Verastem, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of business
Verastem, Inc. (the Company) is a biopharmaceutical company focused on discovering and developing drugs to improve the survival and quality of life of cancer patients. The Company’s operations to date have been limited to organizing and staffing the Company, business planning, raising capital, identifying and acquiring potential product candidates and undertaking preclinical and clinical studies of its product candidates.
The Company is subject to a number of risks similar to other life science companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, inability to obtain marketing approval of product candidates, competitors developing new technological innovations, market acceptance of the Company’s products and protection of proprietary technology. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate product revenue or achieve profitability.
As of June 30, 2017, the Company had cash, cash equivalents and investments of $57.9 million and accumulated deficit of $261.8 million. Although the Company has incurred recurring losses and expects to continue to incur losses for the foreseeable future, the Company expects its cash, cash equivalents and investments to be sufficient to fund its current operating plan for at least the next twelve months from the date of issuance of these condensed consolidated financial statements.
2. Summary of significant accounting policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2017. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (SEC) on March 23, 2017.
Recently Issued Accounting Standards Updates
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting under Topic 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after a modification. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15
adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted.
The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which supersedes the guidance under FASB Accounting Standards Codification (ASC) Topic 840,
Leases
, resulting in the creation of FASB ASC Topic 842,
Leases.
ASU 2016-02 requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. The guidance also eliminates the current real estate-specific provisions for all entities. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Standards Updates
In January 2017, the FASB issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.
ASU 2017-03 clarifies the SEC staff’s expectations about the extent of disclosures that a registrant is expected to provide regarding the impact that the adoption of ASUs 2014-09 (Revenue from Contracts with Customers), 2016-02 (Leases) and 2016-13 (Measurement of Credit Losses on Financial Instruments) will have on its financial statements. It also conforms SEC guidance on accounting for tax benefits resulting from investments in affordable housing projects to the guidance in ASU 2014-01,
Investments -Equity Method and Joint Ventures (Topic 323)
. The guidance under this ASU was effective upon issuance and did not have a material impact on the Company’s disclosures.
In October 2016, the FASB issued ASU 2016-17,
Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
. ASU 2016-17 updates ASU 2015-02. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. ASU 2016-17 is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard effective January 1, 2017. The adoption of this ASU did not have an effect on the Company’s financial statements or disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 simplifies the accounting for share-based compensation arrangements, including the accounting for forfeitures, income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard was effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 effective January 1, 2017. Upon adoption, the Company elected to begin accounting for forfeitures as they occur, rather than estimating a forfeiture rate, and recorded an immaterial cumulative-effect adjustment to opening accumulated deficit. Also u
pon adoption, the Company recognized all previously unrecognized tax benefits, which would have resulted in the recognition of an immaterial cumulative-effect adjustment to opening accumulated deficit; however, these unrecognized tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance. Therefore, the recognition of these benefits had no net cumulative-effect on opening accumulated deficit upon adoption.
Significant accounting policies
There have been no material changes, other than those described above, to the significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on March 23, 2017.
3. Fair value of financial instruments
The Company determines the fair value of its financial instruments based upon the fair value hierarchy, which prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:
Level 1 inputs
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Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.
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Level 2 inputs
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Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
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Level 3 inputs
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Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
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Items Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis (in thousands):
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June 30, 2017
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Description
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Total
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Level 1
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Level 2
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Level 3
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Financial assets
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|
|
|
|
|
|
|
|
|
|
|
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Cash equivalents
|
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$
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25,627
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$
|
25,627
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$
|
—
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$
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—
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|
Short-term investments
|
|
|
30,335
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|
|
—
|
|
|
30,335
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|
|
—
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|
Total financial assets
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$
|
55,962
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|
$
|
25,627
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|
$
|
30,335
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$
|
—
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December 31, 2016
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Description
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Total
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Level 1
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Level 2
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Level 3
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Financial assets
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Cash equivalents
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$
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30,540
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$
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20,540
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$
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10,000
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$
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—
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Short-term investments
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48,548
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|
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—
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48,548
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|
|
—
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Total financial assets
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$
|
79,088
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$
|
20,540
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|
$
|
58,548
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$
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—
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The Company’s cash equivalents and investments are comprised of U.S. Government money market funds and corporate bonds and commercial paper of publicly traded companies. These investments have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices provided by third party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by the pricing services as of June 30, 2017 and December 31, 2016.
