will be reported as a liability in the balance sheet, with a corresponding interest expense being accreted based on a discount rate applied over the expected commitment period.

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Development, Regulatory or Commercial Milestone Payments: At the inception of each arrangement that includes payments based the achievement of certain development, regulatory and commercial or launch events, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development and regulatory milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, and are recorded as part of contract revenues from collaborations during the period of adjustment.

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

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

Stock-Based Compensation

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The fair value of our stock option award is estimated on the date of grant using the Black-Scholes option pricing model which considered our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, volatility, expected term, risk-free interest rate and dividends. We estimate volatility over the expected term of the option using historical share price performance. For expected term, we take into consideration our historical data of options exercised, cancelled and expired. The risk-free rate is based on the US Treasury constant maturity rate. We have not paid and do not expect to pay dividends in the foreseeable future. We use the straight-line attribution method over the requisite employee service period for the entire award in recognizing stock-based compensation expense. We account for forfeitures as they occur.

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

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Research and Development Accruals

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We have various contracts with third parties related to our research and development activities. Costs that are incurred but not billed to us as of the end of the period are accrued. We make estimates of the amounts incurred in each period based on the information available to us and our knowledge of the nature of the contractual activities generating such costs. Clinical trial contract expenses are accrued based on units of activity. Expenses related to other research and development contracts, such as research contracts, toxicology study contracts and manufacturing contracts are estimated to be incurred generally on a straight-line basis over the duration of the contracts. Raw materials and study materials not related to our approved drug, purchased for us by third parties are expensed at the time of purchase.

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We make significant judgments and estimates in determining the accrual balance in each reporting period. As actual costs become known, we adjust our accruals. Although we do not expect our estimates to be materially different from amounts actually incurred, such estimates for the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. Variations in assumptions used to estimate accruals including, but not limited to, the number of patients enrolled, the rate of patient enrollment and the actual services performed may result in adjustments in research and development accruals in future periods. Changes in these estimates that result in material changes to our accruals could materially affect our financial condition and results of operations.

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Recent Accounting Pronouncements

For a discussion of new accounting pronouncements, see “Note 1- Description of Business and Summary of Significant Accounting Policies”, in the “Notes to Financial Statements” contained in “Part II, Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

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Results of Operations

Years Ended December 31, 2021, 2020 and 2019

Revenues

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The following table summarizes revenues from each of our customers who individually accounted for 10% or more (wherein * denotes less than 10%) of our gross revenues (as a percentage of gross revenues):

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Net product sales during the periods presented pertained to sales of TAVALISSE in the US, net of chargebacks, discounts and fees, government and other rebates and returns. The increase in our net product sales in 2021 compared to 2020 was primarily driven by the increase in quantities sold as well as the increase in price per bottle of TAVALISSE. The increase in our net product sales resulting from the increase in quantities sold and price per bottle were partially offset by the increase in revenue reserves mainly due to higher government program rebates.

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Following table summarizes our revenues by collaborative partners for the periods presented:

Contract revenues from collaborations in 2021 comprised of $66.6 million revenue related to our license agreement with Lilly, $4.0 million revenue related to grant of non-exclusive license of a certain patent to an unrelated third-party company, $1.8 million in revenue related to the achievement of milestone under our collaboration agreement with Daiichi, $3.0 million related to our performance of research and development services and delivery of drug supply under our collaboration agreement with Grifols, $0.3 million related delivery of drug supply to Kissei, and $0.1 million milestone payment under our commercial and license agreement with Medison. Contract revenues from collaborations in 2020 were comprised of revenue of $44.9 million from Grifols related to the upfront fee previously received, as well as the milestone payment received in the 2020 upon EC approval of the MAA for fostamatinib in Europe, and $2.1 million milestone payment under our collaboration agreement with Daiichi.

