UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM10-Q

(Mark One)

For the quarterly period ended September 30, 20172018

OR

For the transition period from                    to                    

Commission file number:001-33221

HERON THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☑            No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-2 of the Exchange Act.

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 Rule12b-2 of the Exchange Act).

Yes  ☐            No   ☑

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of October 25, 201726, 2018 was 54,504,647.78,019,031.

HERON THERAPEUTICS, INC.

FORM10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 20172018

TABLE OF CONTENTS

PART I.     FINANCIAL STATEMENTS (Unaudited)

HERON THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes.

HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except per share amounts)

See accompanying notes.

HERON THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

See accompanying notes.

HERON THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

In this Quarterly Report on Form10-Q, all references to “Heron,” the “Company,” “we,” “us,” “our” and similar terms refer to Heron Therapeutics, Inc. and its wholly-owned subsidiary. Heron Therapeutics^®, the Heron logo, SUSTOL^®, CINVANTI™CINVANTI^® and Biochronomer^®are our trademarks. All other trademarks appearing or incorporated by reference into this Quarterly Report on Form10-Q are the property of their respective owners.

1. Business

Overview

1.

Business

We are a commercial-stage biotechnology company focused on improving the lives of patients by developingbest-in-class treatments thatto address some of the most important unmet patient needs. We are developing novel, patient-focused solutions that apply our innovative science and technologies to already approvedalready-approved pharmacological agents for patients suffering from cancer or pain.

On August 9, 2016, our first commercial product, SUSTOL^® (granisetron) extended-release injection (“SUSTOL”), was approved by the U.S. Food and Drug Administration (“FDA”). We developed SUSTOL for the prevention of chemotherapy-induced nausea and vomiting (“CINV”). SUSTOL is indicated in combination with other antiemetics in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of moderately emetogenic chemotherapy (MEC) or anthracycline and cyclophosphamide (AC) combination chemotherapy regimens. SUSTOL is an extended-release, injectable5-hydroxytryptamine type 3 receptor antagonist that utilizes Heron’s proprietary Biochronomer drug delivery technology (“Biochronomer Technology”) to maintain therapeutic levels of granisetron for³5 days. We commenced commercial sales of SUSTOL in the U.S. in October 2016.

We have two investigational pharmaceutical products for patients suffering from cancer or postoperative pain.

CINVANTI™(HTX-019)On November 9, 2017, our second commercial product, CINVANTI (aprepitant) injectable emulsion (“CINVANTI”), an intravenous formulation ofwas approved by theneurokinin-1 receptor antagonist aprepitant, has been developed FDA. CINVANTI, in combination with other antiemetic agents, is indicated in adults for the prevention of CINV asacute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer chemotherapy (HEC) including high-dose cisplatin and nausea and vomiting associated with initial and repeat courses of moderately emetogenic cancer chemotherapy (MEC). CINVANTI is an adjunct tointravenous (“IV”) formulation of aprepitant, a substanceP/neurokinin-1 (“NK₁”) receptor antagonist. CINVANTI is the only IV formulation of an NK₁ receptor antagonist indicated for the prevention of acute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC that is free of polysorbate 80 or any other antiemetic agents.synthetic surfactant. We submitted a New Drug Application (“NDA”) withcommenced commercial sales of CINVANTI in the FDA for CINVANTI. Our NDA is pending review with the FDA and has been assigned a Prescription Drug User Fee Act goal date of November 12, 2017.U.S. in January 2018.

HTX-011, which utilizes Heron’s proprietary Biochronomer Technology, is aan investigational, long-acting, extended-release formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory meloxicam for the preventionmanagement of postoperative pain. By delivering sustained levels of both a potent anesthetic and ana local anti-inflammatory agent directly to the site of tissue injury,HTX-011 was designed to providedeliver superior pain relief while potentially reducing the need for systemically administered pain medications such as opioids, which carry the risk of harmful side effects, abuse and addiction. The Phase 2 development program forHTX-011 has been shown to reduce pain significantly better than placebo or bupivacaine alone in five diverse surgical models: hernia repair, abdominoplasty, bunionectomy, total knee arthroplasty and breast augmentation.HTX-011 was designed to target the many patients undergoing a wide range of surgeries who experience significant postoperative pain. Following anEnd-of-Phase 2 meeting with the FDA, we initiated our Phase 3 program, which we anticipate completing in the first half of 2018. We expect to file an NDA forHTX-011 in 2018. We have been granted Fast Track designation forHTX-011 byfrom the FDA for local administration into the surgical site to reduce postoperative pain and the need for opioid analgesics for 72 hours. Fast Track designation is intended to facilitate the development and expedite the review of new therapies to treat serious conditions with unmet medical needs by providing sponsors with the opportunity for frequent interactions with the FDA.