Fair Value of Financial Instruments
The fair value of the Company’s long-term debt is
determined using current applicable rates for similar instruments as of the balance sheet dates and an assessment of the credit rating of the Company. The carrying value of the Company’s debt approximates fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments.
The fair value of the Company’s long-term debt was determined using Level 3 inputs.
4. Investments
Cash, cash equivalents and investments consist of the following (in thousands):
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June 30, 2017
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
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Cost
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Gains
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Losses
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Value
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Cash and cash equivalents:
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Cash and money market accounts
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$
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27,583
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$
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—
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|
$
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—
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$
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27,583
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Total cash and cash equivalents
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|
$
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27,583
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$
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—
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$
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—
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$
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27,583
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Investments:
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|
|
|
|
|
|
|
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|
|
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|
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Corporate bonds and commercial paper (due within 1 year)
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$
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30,340
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$
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6
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|
$
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(11)
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$
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30,335
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Total investments
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$
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30,340
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$
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6
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$
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(11)
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$
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30,335
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Total cash, cash equivalents, and investments
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$
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57,923
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$
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6
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$
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(11)
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$
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57,918
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December 31, 2016
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Gross
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Gross
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Amortized
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Unrealized
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Unrealized
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Fair
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Cost
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Gains
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Losses
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Value
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Cash and cash equivalents:
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|
|
|
|
|
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|
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Cash and money market accounts
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$
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22,349
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$
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—
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|
$
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—
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$
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22,349
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Overnight repurchase agreements
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|
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10,000
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|
|
—
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|
|
—
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|
|
10,000
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Total cash and cash equivalents
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$
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32,349
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|
$
|
—
|
|
$
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—
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$
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32,349
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Investments:
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|
|
|
|
|
|
|
|
|
|
|
|
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Corporate bonds and commercial paper (due within 1 year)
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$
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48,519
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$
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53
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|
$
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(24)
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|
$
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48,548
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Total investments
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$
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48,519
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|
$
|
53
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|
$
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(24)
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$
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48,548
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Total cash, cash equivalents, and investments
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|
$
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80,868
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$
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53
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$
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(24)
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$
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80,897
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There were no realized gains or losses on investments for the three and six months ended June 30, 2017 or 2016. There were
no investments that had been in an unrealized loss position for more than 12 months as of June 30, 2017 or December 31, 2016. There were 8 debt securities in an unrealized loss position for less than 12 months at June 30, 2017 and there were 14 debt securities that had been in an unrealized loss position for less than 12 months at December 31, 2016. The aggregate unrealized loss on these securities as of June 30, 2017 and December 31, 2016 was approximately $11,000 and $24,000, respectively, and the fair value was $17.4 million and $23.6 million, respectively. The Company considered the decline in the market value for these securities to be primarily attributable to current economic conditions. As it was not more likely than not that the Company would be required to sell these securities before the recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of June 30, 2017.