Government contract revenue in 2021 of $10.5 million was related to the income we recognized from the $16.5 million government award granted to us, pursuant to the agreement we entered in January 2021 with the US Department of Defense to support our ongoing Phase 3 clinical trial to evaluate the safety and efficacy of fostamatinib in hospitalized COVID-19 patients. We expect to receive the remaining award of $6.0 million and will recognize as income throughout the period we conduct our clinical trial, when there is reasonable assurance that the conditions of the grant will be met, and the grant will be received.

Our potential future revenues may include product sales from TAVALISSE; payments from our collaboration partners and from new collaboration partners with whom we enter into agreements in the future, if any; and from existing government grants and any future grants we may be entitled to, if any; the timing and amount of which is unknown at this time. We cannot currently fully forecast the extent of the impacts that the COVID-19 pandemic may have on our revenues. Our net product sales may be impacted by changes to the government program rebates and new private payer rebate contracts we entered or may enter in the future. As of December 31, 2021, we had deferred revenues of $2.6 million, which we will recognize as revenue upon satisfaction of our remaining performance obligations under our respective collaboration agreements.

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Cost of Product Sales

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The cost of product sales for the periods presented was related to our product, TAVALISSE. Prior to the FDA approval in May 2018, manufacturing and related costs were charged to research and development expense. Therefore, these costs were not capitalized and as a result, are not fully reflected in the cost of product sales during the periods presented. We expect we will continue to have a lower cost of product sales that excludes the cost of the active

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pharmaceutical ingredient (API) that was produced prior to FDA approval until we sell TAVALISSE that includes newly manufactured API. We expect that this will be the case for the near-term and as a result, our cost of product sales will be less than we anticipate it will be in future periods. As we produce TAVALISSE in the future, our inventory cost in the Balance Sheet and cost of product sales will increase reflecting the full cost of manufacturing. The cost of product sales remained relatively flat for 2021 compared to 2020.

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Research and Development Expenses

The increase in research and development expense in 2021 compared to 2020 was primarily due to higher research and development costs of $10.9 million related to our ongoing Phase 3 clinical trial on hospitalized COVID-19 patients, increase in our research and development of our IRAK 1/4 inhibitor program of $1.0 million, and increase in our other research and development costs in our other clinical studies of $0.5 million. These increases were partially offset by a decrease in research and development costs of $6.1 million due to the completion of a clinical trial in our RIPK1 inhibitor program, and decrease in personnel- related costs of $1.2 million mainly due to decrease in headcount as a result of the restructuring of the research department in November 2021.

Our research and development expenditures include costs related to preclinical and clinical trials, scientific personnel, supplies, equipment, consultants, sponsored research, stock-based compensation, and allocated facility costs. We expect to continue to incur significant research and development expense as we continue our activities in our Phase 3 wAIHA, COVID-19 and other clinical studies. In November 2021, we completed enrollment of the wAIHA study. Following the six-month treatment period after the last patient enrollment, we expect to report topline data from the 24-week study in mid-2022 and proceed with regulatory filings if the data is positive. If approved, fostamatinib has the potential to be the first to market therapy for patients with wAIHA. We also continue to enroll patients in our Phase 3 clinical trial of fostamatinib for the treatment of hospitalized high-risk patients with COVID-19. In January 2021, the US Department of Defense awarded us a total of $16.5 million grant that will partially fund our Phase 3 clinical trial for hospitalized COVID-19 patients. Currently, we cannot fully forecast the scope the evolving effects of COVID-19 pandemic may have on our ability to continue to treat patients enrolled in our trials, enroll and assess new patients, supply study drug, obtain complete data points in accordance with the study protocol, and overall impact on, and timing of, clinical study results. We expect cost savings on our research and development costs because of reduction in workforce, primarily in the research organization. In November 2021, we announced our plans to exit early-stage research and focus resources on our mid to late-stage development programs and our commercialization efforts. The strategy will strengthen our ability to execute or near-term value drivers, such as growing ITP sales, expanding the addressable market for fostamatinib with wAIHA and COVID-19, advancing our wholly-owned IRAK1/4 program in hematology and immunology.