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal coursefourth quarter of business.2017 and Breakthrough Therapy designation in the second quarter of 2018. We recently submitted our New Drug Application (“NDA”) to the FDA forHTX-011.

As of September 30, 2018, we had $364.8 million in cash, cash equivalents and short-term investments. We have incurred significant operating losses and negative cash flows from operations. As of September 30, 2017, our accumulated deficit was $721.0 million, and we had $74.0 million inManagement believes that cash, cash equivalents and short-term investments. Our capital requirements going forward will depend on numerous factors, including, but not limited to: the degreeinvestments as of commercial success of SUSTOL; the scope, rate of progress, results and costs of preclinical testing and clinical trials; the timing and cost to manufacture our products; an approval decision by the FDA with respect to CINVANTI; the timing and costs associated with the commercial launch of CINVANTI, if approved; the degree of commercial success of CINVANTI, if approved; the number and characteristics of product development programs we pursue and the pace of each program, including the timing of clinical trials; the time, cost and outcome involved in seeking other regulatory approvals; scientific progress in our research and development programs; the magnitude and scope of our research and development programs; our ability to establish and maintain strategic collaborations or partnerships for research, development, clinical testing, manufacturing and marketing of our product candidates; the cost and timing of establishing sales, marketing and distribution capabilities if we commercialize products independently; the cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop; and general market conditions. We expect to satisfy our future cash needs through public or private equity offerings, debt financings, strategic collaborations and licensing arrangements, or other sources of financing. We cannot be certain that additional fundingSeptember 30, 2018 will be availablesufficient to us on acceptable terms, orfund operations for at all. Our ability to obtain new financing may be constrained by our failure to achieve significant business objectives, covenants applicable to our Senior Secured Convertible Notes (the “Convertible Notes”) and Subordinated Secured Promissory Note (the “Promissory Note”), and numerous other factors. These factors, among others, raise substantial doubt about our ability to continue as a going concern withinleast one year from the date this Quarterly Report on Form10-Q is filed with the U.S. Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United StatesU.S. (“GAAP”) for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017,2018 are not necessarily indicative of the results that may be expected for other quarters or the year ending December 31, 2017.2018. The condensed consolidated balance sheet as of December 31, 2016,2017 has been derived from the audited financial statements as of that date, but does not include all of the information and disclosures required by GAAP. For more complete financial information, these unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2016,2017, which was filed with the SEC on February 23, 2017.27, 2018.

3.

Principles of Consolidation

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

Use of Estimates

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

Cash, Cash Equivalents and Short-TermShort-term Investments

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

Short-term investments consist of securities with contractual maturities of greater than three months to one year or less.from the original purchase date. We have classified our short-term investments asavailable-for-sale securities in the accompanying unaudited condensed consolidated financial statements.Available-for-sale securities are stated at fair market value, with net changes in unrealized gains and losses reported in other comprehensive loss and realized gains and losses included in interest expense,other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest and dividends on securities classified asavailable-for-sale are included in interest income.

The following is a summary of ouravailable-for-sale securities (in thousands):

Concentration of Credit Risk

Cash, cash equivalents and short-term investments are financial instruments that potentially subject us to concentrations of credit risk. We deposit our cash in financial institutions. At times, such deposits may be in excess of insured limits. We may also invest our excess cash in money market funds, U.S. government and agencies, corporate debt securities and commercial paper. We have established guidelines relative to our diversification of our cash investments and their maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.

SalesOur products are distributed in the U.S. through a limited number of SUSTOLspecialty distributors and full line wholesalers (collectively, “Customers”) that resell our products to two customers accountedhealthcare providers and hospitals, the end users.