5. Accrued expenses
Accrued expenses consist of the following (in thousands):
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June 30,
2017
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December 31, 2016
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Contract research organization costs
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$
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2,493
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$
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3,258
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Compensation and related benefits
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1,102
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2,505
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Professional fees
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346
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|
403
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Deferred rent
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|
182
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|
|
175
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Consulting fees
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|
81
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|
|
527
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Other
|
|
|
37
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|
|
28
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|
|
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$
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4,241
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$
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6,896
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6. Long-term debt
On March 21, 2017 (Closing Date), Verastem, Inc. (Borrower) entered into a term loan facility of up to $25.0 million (Term Loan) with Hercules Capital, Inc., a Maryland corporation (Hercules), the proceeds of which will be used for its ongoing research and development programs and for general corporate purposes. The Term Loan is governed by a loan and security agreement, dated March 21, 2017 (Loan Agreement), which provides for up to four separate advances subject to certain conditions of funding. The first tranche of $2.5 million was drawn on the Closing Date.
The Term Loan will mature on December 1, 2020 (Loan Maturity Date). Each advance accrues interest at a floating per annum rate equal to the greater of either (a) 10.5% or (b) the lesser of (i) 12.75% and (ii) the sum of (x) 10.5% plus (y) (A) the prime rate minus (B) 4.5%. As of June 30, 2017, the interest rate was 10.5%. The Term Loan provides for interest-only payments until November 1, 2018. The interest-only period may be extended to May 1, 2019 if the Borrower obtains minimum cash proceeds of $20.0 million from a sale of equity securities or subordinated debt and/or ongoing commercial partnerships. Thereafter, amortization payments will be payable monthly in twenty-six installments (or, if the period requiring interest-only payments has been extended to May 1, 2019, in twenty installments) of principal and interest (subject to recalculation upon a change in prime rates).
The Term Loan is secured by a lien on substantially all of the assets of the Borrower, other than intellectual property, and contains customary covenants and representations.
The Company assessed all terms and features of the Loan Agreement in order to identify any potential embedded features that would require bifurcation or any beneficial conversion features. As part of this analysis, the Company assessed the economic characteristics and risks of the Loan Agreement, including put and call features. The Company determined that all features of the Loan Agreement were clearly and closely associated with a debt host and did not require bifurcation as a derivative liability, or the fair value of the feature was immaterial to the Company's financial statements. The Company reassesses the features on a quarterly basis to determine if they require separate accounting.
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Six months ended June 30,
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2017
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2016
|
Risk-free interest rate
|
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2.05
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%
|
|
1.47
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%
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Volatility
|
|
79
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%
|
|
75
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%
|
Dividend yield
|
|
—
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—
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Expected term (years)
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6.4
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5.9
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In June 2016, the Company granted stock options to purchase a total of 500,000 shares of common stock to certain employees that vest only upon the achievement of specified performance conditions. The grant date fair value of these options was approximately $445,000. In October 2016, the Company determined that 50% of performance conditions had been achieved and as a result 250,000 shares vested and the Company recognized stock-based compensation expense of approximately $222,000 for the year ended December 31, 2016. The Company determined that the remaining 50% of the performance conditions were not considered probable of achievement as of June 30, 2017 and as a result, has not recognized any stock-based compensation expense related to the remaining unvested awards.
Restricted stock units
The approximate total fair value of restricted stock units (RSUs) vested during the three and six months ended June 30, 2016 was $0 and $65,000, respectively. As of June 30, 2016, all RSUs had vested and there was no remaining unrecognized stock-based compensation expense. There were no RSUs granted during or subsequent to the three and six months ended June 30, 2016.
During the first quarter of 2013, the Company amended the terms of certain RSUs related to a total of 697,060 shares of common stock to allow for tax withholdings greater than the minimum required statutory withholding amount. As a result of this change in the terms of the awards, the outstanding RSUs were considered to be liability instruments. As a result of this modification, the Company recorded a liability for the fair value of the awards as of each reporting date with the change in fair value recorded through the statement of operations. During the three and six months ended June 30, 2016, the Company made approximate deposits with the taxing authorities of $0 and $5,000 in respect of the tax liability for awards that settled during the period. As of June 30, 2016, the Company had no remaining tax liability related to these awards.