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We do not track fully burdened research and development costs separately for each of our drug candidates. We review our research and development expenses by focusing on three categories: research, development, and other. Our research team is focused on identifying and evaluating product candidates in our focused range of therapeutic indications that can be developed into small molecule therapeutics in our own proprietary programs or with potential collaborative partners. “Research” expenses relate primarily to personnel expenses, lab supplies, fees to third party research consultants and compounds. Our development group leads the implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds may be studied in clinical trials. “Development” expenses relate primarily to clinical trials, personnel expenses, costs related to our regulatory filings, lab supplies and fees to third party research consultants. “Other” expenses primarily consist of allocated facilities costs and allocated stock-based compensation expense relating to personnel in research and development groups.

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In addition to reviewing the three categories of research and development expenses described in the preceding paragraph, we principally consider qualitative factors in making decisions regarding our research and development programs, which include enrollment in clinical trials and the results thereof, the clinical and commercial potential for our drug candidates and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy, which includes the evaluation of potential collaborations for the development of our drug candidates.

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We do not have reliable estimates regarding the timing of our clinical trials. Preclinical testing and clinical development are long, expensive and uncertain processes. In general, biopharmaceutical development involves a series of steps, beginning with identification of a potential target and including, among others, proof of concept in animals and Phase 1, 2 and 3 clinical trials in humans. Significant delays in clinical testing could materially impact our product development costs and timing of completion of the clinical trials. We do not know whether planned clinical trials will begin on time, will need to be halted or revamped or will be completed on schedule, or at all. Clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a trial, delays from scale up, delays in reaching agreement on acceptable clinical trial agreement terms with prospective clinical sites, delays in obtaining institutional review board approval to conduct a clinical trial at a prospective clinical site or delays in recruiting subjects to participate in a clinical trial.

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We currently do not have reliable estimates of total costs for a particular drug candidate to reach the market. Our potential products are subject to a lengthy and uncertain regulatory process that may involve unanticipated additional clinical trials and may not result in receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected. In addition, clinical trials of our potential products may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval.

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The following table presents our total research and development expenses by category:

“Other” expenses in 2021, 2020 and 2019 consisted of allocated facilities costs of $5.8 million, $6.0 million and $6.0 million, respectively, and allocated stock-based compensation expense of $1.7 million, $2.1 million and $2.6 million, respectively.

In 2021, a major portion of our total research and development expense was associated with our COVID-19, AIHA and IRAK programs, personnel-related costs of our research and development personnel and allocated facilities costs. In 2020 and 2019, a major portion of our total research and development expense was associated with our AIHA, RIPK1, and IRAK programs, personnel-related costs of our research and development personnel and allocated facilities costs.

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Selling, General and Administrative Expense

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The increase in selling, general and administrative expense in 2021 compared to 2020 was primarily due to the increases in costs of commercial activities of $4.8 million, costs of consultants and third-party services of $2.8 million, personnel-related costs of $2.7 million, stock-based compensation expense of $2.1 million, recruitment fees of $0.6 million, and other various sales, general and administrative costs of $2.3 million. These increases were primarily impacted by the expansion of our commercial operations.

We expect our selling, general and administrative expense in 2022 to increase as we continue to expand our commercial activities, including the effect of the recent sales force expansion. In response to the limitations on in-person office visits during the ongoing COVID-19 pandemic, we continue to deploy resources to enable our field-based employees to continue to engage virtually with healthcare providers. These virtual engagements have enabled our field team to support existing prescribers as well as partner with new prescribers to identify appropriate patients for our product. However, we are not currently able to fully forecast the scope of impacts that the COVID-19 pandemic may have on our commercial activities and sales of our product.

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Restructuring charges

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In November 2021, we announced a reduction in our workforce resulting in the elimination of positions primarily in the research organization. We recorded restructuring charges of $3.5 million in the statements of operations in 2021, comprised of $2.9 million cash severance, bonus and related taxes of affected employees, $0.4 million of stock-based compensation expense related to modification of stock options and $0.1 million impairment of certain property and equipment which was recorded within depreciation expense14.