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

Inventory

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

As of September 30, 2017, inventory totaled $5.2 million, which consisted of raw materials of $1.4 million, work in process of $1.3 million and finished goods of $2.5 million. For the three and nine months ended September 30, 2017, we recognized cost of product sales of $1.1 million and $3.3 million, respectively, for sales of SUSTOL, which primarily included raw materials, labor and overhead related to the manufacturing of SUSTOL, as well as shipping and distribution costs. In addition, cost of product sales included aone-time charge of $0.9 million resulting from thewrite-off of short-dated inventory in March 2017.

Revenue Recognition

Product Sales

SUSTOL is distributed in the U.S. through a limited number of specialty distributors (“Customers”) that resell SUSTOL to healthcare providers, the end users of SUSTOL. Product sales are recorded net of sales allowances and estimated rebates, chargebacks, distributor fees, and other deductions.

Product sales are recognized as revenue when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and we are reasonably assured of collecting the resulting receivable. Product sales are recorded net of sales allowances and estimated rebates, chargebacks, distributor fees and other deductions. At this point in the SUSTOL commercial launch, we do not yet have sufficient historical data regarding the third-party payor mix and resulting rebates related to shipments of SUSTOL to our Customers. In addition, we do not currently have the data necessary to provide sufficient visibility into the ultimate utilization of SUSTOL, which inhibits our ability to determine a reasonable estimate of potential returns. As a result, we are not yet able to make reliable estimates necessary to meet certain of the key recognition criteria to recognize product sales as revenue with respect to shipments of SUSTOL to our Customers. Accordingly, revenue related to shipments to our Customers is deferred, except to the extent that our Customers have resold SUSTOL to healthcare providers (sell-through approach). As of September 30, 2017, product sales of $5.6 million to our Customers have been deferred and are recorded as deferred revenue on our unaudited condensed consolidated balance sheet.

In the fourth quarter, we expect to have sufficient historical data regarding the third-party payor mix and resulting rebates related to shipments of SUSTOL to our Customers so as to begin recognizing SUSTOL revenue, net of estimated allowances for rebates, returns and chargebacks at the point of sale to our Customers(sell-in approach).

Product Sales Allowances

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

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

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

The following provides a summary of activity with respect to our accrued distributor fees, rebates and chargebacks and product returns for the nine months ended September 30, 2017, which are included in other accrued liabilities on the unaudited consolidated balance sheets (in thousands):

Recent Accounting Pronouncements

Recently Adopted

In May 2017, the FASB issued ASUNo. 2017-09,Compensation – Stock Compensation: Scope of Modification Accounting (“ASU2017-09”).The amendments in ASU2017-09 provide guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. In the first quarter of 2018, we adopted the provisions of ASU2014-092017-09, allowwhich did not have a material impact on our results of operations or financial condition.

Not Yet Adopted

In February 2016, the FASB issued ASUNo. 2016-02,Leases (Topic 842) (“ASU2016-02”),which provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. In July 2018, the FASB issued ASUNo. 2018-11,Leases (Topic 842): Targeted Improvements and ASUNo. 2018-10,Codification Improvements to Topic 842, Leases. ASU2016-02 and the subsequent modifications are identified as “ASC 842.” ASC 842 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a full retrospectivefinanced purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a modified retrospectivestraight-line basis over the term of the lease, respectively. A lessee is also required to record aright-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. ASC 842 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption approach.is permitted. We plan to adopt the provisions of ASU2014-092016-02 on January 1, 2019, and we are currently evaluating the impact on our results of operations and financial condition.

In August 2018, the FASB issued ASUNo. 2018-13,Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU2018-13”), which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt the provisions of ASU2018-13 in the first quarter of 2018 using the modified retrospective approach. We have performed a review of ASU2014-09 compared to our current accounting policies2020, and we are currently reviewing our customer contracts. Although our review of our customer contracts is not complete, we expectevaluating the adoption of ASU2014-09 to have a material impact on our consolidated financial statements and related disclosures. Specifically, as disclosed above in our revenue recognition policy, we recognize revenue using the sell-through approach through September 30, 2017. Under ASU2014-09, we will be required to estimate our sales allowances at the time of sale, resulting in earlier recognition of revenue. During the second half of 2017, we plan to finalize our review of product revenues to determine the impact that ASU2014-09 may have on our results of operations, financial position and related disclosures.statements.