9. Equity offerings
In March 2017, the Company terminated the at-the-market equity offering program established in December 2013 and established a new at-the-market equity offering program pursuant to which it is able to offer and sell up to $35.0 million of its common stock at then current market prices from time to time through Cantor Fitzgerald & Co., as sales agent. The Company has not commenced sales under this program.
10. Reduction in force
In October 2015, the Company announced a reduction of workforce by approximately 50% to 20 full time employees. All affected employees
received
severance pay and outplacement assistance. As a result of the reduction in force and associated costs, the Company paid one-time severance and related costs of $1.1 million.
Of these one-time severance and related costs, approximately $349,000 was paid through December 31, 2015, approximately $114,000 and approximately $635,000 was paid in the three and six months ended June 30, 2016, and approximately $78,000 was paid in the 2016 fiscal year subsequent to June 30, 2016. As of December 31, 2016, all one-time severance and related costs have been paid and no liability remains.
11. Subsequent events
The Company reviews all activity subsequent to the end of the quarter but prior to issuance of the condensed consolidated financial statements for events that could require disclosure or that could impact the carrying value of assets or liabilities as of the balance sheet date. There are no material subsequent events to the three and six months ended June 30, 2017.
Item 2. Management’s Discussion and Analysi
s of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10‑Q. The following discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward‑looking statements as a result of certain factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016. Please also refer to the sections under headings “Forward‑Looking Statements” and “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016.
OVERVIEW
We are a biopharmaceutical company focused on discovering and developing drugs to improve the survival and quality of life of cancer patients. Our most advanced product candidates, duvelisib and defactinib (VS-6063), utilize a multi-faceted approach to treat cancers originating either in the blood or major organ systems. We are currently evaluating these compounds in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, lung cancer, ovarian cancer, mesothelioma, and pancreatic cancer. We believe that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents or other current and emerging standard of care treatments in aggressive cancers that are poorly served by currently available therapies.
Duvelisib targets the Phosphoinositide 3-kinase (PI3K) and defactinib targets the Focal Adhesion Kinase (FAK) signaling pathways. The PI3K signaling pathway plays a central role in cancer proliferation and survival. Duvelisib is an investigational oral therapy designed to attack both malignant B-cells and T-cells and disrupt the tumor microenvironment to help thwart their growth and proliferation for patients with lymphatic cancers through the dual inhibition of PI3K delta and gamma. FAK is a non-receptor tyrosine kinase that is involved in cellular adhesion and, in cancer, metastatic capability. Defactinib is a targeted inhibitor of FAK. Similar to duvelisib, defactinib is also orally available and designed to be a potential therapy for patients to take at home under the advice of their physician.
Duvelisib is currently being studied in the DUO™ study, which is a Phase 3, randomized, open-label, two-arm trial of duvelisib versus treatment with ofatumumab. This study will evaluate the safety and efficacy of duvelisib as compared to ofatumumab in approximately 300 patients with relapsed or refractory chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL).
Duvelisib has successfully completed the Phase 2 DYNAMO™ study which is an open-label, single-arm trial of duvelisib that evaluated the safety and efficacy of duvelisib in 129 patients with refractory indolent non-Hodgkin lymphoma (iNHL). This study met its primary endpoint of overall response rate and the majority of reported side effects were expected, reversible and clinically manageable.
Defactinib is currently being evaluated in a Phase 1b study in combination with Merck & Co.’s PD-1 inhibitor pembrolizumab and gemcitabine in patients with advanced pancreatic cancer, a Phase 1/2 clinical collaboration with Pfizer Inc. (Pfizer) and Merck KGaA to evaluate defactinib in combination with avelumab, an anti-PD-L1 antibody, in patients with ovarian cancer, and a Phase 1/2 study in collaboration with Cancer Research UK and Merck & Co. for the combination of defactinib with pembrolizumab in patients with non-small cell lung cancer (NSCLC), mesothelioma or pancreatic cancer.