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Interest Income

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Interest income results from our interest-bearing cash and investment balances. The decreases in interest income in 2021 compared to 2020 were primarily due to a decrease in interest rates on our investments.

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Interest Expense

Interest expense in 2021 was comprised of interest on the financing liability from our collaboration partners Lilly and Medison, and interest on outstanding balance on our term loan from Midcap. Interest expense in 2020 and 2019 was related to the outstanding balance on our term loan from Midcap. The increase in interest expense in 2021 compared to 2020 was mainly due to the interest expense associated with the financing liability from our collaboration partners amounting to $3.1 million. Incrementally, interest expense increased due to the increase in the outstanding term loan credit balance. The principal balance of loan prior to May 2020 was the initial $10.0 million under Tranche 1. In May 2020, we accessed the Tranche 2 for an additional $10.0 million loan. See “Note 10 - Debt” to our “Notes to Financial Statements” contained in “Part II, Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Provision for Income Taxes

The provision for income taxes in 2021 was related to the state tax liability primarily due to revenue recognized for the Lilly Agreement. We do not expect to owe federal income taxes due to the sufficient NOL carryforwards that were generated prior to the enactment of the Tax Act, as well as significant research and development credit carryforwards. We continue to record a full valuation allowance on our deferred tax assets considering our cumulative losses in prior years and forecasted losses in the future.

Liquidity and Capital Resources

Liquidity

As of December 31, 2021, we had approximately $125.0 million in cash, cash equivalents and short-term investments, as compared to approximately $57.3 million as of December 31, 2020. The increase of approximately $67.6 million was primarily attributable to the upfront cash payment of $125.0 million from Lilly, partially offset by cash used in our other operating activities. As of December 31, 2021 and 2020, we maintained investment portfolios primarily in money market funds, US treasury bills, government-sponsored enterprise securities, and corporate bonds and commercial paper. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. We view our investments portfolio as available-for-sale and are available for use in current operations. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk. We continue to monitor the impact of the changes in the conditions of the credit and financial markets to our investment portfolio and assess if future changes in our investment strategy are necessary.

Following summarizes our cash flow activity for the periods presented:

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Net cash provided by operating activities in 2021 was primarily due to the cash received from Lilly for the portion allocated as net transaction price of $67.1 million, proceeds from sales of TAVALISSE, cash received from the awards granted by the US Department of Defense, and cash received from our other collaboration partners. These increases were partially offset by payments of our research and development programs and other operating expenses. Net cash used in operating activities in 2020 was related to our research and development programs and our continued commercialization of TAVALISSE, partially offset by the $20.0 million payment received from Grifols, proceeds from sale of TAVALISSE, and other cash received from our other collaboration partners.

Net cash used in investing activities in 2021 was due to net purchases of short-term investments of $79.4 million and capital expenditures of $0.6 million. Net cash provided by investing activities in 2020 was related to net maturities of short-term investments of $48.7 million, partially offset by capital expenditures of $1.3 million.

Net cash provided by financing activities in 2021 was primarily due to the cash received from Lilly for the portion allocated as financing component amounting to $57.9 million and proceeds from exercise of stock options and participation in the Purchase Plan of $4.8 million. Net cash provided by financing activities in 2020 consisted of proceeds from funding of the second $10.0 million tranche from our term loan credit facility with MidCap and $2.6 million from the exercise of stock options and participation in the Purchase Plan.

We believe that our existing capital resources will be sufficient to support our current and projected funding requirements, including the continued commercialization of TAVALISSE, through at least the next 12 months from the Annual Report on Form 10-K filing date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with commercializing a product, the development of our product candidates and other research and development activities, we are unable to estimate with certainty our future product revenues, our revenues from our current and future collaborative partners, the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials and other research and development activities.

Capital Resources

Since inception, we have financed our operations primarily through sales of equity securities, contract payments under our collaboration agreements and from sales of TAVALISSE beginning in May 2018. We have consumed substantial amounts of capital resources to date as we continue our research and development activities, including preclinical studies and clinical trials and our ongoing commercial launch of TAVALISSE.

In addition to the upfront cash payment we received from Lilly under the Lilly Agreement, we may also be eligible for potential development, regulatory, and commercial milestone payments totaling up to an additional $835.0 million, as well as tiered royalties on net sales of non-CNS and CNS disease products up to low-double digits that will vary depending upon our clinical development investment. Further, under our other sponsored research and license agreements with Grifols, Kissei, Medison, BerGenBio and Daiichi, we may be entitled to receive future payments contingent upon specified events achieved by such partners. Total future contingent payments to us under such agreements (excluding Lilly) could exceed $500.0 million if all potential product candidates achieved all of the payment triggering events under such agreements (based on a single product candidate under each agreement). See further discussions of our Sponsored Research and License Agreements and Government Contract in “Note 4 - Sponsored Research and License Agreements and Government Contract” to our “Notes to Financial Statements” contained in “Part II, Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

In January 2021, we were awarded $16.5 million by the US Department of Defense to support our ongoing Phase 3 clinical trial to evaluate the safety and efficacy of fostamatinib in hospitalized COVID-19 patients. Under the agreement with the US Department of Defense, we are entitled to receive such award based on the agreed-upon payment schedule, subject to submission of proper documentation as evidence of completion of certain clinical trial events or milestones as specified in the agreement, and approval by the US Department of Defense that such events or milestones have been met. In 2021, we recognized income from the awards from the US Department of Defense of $10.5 million, of which $9.5 million was collected as of December 31, 2021. We expect to bill the remaining awards of $6.0 million throughout the period of which we conduct our clinical trial, subject to us meeting certain clinical trial events or milestones and approval by the US Department of Defense as specified in the agreement.

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In August 2020, we entered into an Open Market Sale Agreement with Jefferies LLC, as a sole agent, pursuant to which we may sell from time to time, through Jefferies, shares of our common stock in sales deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act, subject to conditions specified in the Open Market Sale Agreement, including maintaining an effective registration statement covering the sale of shares under the Open Market Sale Agreement. In April 2021, the registration statement registering the sale of shares under the Open Market Sale Agreement expired. From the time of implementation of the Open Market Sale Agreement through expiration of the registration statement, no sales of shares occurred. A new automatic shelf registration statement was filed on August 3, 2021 to register the sale of up to a maximum aggregate offering price of $100.0 million of shares of our common stock that may be issued and sold from time to time under the Open Market Sale Agreement.

As of December 31, 2021, we have a principal term loan outstanding with MidCap amounting to $20.0 million, pursuant to the Credit and Security Agreement (Credit Agreement) we entered in September 2019. The Credit Agreement provides for $60.0 million term loan credit facility. As of December 31, 2021, the credit facility provides us with access for an additional $40.0 million term loan subject to the achievement of certain customary conditions. On February 11, 2022, we entered into Second Amendment to our Credit Agreement with MidCap which, among other things, amend the applicable funding conditions, applicable commitments and certain other terms relating to available credit facilities (Tranches 3 and 4), add additional term loan credit facility (Tranche 5), and revise certain terms related to the financial covenants. See “Note 15 – Subsequent Events” to our “Notes to Financial Statements” for further discussions.

We have a sublease agreement originally entered in December 2014 with an unrelated third party to occupy a portion of our research and office space which will expire in January 2023. As of December 31, 2021, we expect to receive approximately $5.1 million in future sublease income (excluding our subtenant’s share of the facility’s operating expenses) through January 2023.

Our operations will require significant additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of product, royalty or milestone revenue, we expect to opportunistically finance future cash needs through public and/or private offerings of equity securities, debt financings and/or collaboration and licensing arrangements, and to a much lesser extent through the proceeds from exercise of stock options and interest income earned on the investment of our excess cash balances and short-term investments. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. Our ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the US and worldwide resulting from the pandemic. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity for certain corporate development transactions or our ability to make important, opportunistic investments. In addition, any additional capital we raise by issuing equity securities, our stockholders could at that time experience substantial dilution. Our current credit facility with MidCap and any debt financing that we are able to obtain in the future may involve operating covenants that may restrict our business. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some of our rights to our technologies or product candidates or grant licenses on terms that are not favorable to us.

Our future funding requirements will depend upon many factors, including, but not limited to:

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Insufficient funds may require us to delay, scale back or eliminate some or all of our commercial efforts and/or research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern.

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Material Cash Requirements

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We conduct our commercial activities and research and development programs internally and through third parties that include, among others, arrangements with vendors, consultants, contract research organizations (CRO) and universities. We have contractual arrangements with these parties, however our contracts with them are cancelable generally on reasonable notice within one year and our obligations under these contracts are primarily based on services performed. We do not have any purchase commitments under any collaboration arrangements.

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We have agreements with certain clinical research organizations to conduct our clinical trials and with third parties relative to our commercialization of TAVALISSE. The timing of payments for any amounts owed under the respective agreements will depend on various factors including, but not limited to, patient enrollment and other progress of the clinical trial and various activities related to commercial launch. We expect we will continue to enter into contracts in the normal course of business with various third parties who support our clinical trials, support our preclinical research studies, and provide other services related to our operating purposes as well as our commercial launch of TAVALISSE. We can terminate these agreements at any time, and if terminated, we would not be liable for the full amount of the respective agreements. Instead, we will be liable for services provided through the termination date plus certain cancellation charges, if any, as defined in each of the respective agreements. In addition, these agreements may, from time to time, be subjected to amendments as a result of any change orders executed by the parties.

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As discussed in detail in “Note 4 – Sponsored Research and License Agreements and Government Contract” of our “Notes to Financial Statements” contained in “Part II, Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, pursuant to our global exclusive license agreement and strategic collaboration agreement with Lilly, we are responsible for funding the development costs for R552 in the US, Europe, and Japan, up to $65.0 million through April 1, 2024. As of and for the year ended December 31, 2021, Lilly billed us $2.1 million of the funding development costs, which was subsequently paid in the first quarter of 2022. We have the right to opt-out of co-funding of development costs at two different specified times. If we decide not to exercise our opt-out rights, we will be required to share in global development costs up to certain amounts at a specified cap, as set forth in the agreement.

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As of December 31, 2021, we have a contractual commitment related to our facilities lease which will expire in January 2023 amounting to $11.4 million, with $10.5 million payable within 12 months. This amount excludes the expected sublease income as discussed above.

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We also have a contractual commitment with respect to our credit facility with Midcap. Under our Credit Agreement with MidCap, we are obligated to make interest payments at an annual rate of one-month LIBOR (or a comparable applicable index rate determined pursuant to the Credit Agreement if the LIBOR is no longer available) plus 5.65%, subject to a LIBOR floor of 1.50% and payable monthly in arrears, originally for the first 24 months and the interest plus principal amortization for the next 36 months. Our Credit Agreement provides us an option to extend the interest-only period to 36 months (first interest-only extension) and again to 48 months (second interest-only extension) upon the satisfaction of certain conditions set forth in the Credit Agreement. In June 2021, we satisfied the first interest-only extension conditions under the Initial Credit Agreement which effectively extended the interest-only period to 36 months or through October 1, 2022. As of December 31, 2021, the outstanding principal amount of the loan was $20.0 million, with $2.5 million payable within 12 months. As of December 31, 2021, we deemed that it is probable that we will satisfy the second interest-only criteria. Accordingly, we classified our outstanding loan as long-term liabilities in the Balance Sheet. We are also obligated to pay annual administrative fees and a final fee due at maturity. Future interest and final fee payments associated with the credit facility amounted to $2.8 million, with $1.4 million payable within 12 months.

We are also subject to claims related to the patent protection of certain of our technologies, as well as purported securities class action lawsuit, other litigations, and other contractual agreements. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual matter.

We do not have other material contractual commitments with respect to matters discussed above.

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