4. Fair Value Measurements

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

We measure the following financial assetscash, cash equivalents and short-term investments at fair value on a recurring basis. The fair values of these financialsuch assets at September 30, 2017 and December 31, 2016 were as follows (in thousands):

Financial instruments, including cash, and cash equivalents, receivables, inventory, prepaid expenses, and other current assets, accounts payable and accrued liabilitiesexpenses are carried at cost, which is considered to be representative of their respective fair values because of the short-term naturematurity of thosethese instruments. Short-termavailable-for-sale investments are carried at fair value.

5. Short-Term Investments

The following is a summary of our short-term investments (in thousands):

6. Inventory

Inventory consists of the following (in thousands):

The following table shows the reconciliation of assets and liabilities disclosed in our Annual Report on Form10-K for the year ended December 31, 2017, as adjusted, due to the modified retrospective adoption of Topic 606 on January 1, 2018 (in thousands):

Product Sales Allowances

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

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

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

The following table provides a summary of activity with respect to our product returns, distributor fees and discounts, rebates and administrative fees for the nine months ended September 30, 2018, which are included in other accrued liabilities on the unaudited condensed consolidated balance sheets (in thousands):

8. Leases

On May 8, 2018, we entered into a Second Amendment to Lease (the “Lease Amendment”) withAP3-SD1 Campus Point LLC (the “Landlord”), amending that certain Lease, dated October 18, 2016, by and between us and the Landlord, as amended by that certain First Amendment to Lease, dated March 15, 2017 (the “Lease”). The Lease Amendment provides for us to lease additional office space in the building located at 4242 Campus Point Court, San Diego, California, for a period of 87 months, beginning on the date that our improvements to the premises are substantially complete. Pursuant to the Lease Amendment, we have agreed to pay a basic annual rent that increases incrementally over the term of the Lease Amendment from $0.9 million for the first 12 months of the Lease Amendment (inclusive of certain rent abatements) to a prorated portion of a basic annual rent of $1.4 million for the last three months of the Lease Amendment, and such other amounts as set forth in the Lease Amendment. We also paid to the Landlord an additional security deposit in the amount of $0.1 million. Except as modified by the Lease Amendment, all of the provisions of the Lease will continue unmodified and in full force and effect.

The following table shows the annual future minimum lease payments under all of our operating leases as of September 30, 2018 (in thousands):

In March 2018, we shut down operations at our Redwood City facility and entered into a sublease agreement for the three months ended September 30, 2017, total expenses relatedremainder of the lease term. The fair value of thecease-use liability was calculated using the remaining lease payments, offset by futuresub-lease payments, deferred rent amortization and prepaid rent amounts. In the first quarter of 2018, we recorded expense of $0.5 million to the realignment were $0.2 million, which were included in research and development expense. For the nine months ended September 30, 2017, total expenses related to the realignment were $1.9 million, with $1.6 million included in research and development expense and $0.3 million in general and administrative expense.expense as a loss on the lease.

The expenses we expect to incur are subject to a number of assumptions, and actual results may materially differ. We may also incur other material expenses not currently contemplated due to events that may be associated with, or result from, the realignment of our goals and objectives and new development focus. We have accounted for these expenses in accordance with Accounting Standard Codification No.ASC Topic 420,Exit or Disposal Cost Obligations.

6.10. Secured Notes to Related Party

Convertible Notes

In April 2011, we entered into a securities purchase agreement for a private placement of up to $4.5 million in Convertible Notes with certain investors, including Tang Capital Partners, LP (“TCP”). TCP is controlled by Tang Capital Management, LLC (“TCM”). The manager of TCM is Kevin C. Tang, who served as a director at the time and currently serves as the Chairman of our Board of Directors. TheAt the time of issuance, the terms of the Convertible Notes were determined by our independent directors to be no less favorable than terms that would be obtained in an arm’s length financing transaction. We received a total of $4.3 million, net of issuance costs, from the issuance of these Convertible Notes.

The Convertible Notes are secured by substantially all of our assets, including placing our bank and investment accounts under a control agreement. The Convertible Notes bear interest at a rate of 6% per annum, payable quarterly in cash or in additional principal amount of Convertible Notes, at the election of the purchasers. The Convertible Notes mature on May 2, 2021; however, the holders of the Convertible Notes may require prepayment of the Convertible Notes at any time, at each holder’s option.