Our operations to date have been organizing and staffing our company, business planning, raising capital, identifying and acquiring potential product candidates and undertaking preclinical studies and clinical trials for our product candidates. To date, we have not generated any revenues. We have financed our operations to date through private placements of preferred stock, our initial public offering in February 2012, our follow-on offerings in July 2013 and January 2015, our loan and security agreement executed with Hercules Capital, Inc. (Hercules) in March 2017, and sales of common stock under our at-the market equity offering program.
As of June 30, 2017, we had an accumulated deficit of $261.8 million. Our net loss was $13.4 million, $26.4 million, $8.6 million and $16.9 million for the three and six months ended June 30, 2017 and 2016, respectively. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.
The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2016 related to accrued research and development expenses and stock-based compensation. There were no material changes to these critical accounting policies in the three and six months ended June 30, 2017. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on March 23, 2017.
The Company has elected to follow the extended transition period guidance provided for in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. The Company will disclose the date on which adoption of such standards is required for non-emerging growth companies and the date on which the Company will adopt the recently issued accounting standards.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2017 and 2016
Research and development expense.
Research and development expense for the three months ended June 30, 2017 (2017 Quarter) was $9.0 million compared to $4.5 million for the three months ended June 30, 2016 (2016 Quarter). The $4.5 million increase from the 2016 Quarter to the 2017 Quarter was primarily related to an increase of $3.6 million in contract research organization (CRO) expense for outsourced biology, development and clinical services, which includes our clinical trial costs, an increase of approximately $894,000 in consulting fees, and an increase in personnel related costs of approximately $244,000. These increases were offset by a decrease in stock-based compensation and other expenses of approximately $176,000.
We allocate the expenses related to external research and development services, such as CROs, clinical sites, manufacturing organizations and consultants by project. The table below summarizes our allocation of research and development expenses to our clinical programs, including duvelisib and defactinib, for the 2017 Quarter and the 2016 Quarter. We use our employee and infrastructure resources across multiple research and development projects. Our project costing methodology does not allocate personnel and other indirect costs to specific clinical programs. These unallocated research and development expenses are summarized in the table below and include approximate personnel related costs of $1.1 million and $869,000 for the 2017 Quarter and the 2016 Quarter, respectively.
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Three months ended June 30,
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2017
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2016
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(in
thousands)
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|
(in
thousands)
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|
Duvelisib
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$
|
5,478
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|
$
|
—
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|
Defactinib
|
|
|
911
|
|
|
859
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|
Unallocated and other research and development expense
|
|
|
2,416
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|
|
3,416
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|
Unallocated stock-based compensation expense
|
|
|
237
|
|
|
217
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|
Total research and development expense
|
|
$
|
9,042
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|
$
|
4,492
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|
General and administrative expense.
General and administrative expense for the 2017 Quarter was $4.4 million compared to $4.2 million for the 2016 Quarter. The increase of approximately $208,000 from the 2016 Quarter to the 2017 Quarter primarily resulted from an increase in consulting and professional fees of approximately $870,000, partially offset by decreases in stock-based compensation expense of approximately $534,000 and personnel costs of approximately $152,000.
Interest income.
Interest income remained flat from the 2016 Quarter to the 2017 Quarter primarily as a result of higher interest rates on investments in the 2017 Quarter, offset by a lower investment cost basis.
Interest expense.
Interest expense for the 2017 Quarter was approximately $109,000 related to our loan and security agreement executed with Hercules in March 2017. We did not incur any interest expense in the 2016 Quarter.
Comparison of the six months ended June 30, 2017 and June 30, 2016
Research and development expense.
Research and development expense for the six months ended June 30, 2017 (2017 Period) was $17.4 million compared to $8.7 million for the six months ended June 30, 2016 (2016 Period). The $8.7 million increase from the 2016 Period to the 2017 Period was primarily related to an increase of $6.4 million in CRO expense for outsourced biology, development and clinical services, which includes our clinical trial costs, an increase of $1.4 million in consulting fees, and an increase in personnel related costs of $1.2 million. These increases were offset by a decrease in stock-based compensation and other expenses of approximately $263,000.
We allocate the expenses related to external research and development services, such as CROs, clinical sites, manufacturing organizations and consultants by project. The table below summarizes our allocation of research and development expenses to our clinical programs, including duvelisib and defactinib, for the 2017 Period and the 2016 Period. We use our employee and infrastructure resources across multiple research and development projects. Our project costing methodology does not allocate personnel and other indirect costs to specific clinical programs. These unallocated research and development expenses are summarized in the table below and include approximate personnel related costs of $2.7 million and $1.5 million for the 2017 Period and the 2016 Period, respectively.
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Six months ended June 30,
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2017
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2016
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(in
thousands)
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(in
thousands)
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Duvelisib
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$
|
9,525
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$
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—
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Defactinib
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1,519
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2,357
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Unallocated and other research and development expense
|
|
|
5,902
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5,810
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Unallocated stock-based compensation expense
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481
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|
|
504
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|
Total research and development expense
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|
$
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17,427
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|
$
|
8,671
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|
General and administrative expense.
General and administrative expense for the 2017 Period was $9.2 million compared to $8.5 million for the 2016 Period. The increase of approximately $716,000 from the 2016 Period to the 2017 Period primarily resulted from an increase in consulting and professional fees of $1.8 million, partially offset by decreases in stock-based compensation expense of approximately $931,000 and personnel costs of approximately $117,000.
Interest income.
Interest income increased to approximately $295,000 for the 2017 Period from approximately $280,000 for the 2016 Period. This increase was primarily due to higher interest rates on investments, offset by a lower investment cost basis.
Interest expense.
Interest expense for the 2017 Period was approximately $121,000 related to our loan and security agreement executed with Hercules in March 2017. We did not incur any interest expense in the 2016 Period.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
To date, we have not generated any revenues. We have financed our operations to date through private placements of preferred stock, our initial public offering in February 2012, our follow-on offerings in July 2013 and January 2015, our loan and security agreement executed with Hercules in March 2017, and sales of common stock under our former at-the market equity offering program.
As of June 30, 2017, we had $57.9 million in cash, cash equivalents and investments. We primarily invest our cash, cash equivalents and investments in a U.S. Government money market fund and corporate bonds and commercial paper of publicly traded companies.
Cash flows
The following table sets forth the primary sources and uses of cash for the 2017 Period and the 2016 Period (in thousands):
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Six months ended June 30,
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2017
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2016
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Net cash (used in) provided by:
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Operating activities
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$
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(25,133)
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$
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(17,513)
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Investing activities
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18,119
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|
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32,212
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|
Financing activities
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|
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2,248
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(5)
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(Decrease) increase in cash and cash equivalents
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$
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(4,766)
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$
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14,694
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Operating activities.
The use of cash in both periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital, including payments of one-time severance and related costs of approximately $635,000 in the 2016 Period.
Investing activities.
The cash provided by investing activities for the 2017 Period reflects the net maturities of investments of $18.1 million. The cash provided in investing activities for the 2016 Period reflects the net maturities of investments of $32.2 million.
Financing activities.
The cash provided by financing activities for the 2017 Period represents $2.4 million in net proceeds received from a loan and security agreement executed with Hercules, offset by approximately $138,000 of deferred financing costs. The cash used in financing activities for the 2016 Period represents approximately $5,000 used to satisfy the tax withholding obligations on certain restricted stock units that were net settled by employees.
On March 21, 2017 (Closing Date), Verastem, Inc. (Borrower) entered into a term loan facility of up to $25.0 million (Term Loan) with Hercules, the proceeds of which will be used for our ongoing research and development programs and for general corporate purposes. The Term Loan is governed by a loan and security agreement, dated March 21, 2017 (Loan Agreement), which provides for up to four separate advances subject to certain conditions of funding. The first tranche of $2.5 million was drawn on the Closing Date.