The Convertible Notes are convertible into shares of our common stock at a rate of 1,250 shares for every $1,000 of outstanding principal due under the Convertible Notes. There is no right to convert the Convertible Notes to the extent that, after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of our outstanding common stock. Each holder of the Convertible Notes can increase or decrease this beneficial ownership conversion limit by written notice to us, which will not be effective until 61 days after delivery of the notice.

As of September 30, 2017,2018, we were in compliance with all covenants under the Convertible Notes. UponOn the occurrence of an event of default under the Convertible Notes, the holders of the Convertible Notes have the right to require us to redeem all or a portion of their Convertible Notes.

In 2011, we filed a registration statement with the SEC to register for resale 3.5 million shares underlying the Convertible Notes. The registration statement was declared effective on July 29, 2011. The Convertible Note holders have agreed to waive their right to require us to maintain the effectiveness of the registration statement and to register the additional shares underlying the Convertible Notes until they provide notice otherwise.

The Convertible Notes contain an embedded conversion feature that wasin-the-money on the issuance dates. Based on an effective fixed conversion rate of 1,250 shares for every $1,000 of outstanding principal and accrued interest due under the Convertible Notes, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a debt discount was recorded in an amount equal to the face value of the Convertible Notes on the issuance dates, and we began amortizing the resultant debt discount over the respective10-year term of the Convertible Notes. During the nine months ended September 30, 2017,2018, accrued interest of $0.3 million waspaid-in-kind and rolled into the Convertible Note principal balance, which resulted in an additional debt discount of $0.3 million. For the three months ended September 30, 20172018 and 2016,2017, interest expense relating to the stated rate was $0.1 million and $0.1 million, respectively,for each period, and interest expense relating to the amortization of the debt discount was $0.2 million and $0.2 million, respectively.for each period. For the nine months ended September 30, 20172018 and 2016,2017, interest expense relating to the stated rate was $0.3 million for each period, and interest expense relating to the amortization of the debt discount was $0.6 million and $0.5 million, respectively.for each period.

As of September 30, 2017,2018, the carrying value of the Convertible Notes was $3.5$4.3 million, which is comprised of the $6.3$6.6 million principal amount of the Convertible Notes outstanding, less debt discount of $2.8$2.3 million. At September 30, 2017,2018, the Convertible Notes were convertible into 7.98.3 million shares of our common stock.

Promissory Note

In August 2016, we entered into the Promissory Note with TCP whereby TCP agreed to lend us up to $100.0 million. The Promissory Note hashad atwo-year term and bearsbore interest at a rate of 8% per annum. The first close of $50.0 million occurred on August 5, 2016. The second close of an additional $50.0 million was subject to the achievement of a corporate milestone. The additional $50.0 million was not drawn down dueand expired prior to the expiration of the corporate milestone.draw down. There arewere no fees, no warrants and no equity conversion featurefeatures associated with this transaction. The Promissory Note iswas secured by a second-priority lien on substantially all of our assets. TCP is controlled by TCM. The manager of TCM is Kevin C. Tang, who serves as the Chairman of our Board of Directors. The terms of the Promissory Note were determined by our independent directors to be no less favorable than terms that would be obtained in an arm’s length financing transaction.

For the three and nine months ended September 30, 2017,2018, interest expense was $0.2 million and $1.2 million, respectively, compared to $0.5 million and $2.3 million respectively, compared to $0.6for the same periods in 2017, respectively. In August 2018, we paid the remaining obligation under the Promissory Note, which included $25.0 million for both the threeof outstanding principal and nine months ended September 30, 2016.$0.2 million of accrued interest. As of September 30, 2017, the outstanding principal amount of2018, there were no remaining obligations under the Promissory Note was $25.0 million, as we paid $25.0 million towards the outstanding principal amount during the second quarter of 2017.Note.

7.11. Stockholders’ Equity

2017 Common Stock OfferingOfferings

In January 2017, we sold 14.1 million shares of our common stock at a public offering price of $12.20 per share. We received total net proceeds of $163.7 million (net of $8.8 million in issuance costs) from the sale of the common stock.