The Term Loan will mature on December 1, 2020 (Loan Maturity Date). Each advance accrues interest at a floating per annum rate equal to the greater of either (a) 10.5% or (b) the lesser of (i) 12.75% and (ii) the sum of (x) 10.5% plus (y) (A) the prime rate minus (B) 4.5%. The Term Loan provides for interest-only payments until November 1, 2018. The interest-only period may be extended to May 1, 2019 if the Borrower obtains minimum cash proceeds of $20.0 million from a sale of equity securities or subordinated debt and/or ongoing commercial partnerships. Thereafter, amortization payments will be payable monthly in twenty-six installments (or, if the period requiring interest-only payments has been extended to May 1, 2019, in twenty installments) of principal and interest (subject to recalculation upon a change in prime rates).
The Term Loan is secured by a lien on substantially all of the assets of the Borrower, other than intellectual property and contains customary covenants and representations.
In March 2017, we terminated the at-the-market equity offering program established in December 2013 and established a new at-the-market equity offering program pursuant to which we are able to offer and sell up to $35.0 million of our common stock at then current market prices from time to time through Cantor Fitzgerald & Co., as sales agent. We have not commenced sales under this program.
Funding requirements
We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses and operating losses will increase substantially if and as we:
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·
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continue our ongoing clinical trials, including with our most advanced product candidates duvelisib and defactinib;
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·
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initiate additional clinical trials for our product candidates;
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·
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maintain, expand and protect our intellectual property portfolio;
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·
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acquire or in-license other products and technologies;
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·
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hire additional clinical, development and scientific personnel;
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·
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add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts; and
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·
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ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval.
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We expect our existing cash, cash equivalents and investments will be sufficient to fund our current operating plan for at least the next twelve months from the date of filing of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. Our future capital requirements will depend on many factors, including:
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the rate and size of enrollment of, results from, and cost of completing our ongoing clinical trials;
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·
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the scope, progress and results of our ongoing and potential future clinical trials;
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·
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the extent to which we acquire or in-license other products and technologies;
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·
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the costs, timing and outcome of regulatory review and/or approval of our product candidates;
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·
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the costs and timing of future commercialization activities for any of our product candidates for which we receive marketing approval;
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·
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revenue, if any, received from commercial sales of any of our product candidates for which we receive marketing approval;
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·
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and
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·
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our ability to establish collaborations on favorable terms, if at all.
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Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
Item 3. Quantitative and Qualitative Disclosures About Market Ris
k.
We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents and investments of $57.9 million and $80.9 million as of June 30, 2017 and December 31, 2016, respectively, consisting of cash, U.S. Government money market funds and corporate bonds and commercial paper of publicly traded companies. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because most of our investments are interest bearing. Our available for sale securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of most of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.
We have contracts with CROs and contract manufacturers globally, which may be denominated in foreign currencies. We may be subject to fluctuations in foreign currency rates in connection with these agreements. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. As of June 30, 2017, an immaterial amount of our total liabilities was denominated in currencies other than the functional currency.
On March 21, 2017, we entered into a term loan facility of up to $25.0 million with Hercules Capital, Inc. (Term Loan). An initial term loan was made on March 21, 2017 in an aggregate principal amount equal to $2.5 million. The Term Loan bears interest per annum equal to the greater of either (a) 10.5% or (b) the lesser of (i) 12.75% and (ii) the sum of (x) 10.5% plus (y) (A) the prime rate minus (B) 4.5%. Changes in interest rates can cause interest charges to fluctuate under the Term Loan. As of June 30, 2017, principal payable under the Term Loan was $2.5 million. A 10%
increase in current interest rates would have resulted in an immaterial increase in the amount of cash interest expense paid for the three and six months ended June 30, 2017.
Item 4. Controls and Procedure
s.
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934 (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2017, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting during the three and six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.