Private Placement WarrantsIn December 2017, we sold 9.7 million shares of our common stock at a public offering price of $15.50 per share. We received total net proceeds of $142.6 million (net of $7.4 million in issuance costs) from the sale of the common stock.

In April 2018, we sold 6.9 million shares of our common stock at a public offering price of $26.00 per share. We received total net cash proceeds of $168.7 million (net of $10.7 million in issuance costs) from the sale of the common stock.

In June 2011,2018, we sold 5.1 million shares of common stock and warrants to purchase common stock in a private placement. A total of 4.0 million warrants to purchaseour common stock at an exercisea public offering price of $3.60$39.50 per share were issued as partshare. We received total net cash proceeds of this private placement. All warrants were exercised prior to their expiration date$194.4 million (net of July 1, 2016.$5.6 million in issuance costs) from the sale of the common stock.

Stock Option Activity

The following table summarizes the stock option activity for the nine months ended September 30, 2017:2018:

For the nine months ended September 30, 2017, 952,0002018, 1,332,000 shares of common stock were issued pursuant to the exercise of stock options, resulting in net proceeds to us of $7.8$15.8 million.

Stock-BasedStock-based Compensation

The following table summarizes stock-based compensation expense related to stock-based payment awards granted pursuant to all of our equity compensation arrangements for the three and nine months ended September 30, 2017 and 2016 (in thousands):

As of September 30, 2017,2018, there was $62.1$73.8 million of total unrecognized compensation cost related tonon-vested, stock-based payment awards granted under all of our equity compensation plans and allnon-plan option grants. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this compensation cost over a weighted-average period of 2.5 years.

We estimated the fair value of each option grant on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:

We estimateestimated the fair value of each purchase right granted under our 1997 Employee Stock Purchase Plan at the beginning of each new offering period using the Black-Scholes option pricing model. There were no new offering periods for the three months ended September 30, 20172018 and 2016.2017.

12. Income Taxes

Deferred income tax assets and liabilities are recognized for temporary differences between financial statements and income tax carrying values using tax rates in effect for the years such differences are expected to reverse. Due to uncertainties surrounding our ability to generate future taxable income and consequently realize such deferred income tax assets, a full valuation allowance has been established. We continue to maintain a full valuation allowance against our deferred tax assets as of September 30, 2017.2018.

The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will be recognized when it is more likely than not of being sustained. In 2017, we adopted ASU2016-09, which resulted in the recognition of $3.6 million of previously unrecognized tax benefits in deferred tax assets, fully offset by a valuation allowance. The disclosures included in our 2016 Annual Report onForm 10-K for the year ended December 31, 20162017, which was filed with the SEC on February 27, 2018, continue to be accurate for the three and nine months ended September 30, 2017.2018.

13. Other Income (Expense), Net

In the third quarter of 2018, we recorded $1.9 million to other income (expense), net resulting from the disgorgement of short-swing profits arising from the sales of our common stock by a beneficial owner pursuant to Section 16(b) of the Securities and Exchange Act of 1934.

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form10-Q and the audited financial statements and related notes thereto included in our Annual Report on Form10-K for the year ended December 31, 2016,2017, which was filed with the U.S. Securities and Exchange Commission (the “SEC”(“SEC”) on February 23, 2017.27, 2018.

This Quarterly Report on Form10-Q contains forward-looking statements within the meaning of the federal securities laws. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “will,” “should,” “may,” “plan,” “assume” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from our anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Factors that might cause these differences include the following:

On November 9, 2017, our second commercial product, CINVANTI, was approved by the FDA. CINVANTI, in combination with other antiemetic agents, is indicated in adults for patients suffering fromthe prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer or postoperative pain.

chemotherapy (HEC) including high-dose cisplatin and nausea and vomiting associated with initial and repeat courses of moderately emetogenic cancer chemotherapy (MEC). CINVANTI is an intravenous (“IV”) formulation of theaprepitant, a substanceP/neurokinin-1 (“NK₁”) receptor antagonist. CINVANTI is the only IV formulation of an NK₁ receptor antagonist aprepitant, has been developedindicated for the prevention of CINV as an adjunct toacute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC that is free of polysorbate 80 or any other antiemetic agents.synthetic surfactant. We submitted an NDA withcommenced commercial sales of CINVANTI in the FDA for CINVANTI using the 505(b)(2) regulatory pathway.U.S. in January 2018.

HTX-011, which utilizes Heron’s proprietary Biochronomer Technology, is aan investigational, long-acting, extended-release formulation of the local anesthetic bupivacaine in a fixed-dose combination with the anti-inflammatory meloxicam for the preventionmanagement of postoperative pain. By delivering sustained levels of both a potent anesthetic and ana local anti-inflammatory agent directly to the site of tissue injury,HTX-011 was designed to providedeliver superior pain relief while potentially reducing the need for systemically administered pain medications such as opioids, which carry the risk of harmful side effects, abuse and addiction. The Phase 2 development program forHTX-011 has been shown to reduce pain significantly better than placebo or bupivacaine alone in five diverse surgical models: hernia repair, abdominoplasty, bunionectomy, total knee arthroplasty and breast augmentation.HTX-011 was designed to target the many patients undergoing a wide range of surgeries who experience significant postoperative pain. Following anEnd-of-Phase 2 meeting with the FDA, we initiated our Phase 3 program, which we anticipate completing in the first half of 2018. We expect to file an NDA forHTX-011 in 2018. We have been granted Fast Track designation forHTX-011 byfrom the FDA for local administration intoin the surgical sitefourth quarter of 2017 and Breakthrough Therapy designation in the second quarter of 2018. We recently submitted our New Drug Application (“NDA”) to reduce postoperative pain and the needFDA for opioid analgesics for 72 hours. Fast Track designation is intended to facilitate the development and expedite the review of new therapies to treat serious conditions with unmet medical needs by providing sponsors with the opportunity for frequent interactions with the FDA.HTX-011.

CINV Product Portfolio

SUSTOL

SUSTOL iswas our first commercial product. SUSTOL was approved by the FDA on August 9, 2016, and we commenced commercial sales in the U.S. in October 2016.

SUSTOL is indicated in combination with other antiemetics in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of MECmoderately emetogenic chemotherapy (MEC) or ACanthracycline and cyclophosphamide (AC) combination chemotherapy regimens. SUSTOL is an extended-release, injectable5-hydroxytryptamine type 3(“5-HT₃”) receptor antagonist that utilizes our Biochronomer technologyTechnology to maintain therapeutic levels of granisetron for³5 days. The SUSTOL global Phase 3 development program was comprised of two, large, guideline-based clinical trialsstudies that evaluated SUSTOL’s efficacy and safety in more than 2,000 patients with cancer. TheSUSTOL’s efficacy of SUSTOLin preventing nausea and vomiting was evaluated in both the acute phase (day 1(0 – 24 hours following chemotherapy) and the delayed phase (days2-5(24 – 120 hours following chemotherapy).

SUSTOL is the first extended-release5-HT₃ receptor antagonist approved for the prevention of acute and delayed nausea and vomiting associated with both MEC and AC combination chemotherapy regimens. A standard of care in the treatment of breast cancer and other cancer types, AC regimens are among the most commonly prescribed highly emetogenic chemotherapy (“HEC”)HEC regimens, as defined by both the National Comprehensive Cancer Network (“NCCN”) and the American Society of Clinical Oncology.

In February 2017, the NCCN included SUSTOL as a part of its NCCN Clinical Practice Guidelines in Oncology for Antiemesis Version 1.2017. The NCCN has given SUSTOL a Category 1 recommendation, the highest level category of evidence and consensus, for use in the prevention of acute and delayed CINVnausea and vomiting in patients receiving HEC or MEC regimens. The guidelines now identify SUSTOL as a “preferred” agent for preventing CINVnausea and vomiting following MEC. Further, the guidelines highlight the unique, extended-release formulation of SUSTOL.

CINVANTIIn January 2018, a product-specific billing code, or permanentJ-code(“J-code”), for SUSTOL became available. The newJ-code was assigned by the Centers for Medicare and Medicaid Services (“CMS”) and will help simplify the billing and reimbursement process for prescribers of SUSTOL.

CINVANTI using the 505(b)(2) regulatory pathway. Our NDA for CINVANTI is pending review with the FDA, and has been assigned a Prescription Drug User Fee Act goal date of November 12, 2017.

CINVANTI is a proprietary,our second commercial product. CINVANTI was approved by the FDA on November 9, 2017, and we commenced commercial sales in the U.S. in January 2018.

CINVANTI, in combination with other antiemetic agents, is indicated in adults for the prevention of acute and delayed nausea and vomiting associated with initial and repeat courses of highly emetogenic cancer chemotherapy (HEC) including high-dose cisplatin and nausea and vomiting associated with initial and repeat courses of moderately emetogenic cancer chemotherapy (MEC).

CINVANTI is an intravenous formulation of aprepitant, an NK₁ receptor antagonist. CINVANTI is the first intravenous formulation to directly deliver aprepitant, the active ingredient in EMEND^® capsules. Aprepitant (including its prodrug, fosaprepitant) is the only single-agent NK₁ receptor antagonist to significantly reduce nausea and vomiting in both the acute phase (0 – 24 hours after chemotherapy) and the delayed phase (24 – 120 hours after chemotherapy). CINVANTI is the only IV formulation of an NK₁ receptor antagonist indicated for the prevention of CINV. acute and delayed nausea and vomiting associated with HEC and nausea and vomiting associated with MEC that is free of polysorbate 80 or any other synthetic surfactant.

NK₁receptor antagonists are typically used in combination with5-HT₃ receptor antagonists. Currently, theThe only other injectable NK₁ receptor antagonist currently approved in the U.S. for both acute and delayed CINV, EMEND^® IV (fosaprepitant), contains polysorbate 80, a synthetic surfactant, which may increase the risk ofhas been linked to hypersensitivity reactions, including anaphylaxis, and other infusion site reactions. OurThe CINVANTI formulation for CINVANTI does not contain apolysorbate 80 or any other synthetic surfactant. Our NDA submission includesCINVANTI data demonstratinghas demonstrated the bioequivalence of CINVANTI to EMEND IV, for Injection, supporting its efficacy for the prevention of both acute and delayed CINVnausea and vomiting associated with both MECHEC and HEC.

Total Knee Arthroplasty — Study 209 Results

Study 209 was a randomized, placebo- and active-controlled, double-blind, Phase 2b clinical study in patients undergoing primary unilateral total knee arthroplasty to evaluate the analgesic efficacy, safety and pharmacokinetics of locally administeredHTX-011 into the surgical site. Following a dose-escalation phase, 222 patients were randomized to receive:(1) HTX-011 400 mg administered via instillation into the surgical site(HTX-011 alone);(2) HTX-011 400 mg administered via instillation into the surgical site with a low dose of ropivacaine injected into the posterior capsule(HTX-011 combination); (3) bupivacaine 125 mg administered via multiple injections into the surgical site; and (4) placebo. Ropivacaine and bupivacaine are generically availablestandard-of-care local anesthetics used in the management of postoperative pain. This study included apre-specified hierarchical testing strategy for the primary and key secondary endpoints for theHTX-011 400 mg treatment groups. The primary endpoint was pain intensity as measured by the Area Under the Curve (“AUC”) from 0 to 48 hours post-surgery (“AUC0-48”) forHTX-011 compared to placebo. The key secondary endpoint was pain intensity as measured by the AUC from 0 to 72 hours post-surgery (“AUC0-72”) forHTX-011 compared to placebo. The primary and key secondary endpoints were achieved:

Breast Augmentation — Study 211 Results

Study 211 was a randomized, placebo- and active-controlled, double-blind, Phase 2 development program for2b dose-finding study in patients undergoing augmentation mammoplasty to evaluate the analgesic efficacy, safety and pharmacokinetics ofHTX-011 when administered by instillation into the surgical site or via ultrasound-guided lateral and medial pectoral nerve block before surgery. The study consisted of three cohorts comparingHTX-011 nerve block (60 mg, 120 mg, 240 mg) to the standard dose of bupivacaine 50 mg, administered as a nerve block, and placebo, and a final cohort comparing bothHTX-011 400 mg administered by instillation andHTX-011 400 mg administered as a nerve block to the same two control groups. A total of 243 patients were enrolled. The primary endpoint was pain intensity as measured by the AUC from 0 to 24 hours post-surgery (“AUC0-24”) compared to placebo. The primary endpoint of the study was achieved: