Item 7. Management’s Discussion and Analysis 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 consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10‑K. 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 as set forth under “Risk Factors.” Please also refer to the section under the heading “Forward‑Looking Statements.”
OVERVIEW
We are a biopharmaceutical company focused on developing and commercializing medicines to improve the survival and quality of life of cancer patients. Our marketed product, COPIKTRA® (duvelisib) capsules, and most advanced product candidates, defactinib and CH5126766 also referred to as VS-6766, utilize a multi-faceted approach to treat cancers originating either in the blood or major organ systems. We are currently developing duvelisib and our product candidates in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, head and neck cancer, ovarian cancer, colorectal cancer, lung cancer, pancreatic cancer, and mesothelioma. We believe that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents, other pathway inhibitors or other current and emerging standard of care treatments in aggressive cancers that do not adequately respond to currently available therapies.
Our operations to date have been organizing and staffing our company, business planning, raising capital, identifying and acquiring potential product candidates, undertaking preclinical studies and clinical trials for duvelisib and our product candidates and initiating U.S. commercial operations following the approval of COPIKTRA. We have financed our operations to date primarily through public offerings of our common stock, sales of common stock under our at-the-market equity offering programs, our loan and security agreement executed with Hercules Capital, Inc. (Hercules) in March 2017, as amended, the upfront payments under our license and collaboration agreements with Sanofi, Yakult and CSPC, and the issuance of $150.0 million aggregate principal amount of 2018 Notes in October 2018. With our U.S. commercial launch of COPIKTRA on September 24, 2018, we have recently begun financing a portion of our operations through product revenue.
As of December 31, 2019, we had an accumulated deficit of $524.8 million. Our net loss was $149.2 million, $72.4 million, and $67.8 million the years ended December 31, 2019, 2018 and 2017 respectively. We expect to incur significant expenses and operating losses for the foreseeable future as a result of our commercialization of COPIKTRA and the continued research and development of all of our product candidates. We will need to generate significant revenues to achieve profitability, and we may never do so. As of December 31, 2019, we had cash, cash equivalents, restricted cash and short-term investments of $111.3 million, inclusive of $35.7 million of restricted cash. On March 3, 2020, we received gross proceeds of $100.0 million from the sale of 46,511,628 shares of Common Stock. We expect our existing cash resources including proceeds from the sale of Common Stock in March 2020, along with revenue we expect to generate from sales of COPIKTRA, will be sufficient to fund our planned operations through 12 months from the date of issuance of these consolidated financial statements.
We expect to finance the future development costs of our clinical product portfolio with our existing cash, cash equivalents and short-term investments, or through strategic financing opportunities that could include, but are not limited to collaboration agreements, future offerings of our equity, or the incurrence of debt. However, there is no guarantee that any of these strategic or financing opportunities will be executed or executed on favorable terms, and some could be dilutive to existing stockholders. If we fail to obtain additional future capital, we may be unable to complete our planned preclinical studies and clinical trials and obtain approval of certain investigational product candidates from the FDA or foreign regulatory authorities.
FINANCIAL OPERATIONS OVERVIEW
Revenue
Product revenue, net represents the gross sales of COPIKTRA in the United States less provisions for product sales allowances and accruals. These provisions include trade allowances, rebates, chargebacks and discounts, product returns and other incentives. We sell COPIKTRA to a limited number of specialty pharmacies and specialty distributors. Although we expect net product revenues to increase over time, the provisions for product sales and allowances may fluctuate based on the mix of sales to either specialty pharmacy or specialty distributor customers. See “Critical Accounting Policies and Significant Judgements and Estimates” below for more information on the components of net U.S. product sales of COPIKTRA.
License and collaboration revenue to date has been generated through our license and collaboration agreements for the development and commercialization of duvelisib with Sanofi in the Sanofi Territory, CSPC in China and Yakult in Japan. The terms of these agreements contain multiple deliverables which may include (i) licenses, (ii) research and development activities, and (iii) the manufacture of finished drug product, active pharmaceutical ingredient (API), or development materials for a partner, which are reimbursed at a contractually determined rate. Payments to us may include (i) up‑front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API or development materials, (iv) payments based upon the achievement of certain milestones, and (v) royalties on product sales. Duvelisib has not received regulatory approval for commercial sale in the Sanofi Territory, China or Japan.
Costs of sales - product
Cost of sales - product consist of costs of COPIKTRA on which product revenue was recognized, royalties owed to Healthcare Royalty Partners (HCR) and Infinity we incur as a result of such sales of COPIKTRA, and certain period costs. We expensed the manufacturing costs of COPIKTRA as operating expenses in the periods prior to July 1, 2018. In the third quarter of 2018, we began capitalizing inventory costs for COPIKTRA manufactured in preparation for our launch in the United States based on our evaluation of, among other factors, the status of the COPIKTRA New Drug Application (NDA) in the United States and the ability of our third-party suppliers to successfully manufacture commercial quantities of COPIKTRA. Certain of the costs of COPIKTRA units recognized as revenue during 2019 were expensed prior to the September 2018 FDA marketing approval and, therefore, are not included in cost of sales during this period. We expect cost of sales - product to increase in relation to product revenues as we deplete these inventories.
Research and development expenses
Research and development expenses consist of costs associated with our research activities, including the development of our product candidates. Our research and development expenses consist of:
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employee‑related expenses, including salaries, benefits, travel and stock‑based compensation expense;
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external research and development expenses incurred under arrangements with third parties, such as contract research organizations (CROs), clinical sites, manufacturing organizations and consultants, including our scientific advisory board;
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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies; and
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costs associated with COPIKTRA prior to us concluding that regulatory approval is probable and that its net realizable value is recoverable.
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We expense research and development costs to operations as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.
On September 24, 2018, COPIKTRA was approved by the FDA and is now indicated for the treatment of adult patients with relapsed or refractory CLL/SLL after at least two prior therapies and relapsed or refractory FL after at least two prior systemic therapies. Due to long-lead time requirements for manufacturing our product, manufacturing constraints and the desire to have COPIKTRA commercially available as soon as possible following regulatory approval, we contracted with our third-party supplier to manufacture commercial quantities of COPIKTRA drug substance prior to final approval by regulators.
We expensed all pre-validation and validation manufacturing costs of drug product as research and development expenses in the periods prior to July 1, 2018. Total costs of manufacturing COPIKTRA drug product expensed as research and development through June 30, 2018 was approximately $1.8 million. Beginning July 1, 2018, we began capitalizing COPIKTRA related drug product costs for validation and post-validation (i.e. commercial) lots as regulatory approval became probable. For the periods beginning on July 1, 2018 and beyond, we have capitalized any COPIKTRA drug product costs incurred for commercial use as inventory.
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 external allocation of research and development expenses to our clinical programs, including COPIKTRA and defactinib, for the years ended December 31, 2019, 2018 and 2017. 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 $11.3 million, $9.2 million and $5.8 million of personnel costs for the years ended December 31, 2019, 2018 and 2017, respectively.
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Year ended December 31,
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2019
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2018
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2017
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(in thousands)
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(in thousands)
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(in thousands)
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COPIKTRA
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$
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25,518
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$
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24,771
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$
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30,409
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Defactinib
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1,823
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2,230
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2,894
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Unallocated and other research and development expense
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16,936
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14,604
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11,739
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Unallocated stock-based compensation expense
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1,501
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2,043
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1,381
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Total research and development expense
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$
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45,778
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$
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43,648
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$
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46,423
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Our research and development expenses may increase significantly in future periods as we undertake costlier development activities for our existing and future product candidates, including larger and later‑stage clinical trials.
The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material net cash inflows from our product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
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clinical trial results;
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the scope, rate of progress and expense of our research and development activities, including preclinical research and clinical trials;
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the potential benefits of our product candidates over other therapies;
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our ability to market, commercialize and achieve market acceptance for COPIKTRA or any of our other product candidates that we receive regulatory approval for;
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the terms and timing of regulatory approvals; and
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the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.
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A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those
which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and related costs for personnel, including stock‑based compensation expense, in our executive, finance, legal, information technology, commercial, communication, human resources, and business development functions. Other selling, general and administrative expenses include allocated facility costs, commercial costs, professional fees for legal, patent, investor and public relations, consulting, insurance premiums, audit, tax and other public company costs.
Other, interest income and interest expense
Other expense in 2019 consists entirely of the mark-to-market adjustment of the bifurcated make-whole interest provision derivative liability related to the 2019 Notes. Other income in 2018 consists entirely of the mark-to-market adjustment of the bifurcated conversion option derivative liability related to the 2018 Notes.
Interest income reflects interest earned on our cash, cash equivalents and available-for-sale securities.
Interest expense reflects interest expense due under both our term loan facility executed with Hercules and the Notes, as well as non-cash interest related to the amortization of debt discount and issuance costs.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, stock‑based compensation, revenue recognition, collaborative agreements, accounts receivable, inventory and intangible assets described in greater detail below. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10‑K. However, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services in accordance with ASC 606 Revenue from Contracts with Customers. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine which goods or services are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Revenue, Net – We sell COPIKTRA to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resell COPIKTRA either directly to patients, or to community hospitals or oncology clinics with in-office dispensaries who in turn distribute COPIKTRA to patients. In addition to distribution agreements with customers, we also enter into arrangements with (1) certain government agencies and various private organizations (Third-Party Payers), which may provide for chargebacks or discounts with respect to the purchase of COPIKTRA, and (2) Medicare and Medicaid, which may provide for certain rebates with respect to the purchase of COPIKTRA.
We recognize revenue on sales of COPIKTRA when a customer obtains control of the product, which occurs at a point in time (typically upon delivery). Product revenues are recorded at the wholesale acquisition costs, net of applicable reserves for variable consideration. Components of variable consideration include trade discounts and allowances, Third-Party Payer chargebacks and discounts, government rebates, other incentives, such as voluntary co-pay assistance, product returns, and other allowances that are offered within contracts between us and customers, payors, and other indirect customers relating to our sale of COPIKTRA. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes based upon relevant factors such as, customer contract terms, information received from third-parties regarding the anticipated payor mix for COPIKTRA, known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled with respect to sale made.
The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period. Our analyses contemplate the application of the constraint in accordance with ASC 606. For the year ended December 31, 2019, we determined a material reversal of revenue would not occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances: We generally provide customers with invoice discounts on sales of COPIKTRA for prompt payment, which are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we compensate our specialty distributor customers for sales order management, data, and distribution services. We have determined such services are not distinct from our sale of COPIKTRA to the specialty distributor customers and, therefore, these payments have also been recorded as a reduction of revenue within the consolidated statements of operations and comprehensive loss through December 31, 2019.
Third-Party Payer Chargebacks, Discounts and Fees: We execute contracts with Third-Party Payers which allow for eligible purchases of COPIKTRA at prices lower than the wholesale acquisition cost charged to customers who directly purchase the product from us. In some cases, customers charge us for the difference between what they pay for COPIKTRA and the ultimate selling price to the Third-Party Payers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable, net. Chargeback amounts are generally determined at the time of resale to the qualified Third-Party Payer by customers, and we generally issue credits for such amounts within a few weeks of the customer’s notification to us of the resale. Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at the end of each reporting period that we expect will be sold to Third-Party Payers, and chargebacks that customers have claimed, but for which we have not yet issued a credit. In addition, we compensate certain Third-Party Payers for administrative services, such as account management and data reporting. These administrative service fees have also been recorded as a reduction of product revenue within the consolidated statements of operations and comprehensive loss through December 31, 2019.
Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheets. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Other Incentives: Other incentives which we offer include voluntary co-pay assistance programs, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses on the consolidated balance sheets.
Product Returns: Consistent with industry practice, we generally offer customers a limited right of return for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We estimate product return liabilities using available industry data and our own sales information, including our visibility into the inventory remaining in the distribution channel.
Subject to certain limitations, our return policy allows for eligible returns of COPIKTRA for credit under the following circumstances:
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Receipt of damaged product;
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Shipment errors that were a result of an error by us;
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Expired product that is returned during the period beginning three months prior to the product’s expiration and ending six months after the expiration date;
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Product subject to a recall; and
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Product that we, at our sole discretion, have specified can be returned for credit.
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As of December 31, 2019, we have not received any returns.
If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from product revenue. We expense incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that we would have recognized is one year or less. However, no such costs were incurred during the year ended December 31, 2019.
Exclusive Licenses of Intellectual Property - We may enter into collaboration and licensing arrangements for research and development, manufacturing, and commercialization activities with collaboration partners for the development and commercialization of our product candidates, which have components within the scope of ASC 606. The arrangements generally contain multiple elements or deliverables, which may include (i) licenses, or options to obtain licenses, to our intellectual property, (ii) research and development activities performed for the collaboration partner, (iii) participation on joint steering committees, and (iv) the manufacturing of commercial, clinical or preclinical material. Payments pursuant to these arrangements typically include non-refundable, upfront payments, milestone payments upon the achievement of significant development events, research and development reimbursements, sales milestones, and royalties on product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period. The contracts into which we enter generally do not include significant financing components.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our collaboration and license agreements, we perform the following steps: (i) identification of the promised goods or services in the contract within the scope of ASC 606; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. As part of the accounting for these arrangements, we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and d) the measure of progress in step (v) above. We use judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below.
If a license to our intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other elements, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of its associated expertise in the general marketplace. In addition, we consider whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining elements, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of progress as of each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, is subject to estimates by management and may change over the course of the arrangement. Such a change could have a material impact on the amount of revenue we record in future periods.
Customer Options: If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services such as research and development services or manufacturing services, the goods and services underlying the customer options are not considered to be performance obligations at the inception of the arrangement; rather, such goods and services are contingent on exercise of the option, and the associated option fees are not included in the transaction price. We evaluate customer options for material rights or options to acquire additional goods or services for free or at a discount. If a customer option is determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. We allocate the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the estimated probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.
Milestone Payments: At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not
occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of us or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.
Collaborative Arrangements: Contracts are considered to be collaborative arrangements when they satisfy the following criteria defined in ASC 808, Collaborative Arrangements: (i) the parties to the contract must actively participate in the joint operating activity and (ii) the joint operating activity must expose the parties to the possibility of significant risks and rewards, based on whether or not the activity is successful. Payments received from or made to a partner that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction or increase to research and development expense, respectively.
Accrued research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. This process involves reviewing contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include fees paid to CROs in connection with research and development activities for which we have not yet been invoiced.
We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Stock‑based compensation
We recognize stock‑based compensation expense for stock options, and restricted stock units (RSUs) issued to employees and directors based on the grant date fair value of the awards on a straight‑line basis over the requisite service period. Historically, we recorded stock‑based compensation expense for stock options and RSUs issued to non‑employees based on the estimated fair value of the services received or of the equity instruments issued, whichever is more reliably measured, based on the vesting date fair value of the awards on a straight‑line basis over the vesting period. Effective January 1, 2019, we adopted Accounting Standard Updated (ASU) 2018-
09, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services to be used or consumed in its own operations by issuing share-based payment awards. Upon adoption, we recognize stock-based compensation expense for stock options and RSUs issued to non-employees based on the grant date fair value of the awards on the straight-line basis over the requisite service period.
We estimate the fair value of stock option awards using the Black‑Scholes option‑pricing model. Determining the fair value of stock options requires the use of subjective assumptions, including the expected term of the award and expected stock price volatility. The assumptions used in determining the fair value of stock options represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change, and we use different assumptions, our stock‑based compensation could be materially different in the future. The risk‑free interest rate used for each grant is based on a U.S. Treasury instrument whose term is consistent with the expected term of the stock option. Because we do not have a sufficient history to estimate the expected term, we use the simplified method as described in Securities and Exchange Commission Staff Accounting Bulletin Topic 14.D.2 for estimating the expected term. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. Because there was no public market for our common stock prior to our initial public offering, we lacked company‑specific historical and implied volatility information prior to December 31, 2017. Therefore, for annual periods ending on or before December 31, 2017, we used the historical volatility of a representative group of public biotechnology and life sciences companies with similar characteristics to us. The computation of expected volatility for these annual periods is based on the historical volatility of five companies, including our own and a representative group of four public biotechnology and life sciences companies with similar characteristics to us, including similar stage of product development and therapeutic focus. As of the first quarter of 2018, there was sufficient company-specific historical and implied volatility information. As such, for the annual period ending December 31, 2019, the computation of expected volatility is based only on the historical volatility of our common stock. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. Historically, we have recognized stock-based compensation net of estimated forfeitures over the vesting period of the respective grant. Effective January 1, 2017, we adopted Accounting Standard Updated (ASU) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplified the accounting for stock-based compensation arrangements, including the accounting for forfeitures. Upon adoption, we 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.
We issue shares under the Company’s employee stock purchase plan (ESPP) to employees. Stock-based compensation expense for discounted purchases under the ESPP is measured using the Black-Scholes model to compute the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the offering period.
We have also granted performance‑based restricted stock units (RSUs) and stock options with terms that allow the recipients to vest in a specific number of shares based upon the achievement of performance‑based milestones as specified in the grants. Stock‑based compensation expense associated with these performance‑based RSUs and stock options is recognized if the performance condition is considered probable of achievement using management’s best estimates of the time to vesting for the achievement of the performance‑based milestones. If the actual achievement of the performance‑based milestones varies from our estimates, stock-based compensation expense could be materially different than what is recorded in the period. The cumulative effect on current and prior periods of a change in the estimated time to vesting for performance‑based RSUs and stock options will be recognized as compensation cost in the period of the revision, and recorded as a change in estimate.
While the assumptions used to calculate and account for stock-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if revisions are made to our underlying assumptions and estimates, our stock‑based compensation expense could vary significantly from period to period.
As of December 31, 2019, there was approximately $14.0 million of unrecognized stock‑based compensation related to stock options, which are expected to be recognized over a weighted‑average period of 2.8 years. As of December 31, 2019, there was approximately $1.2 million of unrecognized stock-based compensation
related to RSUs, which are expected to be recognized over a weighted-average period of 2.6 years. See Notes 2 and 11 to our consolidated financial statements located in this Annual Report on Form 10‑K for further discussion of stock‑based compensation.
Accounts Receivable, Net
Accounts receivable, net relates to amounts due from customers, net of applicable revenue reserves. Accounts receivable are typically due within 31 days. We analyze accounts that are past due for collectability and provide an allowance for receivables when collection becomes doubtful. Given the nature and limited history of collectability of our accounts receivable, an allowance for doubtful accounts is not deemed necessary at December 31, 2019.
Inventory
We capitalize inventories manufactured in preparation for initiating sales of a product candidate when the related product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories. In determining whether or not to capitalize such inventories, we evaluate, among other factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated competitive drugs and the availability of reimbursement. In addition, we evaluate risks associated with manufacturing the product candidate, including the ability of our third-party suppliers to complete the validation batches, and the remaining shelf life of the inventories. Costs associated with manufacturing product candidates prior to satisfying the inventory capitalization criteria are charged to research and development expense as incurred.
We value our inventories at the lower of cost or estimated net realizable value. We determine the cost of our inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. We perform an assessment of the recoverability of capitalized inventory during each reporting period, and we write down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded within costs of sales-product. 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 sales - product in the consolidated statements of operations and comprehensive loss.
Shipping and handling costs for product shipments are recorded as incurred in costs of sales - product along with costs associated with manufacturing the product, and any inventory write-downs.
Intangible Assets
We record finite-lived intangible assets related to certain capitalized milestone payments at their fair value. These assets are amortized on a straight-line basis over their remaining useful lives, which are estimated based on the shorter of the remaining underlying patent life or the estimated useful life of the underlying product.
We assess our finite-lived intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment include the receipt of additional clinical or nonclinical data regarding one of our drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each finite-lived intangible asset or asset group to its carrying value on the consolidated balance sheets. If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the finite-lived intangible asset and recognize an impairment loss if the carrying value of the finite-lived intangible asset exceeds its fair value.
Leases
Effective January 1, 2019, we adopted ASC 842. This standard 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.
At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances within the arrangement. A lease is identified where an arrangement conveys the right to control the use of identified property, plant, and equipment for a period of time in exchange for consideration. Leases which are identified within the scope of ASC 842 and which have a term greater than one year are recognized on our consolidated balance sheets as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We have elected not to recognize leases with terms of one year or less on our consolidated balance sheets. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rates to calculate the present value of lease payments. Incremental borrowing rates are the rates we incur to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
In accordance with ASC 842, components of a lease are split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.). The fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. We have elected to account for the lease and non-lease components of each of our operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the consolidated balance sheets and amortized on a straight-line basis as lease expense.
RESULTS OF OPERATIONS
All financial information presented has been consolidated and includes the accounts of our wholly-owned subsidiaries, Verastem Securities Company and Verastem Europe GmbH. All intercompany balances and transactions have been eliminated in consolidation.
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|
Year Ended December 31,
|
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2019
|
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2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
|
12,339
|
|
|
1,718
|
|
|
—
|
License and collaboration revenue
|
|
|
5,117
|
|
|
25,000
|
|
|
—
|
Total revenue
|
|
|
17,456
|
|
|
26,718
|
|
|
—
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales - product
|
|
$
|
1,238
|
|
$
|
165
|
|
$
|
—
|
Cost of sales - intangible amortization
|
|
|
1,569
|
|
|
423
|
|
|
—
|
Research and development
|
|
|
45,778
|
|
|
43,648
|
|
|
46,423
|
Selling, general and administrative
|
|
|
101,212
|
|
|
77,265
|
|
|
21,381
|
Total operating expenses
|
|
|
149,797
|
|
|
121,501
|
|
|
67,804
|
Loss from operations
|
|
|
(132,341)
|
|
|
(94,783)
|
|
|
(67,804)
|
Other (expense)/ income
|
|
|
(641)
|
|
|
25,556
|
|
|
—
|
Interest income
|
|
|
4,381
|
|
|
2,603
|
|
|
561
|
Interest expense
|
|
|
(20,608)
|
|
|
(5,810)
|
|
|
(559)
|
Net loss
|
|
$
|
(149,209)
|
|
$
|
(72,434)
|
|
$
|
(67,802)
|
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Product revenue, net. Product revenue net for the year ended December 31, 2019 (2019 Period) was $12.3 million compared to $1.7 million for the year ended December 31, 2018 (2018 Period). Product revenue, net consisted of net product sales of COPIKTRA in the United States. We began commercial sales of COPIKTRA within the United States in September 2018 following receipt of FDA marketing approval. The $10.6 million increase was driven primarily by an increase in product shipments for COPIKTRA as a result of greater market penetration.
License and collaboration revenue. License and collaboration revenue for the 2019 Period was $5.1 million compared to $25.0 million for the 2018 Period. The $19.9 million decrease was related to a $10.0 million upfront payment received in connection to our license and collaboration agreement with Yakult and a $15.0 million upfront payment received in connection to our license and collaboration agreement with CSPC in the 2018 period, partially offset by a $5.0 million upfront payment received in connection to our collaboration agreement with Sanofi and collaboration revenue of $0.1 million related to the shipment of clinical supply of COPIKTRA to Yakult and CSPC during the 2019 Period.
Costs of sales – product. Costs of sales – product for the 2019 Period was $1.2 million compared to $0.2 million for the 2018 period. The $1.0 million increase was primarily driven by an increase in the volume of COPIKTRA sold and corresponding increases in royalties, manufacturing and other costs during the 2019 Period as compared to the 2018 Period. Cost of sales - product consisted of costs associated with the manufacturing of COPIKTRA, royalties owed to HCR and Infinity on such sales, and certain period costs. We expensed the manufacturing costs of COPIKTRA as operating expenses in the periods prior to July 1, 2018. In the third quarter of 2018, we began capitalizing inventory costs for COPIKTRA manufactured in preparation for our launch in the United States based on our evaluation of, among other factors, the status of the COPIKTRA New Drug Application (NDA) in the United States and the ability of our third-party suppliers to successfully manufacture commercial quantities of COPIKTRA. Certain of the costs of COPIKTRA units recognized as revenue during the 2019 Period were expensed prior to the September 2018 FDA marketing approval and, therefore, are not included in cost of sales during this period. We expect cost of sales - product to increase in relation to product revenues as we deplete these inventories. Our inventory balance as of December 31, 2019 has increased compared to December 31, 2018 due to manufacturing of COPIKTRA in 2019.
Research and development expense. Research and development expense for the 2019 Period was $45.8 million compared to $43.6 million for the 2018 Period. The $2.2 million increase from the 2018 Period to the 2019 Period was primarily related to an increase of $3.7 million of contract research organization (CRO) costs for our Phase 2 Intermittent Dosing study entitled TEMPO, increase of $1.3 million for CRO costs related to our Phase 2 study for the treatment of PTCL – entitled PRIMO, an increase of $1.6 million in personnel related costs, including non-cash stock-based compensation and $0.5 million of other costs. This increase is partially offset by a decrease of $2.4 million in consulting fees as a result of activities to file an NDA in the 2018 Period and a decrease of $2.5 million in CRO costs as a result of site closures in our Phase 3 DUO and Phase 2 DYNAMO studies throughout 2018 and 2019 as patients continue to complete treatment.
Selling, general and administrative expense. Selling, general and administrative expense for the 2019 Period was $101.2 million compared to $77.3 million for the 2018 Period. The increase of $23.9 million from the 2018 Period to the 2019 Period primarily resulted from an increase in personnel related costs, including non-cash stock-based compensation, of $14.2 million, primarily related to the hiring and staffing of our sales and commercial teams, an increase in consulting and professional fees of $6.7 million, primarily related to the support of the commercial launch activities, and an increase in travel and other costs of $3.0 million.
Cost of Sales – intangible amortization. Cost of sales – intangible amortization for the 2019 Period was approximately $1.6 million compared to $0.4 million for the 2018 Period. Cost of sales – intangible amortization was related to the COPIKTRA finite-lived intangible asset which we recognized and began amortizing in September 2018.
Other (expense)/ income. Other expense for the 2019 Period of approximately $0.6 million was for the mark-to-market adjustment related to the bifurcated make-whole interest provision derivative liability related to the 2019 Notes. Other income for the 2018 Period of approximately $25.6 million was related to the mark-to-market adjustment of the bifurcated conversion option derivative liability related to the 2018 Notes.
Interest income. Interest income for the 2019 Period was $4.4 million compared to $2.6 million for the 2018 Period. The increase of $1.8 million from the 2018 Period to the 2019 period is primarily due to higher investment cost basis and higher interest rates on investments.
Interest expense. Interest expense for the 2019 Period was $20.6 million compared to $5.8 million for the 2018 Period. The increase of $14.8 million was due to the issuance of the 2018 Notes in October 2018, a higher principal balance and higher interest rates on our loan and security agreement with Hercules and the acceleration of an end of term fee related to the Hercules loan and security agreement refinancing recorded as interest expense.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Product revenue, net. We began commercial sales of COPIKTRA within the United States in September 2018, following receipt of FDA marketing approval on September 24, 2018. For the 2018 Period we recorded approximately $1.7 million of net product revenue. We had no product revenue during the year ended December 31, 2017 (2017 Period).
License and collaboration revenue. License and collaboration revenue for the 2018 Period was $25.0 million and was related to upfront payments pursuant to the license and collaboration agreements with Yakult and CSPC. We had no license and collaboration revenue during the 2017 Period.
Costs of sales – product. Costs of sales - product of approximately $0.2 million for the 2018 Period, consisted of costs associated with the manufacturing of COPIKTRA, royalties owed to Infinity on such sales, and certain period costs. We had no cost of sales - product during the 2017 Period.
Research and development expense. Research and development expense for the 2018 Period was $43.6 million compared to $46.4 million for the 2017 Period. The $2.8 million decrease from the 2017 Period to the 2018 Period was primarily related to a decrease of $6.0 million in license fees related to a one-time milestone payment pursuant to the Infinity license agreement that was recognized in the 2017 Period and a decrease of approximately $3.2 million in consulting fees, partially offset by increases of $4.0 million in personnel related costs, including non-cash stock-based compensation, and $1.9 million in CRO expense for outsourced biology, development and clinical services, which includes our clinical trial costs, and approximately $0.5 million of other costs.
Selling, general and administrative expense. Selling, general and administrative expense for the 2018 Period was $77.3 million compared to $21.4 million for the 2017 Period. The increase of $55.9 million from the 2017 Period to the 2018 Period primarily resulted from an increase in personnel related costs, including non-cash stock-based compensation, of $26.9 million, primarily related to the hiring and staffing of our sales and commercial teams, an increase in consulting and professional fees of $24.4 million, primarily related to the support of the commercial launch preparation activities, and an increase in travel and other costs of $4.6 million.
Cost of Sales – intangible amortization. Cost of sales – intangible amortization for the 2018 Period of approximately $0.4 million was related to the COPIKTRA finite-lived intangible asset which we recognized and began amortizing in September 2018. There was no cost of sales – intangible amortization in the 2017 Period.
Other income/(expense) Other income for the 2018 Period of approximately $25.6 million was related to the mark-to-market adjustment of the bifurcated conversion option derivative liability related to the Notes. There was no mark-to-market adjustment or any other income in the 2017 Period.
Interest income. Interest income for the 2018 Period was $2.6 million compared to $0.6 million for the 2017 Period. The increase of $2.0 million from the 2017 Period to the 2018 period is primarily due to higher investment cost basis and higher interest rates on investments.
Interest expense. Interest expense for the 2018 Period was $5.8 million compared to $0.6 million for the 2017 Period. The increase of $5.2 million was due to a higher principal balance and higher interest rates on our loan and security agreement with Hercules, an increase in the number of days the loan with Hercules was outstanding in the 2018 Period compared to the 2017 Period, and the issuance of the Notes in October 2018.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
We have financed our operations to date primarily through public offerings of our common stock, sales of common stock under our at-the market equity offering programs, our loan and security agreement executed with Hercules in March 2017, as amended, the upfront payments under our license and collaboration agreements with Sanofi, Yakult and CSPC and the issuance in October 2018 of $150.0 million aggregate principal amount of 5.00% Convertible Senior Notes due 2048. With the commercial launch of COPIKTRA in the United States in September 2018, we have recently begun financing a portion of our operations through product revenue.
As of December 31, 2019, we had $111.3 million in cash, cash equivalents, restricted cash and short-term investments inclusive of $35.7 million in restricted cash. We primarily invest our cash, cash equivalents and investments in U.S. Government money market funds and corporate bonds and commercial paper of publicly traded companies.
COPIKTRA is our only approved product and our business currently depends heavily on its successful commercialization. Successful commercialization of an approved product is an expensive and uncertain process. Risks and uncertainties include those identified under Item 1A. Risk Factors, in this Annual Report on Form 10-K.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(138,518)
|
|
$
|
(74,515)
|
|
$
|
(57,310)
|
|
Investing activities
|
|
|
89,613
|
|
|
(138,377)
|
|
|
43,953
|
|
Financing activities
|
|
|
(2,441)
|
|
|
261,162
|
|
|
63,184
|
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
|
$
|
(51,346)
|
|
$
|
48,270
|
|
$
|
49,827
|
|
Operating activities. The use of cash in operating activities for all periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital. The $64.0 million increase in cash used in operating activities for the 2019 Period compared to the 2018 Period was primarily due to an increase in selling, general, and administrative expenses related to the post-launch commercial operations supporting COPIKTRA, and due to a $10.0 million license payment from Yakult and $15.0 million license payment received from CSPC during the 2018 Period, partially offset by a $5.0 million license payment received from Sanofi during the 2019 Period. The $17.2 million increase in cash used in operating activities for the 2018 Period compared to the 2017 Period primarily due to an increase in selling, general, and administrative expenses related to the hiring and staffing of our sales and commercial teams as well as an increase in consulting and professional fees primarily related to the support of the commercial launch preparation activities.
Investing activities. The cash provided by investing activities for the 2019 Period relates to the net maturities of investments of $89.6 million. The cash used in investing activities for the 2018 Period relates to the net purchases of investments of $115.0 million, the acquisition of the COPIKTRA finite-lived intangible asset of $22.0 million and net purchases of property and equipment of approximately $1.4 million.
Financing activities. The cash used by financing activities for the 2019 Period represents $12.2 million principal payments on the 2018 Notes, $0.4 million of interest-make whole payments on the 2019 Notes and $0.1 million of payments for settlement of restricted stock for tax withholdings. This is partially offset by $9.7 million of net proceeds as a result of the Amendment to the loan and security agreement with Hercules and $0.6 million of proceeds received related to exercise of stock option and employee stock purchase plan. The cash provided by financing activities for the 2018 Period primarily represents $145.3 million in net proceeds received from the issuance of 2018 Notes, $81.2 million in net proceeds from the sales of our common stock under the Underwriting Agreement and Purchase Agreement described below, $24.3 million in net proceeds received under our at-the-market equity offering program (ATM), $9.9 million in net proceeds received from our loan and security agreement executed with Hercules, and approximately $0.8 million related to stock option exercises, offset by the payment of approximately $0.3 million of issuance costs related to a sale of our common stock during December 2017.
On March 21, 2017 (Closing Date), we entered into a term loan facility of up to $25.0 million with Hercules, a Maryland corporation. The term loan facility is governed by a loan and security agreement, dated March 21, 2017 (the Original Loan Agreement), which originally provided for up to four separate advances, of which an aggregate of $15.0 million were drawn down during the year ended December 31, 2017. The Original Loan Agreement was amended on January 4, 2018, March 6, 2018, and October 11, 2018 (the Amended Loan Agreement) to increase the total borrowing limit under the Original Loan Agreement from $25.0 million up to $50.0 million (the Amended Term Loan), pursuant to certain conditions of funding.
On April 23, 2019 (the Fourth Amendment Date) and November 14, 2019 (the Fifth Amendment Date), we entered into the Fourth Amendment and Fifth Amendment (together the Amendments) to the Original Loan Agreement with Hercules. The Amendments further amend the Amended Loan Agreement (together, with the Amendments, the 2019 Term Loan Agreement).
Per the terms of the 2019 Term Loan Agreement, we may borrow up to an aggregate of $75.0 million, of which $35.0 million was outstanding immediately as of the Fourth Amendment Date (2019 Term A Loan) as a result of the existing outstanding principal of term loans of $25.0 million under the Amended Loan Agreement being converted into the 2019 Term A Loan, and an additional $10.0 million being drawn on the Fourth Amendment Date. The remaining $40.0 million of borrowing capacity may be drawn in multiple tranches comprised of (i) a term loan in an amount of up to $15.0 million upon us generating cumulative net product revenues (as defined in the 2019 Term Loan Agreement) of either (a) $37.5 million on or before April 30, 2020 or (b) $50.0 million on or before June 30, 2020 (2019 Term B Loan), and (ii) a term loan in an amount of up to $25.0 million available through December 31, 2021, subject to Hercules’ approval and certain other conditions specified in the 2019 Term Loan Agreement (the 2019 Term C Loan, and together with the 2019 Term A Loan and 2019 Term B Loan, the 2019 Term Loan). As of December 31, 2019, we have borrowed a total of $35.0 million in term loans.
The 2019 Term Loan will mature on December 1, 2022 (2019 Term Loan Maturity Date). Each advance accrues interest at a floating per annum rate equal to the greater of (a) 9.75% or (b) the lesser of (i) 12.00% and (ii) the sum of (x) 9.75% plus (y) (A) the prime rate minus (B) 5.50%. The 2019 Term Loan provides for interest-only payments until April 1, 2021, which may be extended to December 1, 2021 pursuant to us generating $40.0 million in net product revenue on a trailing six-month basis on or prior to December 31, 2020 provided that no event of default has occurred. Thereafter, amortization payments will be payable monthly in equal installments of principal and interest (subject to recalculation upon a change in prime rates).
The 2019 Term Loan is secured by a lien on substantially all of our assets, other than intellectual property and contains customary covenants and representations, including a liquidity covenant, minimum net revenue covenant, financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.
On the Fourth Amendment Date, we were required to pay any outstanding accrued interest as well as the final payment fee equal to 4.5% on the outstanding principal balance of the Amended Term Loan, or $1.1 million. No prepayment charges were due as a result of executing the Amendment or conversion of the existing term loans into 2019 Term A Loans.
The events of default under the 2019 Term Loan Agreement include, without limitation, and subject to customary grace periods, (i) any failure by us to make any payments of principal or interest under the 2019 Term Loan Agreement, promissory notes or other loan documents, (ii) any breach or default in the performance of any covenant under the 2019 Term Loan Agreement, (iii) any making of false or misleading representations or warranties in any material respect, (iv) our insolvency or bankruptcy, (v) certain attachments or judgments on the assets of Verastem, Inc., or (vi) the occurrence of any material default under certain agreements or obligations of ours involving indebtedness, or (vii) the occurrence of a material adverse effect. If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the 2019 Term Loan Agreement.
The 2019 Term Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. Hercules has indemnification rights and the right to assign the 2019 Term Loan.
On March 30, 2017, we established an at-the-market equity offering program (ATM) pursuant to which were 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. (Cantor), as sales agent. On August 28, 2017, we amended our sales agreement with Cantor to increase the maximum aggregate offering price of shares of common stock that can be sold under the ATM to $75.0 million. Through December 31, 2018, we sold 11,518,354 shares under the ATM for net proceeds of approximately $47.3 million (after deducting commissions and other offering expenses). During the 2019 Period, there were no sales under the ATM. As of December 31, 2019, we can issue an addition $26.6 million of gross proceeds under this program.
On May 16, 2018, we entered into an underwriting agreement with Cantor relating to the underwritten offering of 7,777,778 shares of our common stock (the Underwriting Agreement). Cantor agreed to purchase the shares of our common stock pursuant to the Underwriting Agreement at a price of $4.31 per share. In addition, we granted Cantor an option to purchase, at the public offering price less any underwriting discounts and commissions, an additional 1,166,666 shares of our common stock, exercisable for 30 days from the date of the prospectus supplement. The option was exercised by Cantor on May 23, 2018. The aggregate proceeds from Cantor, net of underwriting discounts and offering costs, were approximately $38.3 million.
On June 14, 2018, we entered into a purchase agreement with Consonance Capital Master Account L.P. and P Consonance Opportunities Ltd. (collectively, Consonance) relating to the registered offering of 7,166,666 shares of our common stock at a price of $6.00 per share (the Purchase Agreement). The aggregate proceeds from Consonance, net of offering costs, were approximately $42.9 million.
On October 17, 2018, we closed a registered direct public offering of $150.0 million aggregate principal amount of our 5.00% Convertible Senior Notes due 2048 (the 2018 Notes) , for net proceeds of approximately $145.3 million. The 2018 Notes are governed by the terms of a base indenture for senior debt securities (the Base Indenture), as supplemented by the first supplemental indenture thereto (the Supplemental Indenture and together with the Base Indenture, the 2018 Indenture), each dated October 17, 2018, by and between us and Wilmington Trust, National Association, as trustee. The 2018 Notes are senior unsecured obligations of us and bear interest at a rate of 5.00% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2019. The 2018 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with their terms.
The 2018 Notes are convertible into shares of our common stock, par value $0.0001 per share, together, if applicable, with cash in lieu of any fractional share, at an initial conversion rate of 139.5771 shares of common stock per $1,000 principal amount of the 2018 Notes, which corresponds to an initial conversion price of approximately $7.16 per share of common stock and represents a conversion premium of approximately 15.0% above the last reported sale price of our common stock of $6.23 per share on October 11, 2018. Upon conversion, converting noteholders will be entitled to receive accrued interest on their converted Notes. To the extent we have insufficient authorized but unissued shares to settle conversions in shares of common stock, we would be required to settle the deficiency in cash.
We will have the right, exercisable at our option, to cause all 2018 Notes then outstanding to be converted automatically if the “Daily VWAP” (as defined in the 2018 Indenture) per share of our common stock equals or
exceeds 130% of the conversion price, which equates to approximately $9.31 per share, on each of at least 20 VWAP Trading Days, whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date we first issued the 2018 Notes.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends, but will not be adjusted for any accrued and unpaid interest.
We assessed all terms and features of the 2018 Notes in order to identify any potential embedded features that would require bifurcation. As part of this analysis, we assessed the economic characteristics and risks of the 2018 Notes, including the conversion, put and call features. Per the terms of the 2018 Indenture, upon conversion of the 2018 Notes, a portion of the principal may be settled in cash until the date upon which our stockholders approve an increase in the number of authorized shares of common stock, or the Authorized Share Effective Date. In consideration of this provision, we concluded the conversion feature required bifurcation as a derivative. The fair value of the conversion feature derivative was determined based on the difference between the fair value of the 2018 Notes with the conversion option and the fair value of the 2018 Notes without the conversion option. We determined that the fair value of the derivative upon issuance of the 2018 Notes was $51.5 million and recorded this amount as a derivative liability and the offsetting amount as a debt discount as a reduction to the carrying value of the Notes on the closing date, or October 17, 2018.
On December 18, 2018, the Authorized Share Effective Date was achieved as our stockholders approved an increase in the number of authorized shares of common stock. Following this approval, no portion of the 2018 Notes are settleable in cash upon conversion. As such, we determined that the conversion feature no longer met the definition of a derivative following the increase in the number of authorized shares of common stock. As of December 18, 2018, we determined the fair value of the conversion feature was $25.9 million. We recorded the change in the fair value of the conversion feature for the period from October 17, 2018 to December 18, 2018 of $25.6 million as other income on the consolidated statements of operations and comprehensive loss. As of December 18, 2018, the fair value of the conversion option was reclassified to additional paid-in capital on the consolidated balance sheets as it qualified for a scope exception from derivative accounting. Accordingly, the conversion feature will no longer be measured at fair value on our financial statements.
On November 14, 2019 and December 23, 2019, we entered into privately negotiated agreements to exchange approximately $114.3 million and $7.4 million, respectively, aggregate principal amount of the 2018 Notes for (i) approximately $62.9 million and $4.0 million, respectively, aggregate principal amount of 5.00% Convertible Senior Second Lien Notes due 2048 (the 2019 Notes) (ii) an aggregate of approximately $11.4 million and $0.7 million in 2018 Notes principal repayment and (iii) accrued interest on the 2018 Notes through November 14, 2019 and December 23, 2019, respectively. The 2019 Notes are governed by the terms of an indenture (the 2019 Indenture). The 2019 Notes are senior secured obligations of the Company and bear interest at 5.00% per annum, payable semi-annually in arrears on May 1 and November 1 of each year. The 2019 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with the terms.
The 2019 Notes are convertible into shares of our common stock, par value $0.0001 per share, together, if applicable, with cash in lieu of any fractional share, at an initial conversion rate of 606.0606 shares of common stock per $1,000 principal amount of the 2019 Notes, which corresponds to an initial conversion price of approximately $1.65 per share of common stock and represents a conversion premium of approximately 52.8% above the last reported sale price of our common stock of $1.08 per share on November 11, 2019.
We will have the right, exercisable at our option, to cause all 2019 Notes then outstanding to be converted automatically if the “Daily VWAP” (as defined in the 2019 Indenture) per share of our common stock equals or exceeds 121% of the conversion price, which equates to approximately $2.00 per share, on each of at least 20 VWAP Trading Days, whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date we first issued the 2019 Notes. (Company’s Mandatory Conversion Option)
Upon conversion, converting noteholders will be entitled to receive accrued interest on their converted 2019 Notes. In addition, if the 2019 Notes are converted with a conversion date that is on or prior to November 1, 2020, other than in connection with the Company’s exercise of the Company’s Mandatory Conversion Option then
the consideration due upon any such conversion will also include a cash interest make-whole payment for all future scheduled interest payments on the converted 2019 Notes through November 1, 2020 (2019 Notes Interest Make-Whole Provision).
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends, but will not be adjusted for any accrued and unpaid interest.
We assessed all terms and features of the 2019 Notes in order to identify any potential embedded features that would require bifurcation. As part of this analysis, we assessed the economic characteristics and risks of the 2019 Notes, including the conversion, put and call features. In consideration of the 2019 Notes Interest Make-Whole Provision, we concluded the provision required bifurcation as a derivative. The fair value of the 2019 Interest Make-Whole Provision was determined using a Monte Carlo model. It was determined that the fair value of the derivative upon the November 14, 2019 and December 23, 2019 issuance of the 2019 Notes was an aggregate of $0.2 million, and we recorded this amount as a derivative liability and the offsetting amount as a debt discount as a reduction to the carrying value of the 2019 Notes on the closing dates. During the period November 14, 2019 to December 31, 2019, we paid out approximately $0.4 million in 2019 Interest Make-Whole payments which was recorded as a reduction of the derivative liability. As of December 31, 2019, we determined the fair value of the 2019 Interest Make-Whole Provision was $0.5 million. We recorded the change in the fair value of the 2019 Interest Make-Whole Provision for the period from November 14, 2019 to December 31, 2019 of $0.6 million as other expense on the consolidated statements of operations and comprehensive loss.
As of December 31, 2019, there was $28.3 million and $57.4 million aggregate principal amount outstanding of the 2018 Notes and 2019 Notes, respectively, for a total of $85.7 million aggregate principal amount outstanding compared to $150.0 million aggregate principal amount outstanding of 2018 Notes as of December 31, 2018. During the 2019 Period, 2019 Note holders converted $9.5 million aggregate principal of 2019 Notes in exchange for 5,767,872 shares of common stock and $0.4 million of cash for 2019 Interest Make-Whole Provision.
Funding requirements
We expect to continue to incur significant expenses and operating losses. We anticipate that our expenses and operating losses will continue as we:
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|
|
commercialize COPIKTRA;
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|
|
|
continue our ongoing clinical trials, including with COPIKTRA, defactinib and CH5126766;
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|
|
|
initiate additional clinical trials for our product candidates;
|
|
|
|
maintain, expand and protect our intellectual property portfolio;
|
|
|
|
acquire or in-license other products and technologies;
|
|
|
|
hire additional clinical, development and scientific personnel;
|
|
|
|
|
|
|
|
add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts; and
|
|
|
|
establish and maintain a sales, marketing and distribution infrastructure to commercialize COPIKTRA or any products for which we may obtain marketing approval.
|
We expect our existing cash resources, including proceeds from the sale of Common Stock in March 2020 along with the revenue we expect to generate from COPIKTRA will be sufficient to fund our obligations for at least the next twelve months from the date of filing of this Annual Report on Form 10-K. 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 costs and timing of commercialization activities for COPIKTRA and the product candidates for which we expect to receive marketing approval;
|
|
|
|
the scope, progress and results of our ongoing and potential future clinical trials;
|
|
|
|
the extent to which we acquire or in-license other products and technologies;
|
|
|
|
the costs, timing and outcome of regulatory review of our product candidates (including our efforts to seek approval and fund the preparation and filing of regulatory submissions);
|
|
|
|
revenue received from commercial sales of COPIKTRA and our product candidates, should any of our other product candidates also receive marketing approval;
|
|
|
|
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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|
|
our ability to establish collaborations or partnerships on favorable terms, if at all.
|
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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes our contractual obligations at December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
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(in thousands)
|
|
Total
|
|
2020
|
|
2021 - 2022
|
|
2023 - 2024
|
|
Thereafter
|
|
Operating lease obligations
|
|
$
|
5,700
|
|
$
|
955
|
|
$
|
2,058
|
|
$
|
2,141
|
|
$
|
546
|
|
2019 Term Loan Agreement
|
|
|
35,000
|
|
|
—
|
|
|
35,000
|
|
|
—
|
|
|
—
|
|
2018 Notes
|
|
|
28,300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,300
|
|
2019 Notes
|
|
|
57,414
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57,414
|
|
License agreements (1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
As discussed in Note 16 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we are party to several agreements to license intellectual property. The license agreements may require us to pay upfront license fees, ongoing annual license maintenance fees, milestone payments, minimum royalty payments, as well as reimbursement of certain patent costs incurred by the licensors, as applicable. We have not included these payments in the table above because: there were no upfront license fees payable in future periods; no annual license maintenance fees; we cannot estimate if milestone and/or royalty payments will occur in future periods; and patent cost reimbursement costs are perpetual and the agreements are cancelable by us at any time upon prior written notice to the licensor.
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OFF‑BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off‑balance sheet arrangements, as defined under Securities and Exchange Commission rules.
TAX LOSS CARRYFORWARDS
As of December 31, 2019, we had federal and state net operating loss carryforwards of $371.7 million and $392.3 million, respectively, which are available to reduce future taxable income. We also had federal and state tax credits of $20.6 million and $3.0 million, respectively, which may be used to offset future tax liabilities. The net operating loss and tax credit carryforwards will expire at various dates through 2039, except for $136.3 million of federal net operating loss carryforwards which may be carried forward indefinitely. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three‑year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. At December 31, 2019, we recorded a 100% valuation allowance against our net operating loss and tax credit carryforwards of $128.4 million, as we believe it is more likely than not that the tax benefits will not be fully realized. In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period of determination.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions accounted for under ASC 606. ASU 2018-07 was effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, but no earlier than the date on which ASC 606 is adopted. The Company adopted this standard prospectively effective January 1, 2019. The adoption of this ASU did not have an effect on the Company’s consolidated financial statements or 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 (ASC 842). 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02. Under the amendments in ASU 2018-11, entities may elect not to restate the comparative periods presented when transitioning to ASC 842 (optional transition method) and lessors may elect not to separate lease and non-lease components when certain conditions are met (lessor relief practical expedient). The optional transition method applies to entities that have not yet adopted ASU 2016-02, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted.
The Company adopted this standard using the optional transition method effective January 1, 2019. Upon adoption of this standard, the Company recognized a lease liability and a corresponding right-of use asset of $4.0 million and $3.4 million, respectively, and derecognized a deferred rent liability and a corresponding lease incentive obligation of $0.4 million and $0.2 million, respectively. The Company did not record any cumulative effect adjustment to accumulated deficit as a result of adopting this standard. The Company also elected to adopt the practical expedients upon transition, which permit companies to not reassess lease identification, classification, and initial direct costs under ASU 2016-02 for leases that commenced prior to the effective date.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of March 2020.
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VERASTEM, INC.
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By:
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/s/ Brian M. stuglik
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Brian M. Stuglik
|
|
|
Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
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Signature
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|
Title
|
|
Date
|
/s/ Brian M. Stuglik R.Ph
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|
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|
Brian M. Stuglik
|
|
Chief Executive Officer and Director
(Principal executive officer)
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|
March 11, 2020
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|
|
|
/s/ Robert Gagnon
|
|
|
|
|
Robert Gagnon
|
|
Chief Business and Financial Officer
(Principal financial and accounting officer)
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|
March 11, 2020
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|
|
|
|
|
/s/ Timothy Barberich
|
|
|
|
|
Timothy Barberich
|
|
Director
|
|
March 11, 2020
|
|
|
|
|
|
/s/ Gina Consylman
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|
|
|
|
Gina Consylman
|
|
Director
|
|
March 11, 2020
|
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|
/s/ Michael Kauffman, M.D.,Ph.D.
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|
|
|
Michael Kauffman, M.D., Ph.D.
|
|
Director
|
|
March 11, 2020
|
|
|
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|
|
/s/ Alison Lawton
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|
|
|
|
Alison Lawton
|
|
Director
|
|
March 11, 2020
|
|
|
|
|
|
/s/ Eric Rowinsky, M.D.
|
|
|
|
|
Eric Rowinsky, M.D.
|
|
Director
|
|
March 11, 2020
|
|
|
|
|
|
/s/ Bruce Wendel
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|
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|
|
Bruce Wendel
|
|
Director
|
|
March 11, 2020
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|
Verastem, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Verastem, Inc.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Verastem, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Verastem, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 11, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
Boston, Massachusetts
March 11, 2020
Verastem, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,514
|
|
$
|
129,867
|
|
Short-term investments
|
|
|
31,992
|
|
|
119,786
|
|
Accounts receivable, net
|
|
|
2,524
|
|
|
306
|
|
Inventory
|
|
|
3,096
|
|
|
327
|
|
Prepaid expenses and other current assets
|
|
|
3,835
|
|
|
2,973
|
|
Total current assets
|
|
|
84,961
|
|
|
253,259
|
|
Property and equipment, net
|
|
|
947
|
|
|
1,369
|
|
Right-of-use asset, net
|
|
|
3,077
|
|
|
—
|
|
Intangible assets, net
|
|
|
20,008
|
|
|
21,577
|
|
Restricted Cash
|
|
|
35,241
|
|
|
241
|
|
Other assets
|
|
|
812
|
|
|
790
|
|
Total assets
|
|
$
|
145,046
|
|
$
|
277,236
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,655
|
|
$
|
10,253
|
|
Accrued expenses
|
|
|
19,365
|
|
|
21,108
|
|
Lease liability, short-term
|
|
|
420
|
|
|
—
|
|
Derivative liability, short-term
|
|
|
450
|
|
|
—
|
|
Current portion of long-term debt
|
|
|
—
|
|
|
5,716
|
|
Total current liabilities
|
|
|
29,890
|
|
|
37,077
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
35,067
|
|
|
19,506
|
|
Convertible senior notes
|
|
|
68,556
|
|
|
95,231
|
|
Lease liability, long-term
|
|
|
3,489
|
|
|
—
|
|
Other non-current liabilities
|
|
|
870
|
|
|
1,123
|
|
Total liabilities
|
|
|
137,872
|
|
|
152,937
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 5,000 shares authorized, no shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
|
|
|
—
|
|
|
—
|
|
Common stock, $0.0001 par value; 200,000 shares authorized, 80,118 and 73,806 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
|
|
|
8
|
|
|
7
|
|
Additional paid-in capital
|
|
|
531,937
|
|
|
499,741
|
|
Accumulated other comprehensive income
|
|
|
14
|
|
|
127
|
|
Accumulated deficit
|
|
|
(524,785)
|
|
|
(375,576)
|
|
Total stockholders’ equity
|
|
|
7,174
|
|
|
124,299
|
|
Total liabilities and stockholders’ equity
|
|
$
|
145,046
|
|
$
|
277,236
|
|
See accompanying notes to the consolidated financial statements.
Verastem, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
12,339
|
|
$
|
1,718
|
|
$
|
—
|
|
License and collaboration revenue
|
|
|
5,117
|
|
|
25,000
|
|
|
—
|
|
Total revenue
|
|
|
17,456
|
|
|
26,718
|
|
|
—
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - product
|
|
$
|
1,238
|
|
$
|
165
|
|
$
|
—
|
|
Cost of sales - intangible amortization
|
|
|
1,569
|
|
|
423
|
|
|
—
|
|
Research and development
|
|
|
45,778
|
|
|
43,648
|
|
|
46,423
|
|
Selling, general and administrative
|
|
|
101,212
|
|
|
77,265
|
|
|
21,381
|
|
Total operating expenses
|
|
|
149,797
|
|
|
121,501
|
|
|
67,804
|
|
Loss from operations
|
|
|
(132,341)
|
|
|
(94,783)
|
|
|
(67,804)
|
|
Other (expense)/ income
|
|
|
(641)
|
|
|
25,556
|
|
|
—
|
|
Interest income
|
|
|
4,381
|
|
|
2,603
|
|
|
561
|
|
Interest expense
|
|
|
(20,608)
|
|
|
(5,810)
|
|
|
(559)
|
|
Net loss
|
|
$
|
(149,209)
|
|
$
|
(72,434)
|
|
$
|
(67,802)
|
|
Net loss per share—basic
|
|
$
|
(2.00)
|
|
$
|
(1.12)
|
|
$
|
(1.76)
|
|
Net loss per share—diluted
|
|
$
|
(2.00)
|
|
$
|
(1.37)
|
|
$
|
(1.76)
|
|
Weighted average common shares outstanding used in computing:
|
|
|
|
|
|
|
|
|
|
|
Net loss per share—basic
|
|
|
74,578
|
|
|
64,962
|
|
|
38,422
|
|
Net loss per share—diluted
|
|
|
74,578
|
|
|
69,321
|
|
|
38,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(149,209)
|
|
$
|
(72,434)
|
|
$
|
(67,802)
|
|
Unrealized (loss) gain on available-for-sale securities
|
|
|
(113)
|
|
|
129
|
|
|
(31)
|
|
Comprehensive loss
|
|
$
|
(149,322)
|
|
$
|
(72,305)
|
|
$
|
(67,833)
|
|
See accompanying notes to the consolidated financial statements.
Verastem, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
comprehensive
|
|
|
|
Total
|
|
|
|
Common stock
|
|
paid-in
|
|
(loss)
|
|
Accumulated
|
|
stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
income
|
|
deficit
|
|
equity
|
|
Balance at December 31, 2016
|
|
36,992,418
|
|
$
|
4
|
|
$
|
307,587
|
|
$
|
29
|
|
$
|
(235,323)
|
|
$
|
72,297
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(67,802)
|
|
|
(67,802)
|
|
Unrealized (loss) on available-for-sale marketable securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31)
|
|
|
—
|
|
|
(31)
|
|
Issuance of common stock resulting from follow-on offering, net of issuance costs of $324
|
|
8,422,877
|
|
|
1
|
|
|
24,691
|
|
|
—
|
|
|
—
|
|
|
24,692
|
|
Issuance of common stock resulting from at-the-market transactions, net of issuance costs of $112
|
|
5,036,879
|
|
|
—
|
|
|
23,053
|
|
|
—
|
|
|
—
|
|
|
23,053
|
|
Issuance of common stock resulting from exercise of stock options
|
|
348,734
|
|
|
—
|
|
|
442
|
|
|
—
|
|
|
—
|
|
|
442
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
5,050
|
|
|
—
|
|
|
(17)
|
|
|
5,033
|
|
Balance at December 31, 2017
|
|
50,800,908
|
|
$
|
5
|
|
$
|
360,823
|
|
$
|
(2)
|
|
$
|
(303,142)
|
|
$
|
57,684
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(72,434)
|
|
|
(72,434)
|
|
Unrealized gain on available-for-sale marketable securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
129
|
|
|
—
|
|
|
129
|
|
Issuance of common stock resulting from follow-on offering, net of issuance costs of $361
|
|
16,111,110
|
|
|
1
|
|
|
81,188
|
|
|
—
|
|
|
—
|
|
|
81,189
|
|
Issuance of common stock resulting from at-the-market transactions, net of issuance costs of $0
|
|
6,481,475
|
|
|
1
|
|
|
24,275
|
|
|
—
|
|
|
—
|
|
|
24,276
|
|
Issuance of common stock resulting from exercise of stock options
|
|
412,851
|
|
|
—
|
|
|
809
|
|
|
—
|
|
|
—
|
|
|
809
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
6,671
|
|
|
—
|
|
|
—
|
|
|
6,671
|
|
Reclassification of derivative liability to equity
|
|
—
|
|
|
—
|
|
|
25,975
|
|
|
—
|
|
|
|
|
|
25,975
|
|
Balance at December 31, 2018
|
|
73,806,344
|
|
$
|
7
|
|
$
|
499,741
|
|
$
|
127
|
|
$
|
(375,576)
|
|
$
|
124,299
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(149,209)
|
|
|
(149,209)
|
|
Unrealized loss on available-for-sale marketable securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(113)
|
|
|
—
|
|
|
(113)
|
|
Conversion of Notes into common stock
|
|
5,767,872
|
|
|
1
|
|
|
9,516
|
|
|
—
|
|
|
—
|
|
|
9,517
|
|
Change in fair value of conversion option of Notes on exchange
|
|
—
|
|
|
—
|
|
|
13,640
|
|
|
—
|
|
|
—
|
|
|
13,640
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
341,701
|
|
|
—
|
|
|
439
|
|
|
—
|
|
|
—
|
|
|
439
|
|
Issuance of common stock resulting from vesting of restricted stock units
|
|
109,707
|
|
|
—
|
|
|
(68)
|
|
|
—
|
|
|
—
|
|
|
(68)
|
|
Issuance of common stock resulting from exercise of stock options
|
|
91,907
|
|
|
—
|
|
|
130
|
|
|
—
|
|
|
—
|
|
|
130
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
8,539
|
|
|
—
|
|
|
—
|
|
|
8,539
|
|
Balance at December 31, 2019
|
|
80,117,531
|
|
$
|
8
|
|
$
|
531,937
|
|
$
|
14
|
|
$
|
(524,785)
|
|
$
|
7,174
|
|
See accompanying notes to the consolidated financial statements.
Verastem, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(149,209)
|
|
$
|
(72,434)
|
|
$
|
(67,802)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
429
|
|
|
996
|
|
|
556
|
Amortization of acquired intangible asset
|
|
|
1,569
|
|
|
423
|
|
|
—
|
Amortization of right-of-use asset and lease liability
|
|
|
181
|
|
|
—
|
|
|
—
|
Stock-based compensation expense
|
|
|
8,539
|
|
|
6,671
|
|
|
5,033
|
Amortization of deferred financing costs, debt discounts and premiums and discounts on available-for-sale marketable securities
|
|
|
7,131
|
|
|
1,814
|
|
|
223
|
Change in fair value of interest make whole provision and conversion option for Notes
|
|
|
641
|
|
|
(25,556)
|
|
|
—
|
Gain on sale of fixed assets
|
|
|
—
|
|
|
(79)
|
|
|
—
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(2,218)
|
|
|
(306)
|
|
|
—
|
Inventory
|
|
|
(2,769)
|
|
|
(327)
|
|
|
—
|
Prepaid expenses, other current assets and other assets
|
|
|
(877)
|
|
|
(1,167)
|
|
|
(943)
|
Accounts payable
|
|
|
(598)
|
|
|
1,048
|
|
|
5,046
|
Accrued expenses and other liabilities
|
|
|
(1,707)
|
|
|
13,902
|
|
|
577
|
Other long-term liabilities
|
|
|
370
|
|
|
500
|
|
|
—
|
Net cash used in operating activities
|
|
|
(138,518)
|
|
|
(74,515)
|
|
|
(57,310)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7)
|
|
|
(1,507)
|
|
|
—
|
Sales of property and equipment
|
|
|
—
|
|
|
82
|
|
|
—
|
Acquisition of intangible asset
|
|
|
—
|
|
|
(22,000)
|
|
|
—
|
Purchases of investments
|
|
|
(94,123)
|
|
|
(125,452)
|
|
|
(7,957)
|
Maturities of investments
|
|
|
183,743
|
|
|
10,500
|
|
|
51,910
|
Net cash provided by (used in) investing activities
|
|
|
89,613
|
|
|
(138,377)
|
|
|
43,953
|
Financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt, net of issuance costs
|
|
|
9,670
|
|
|
9,900
|
|
|
14,811
|
Deferred debt financing costs
|
|
|
—
|
|
|
—
|
|
|
(138)
|
Proceeds from issuance of convertible senior notes, net of issuance costs
|
|
|
—
|
|
|
145,297
|
|
|
—
|
Proceeds from the exercise of stock options and employee stock purchase program
|
|
|
569
|
|
|
809
|
|
|
442
|
Principal payments on the convertible senior notes
|
|
|
(12,174)
|
|
|
—
|
|
|
—
|
Interest make-whole payments on the 2019 Notes
|
|
|
(438)
|
|
|
—
|
|
|
—
|
Settlement of restricted stock for tax withholdings
|
|
|
(68)
|
|
|
—
|
|
|
—
|
Proceeds from the issuance of common stock, net
|
|
|
—
|
|
|
105,156
|
|
|
48,069
|
Net cash (used in) provided by financing activities
|
|
|
(2,441)
|
|
|
261,162
|
|
|
63,184
|
(Decrease) increase in cash, cash equivalents and restricted cash
|
|
|
(51,346)
|
|
|
48,270
|
|
|
49,827
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
130,608
|
|
|
82,338
|
|
|
32,511
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
79,262
|
|
$
|
130,608
|
|
$
|
82,338
|
Supplemental disclosure
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
12,424
|
|
$
|
2,107
|
|
$
|
295
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
Common stock issuance costs included in accounts payable and accrued expenses
|
|
$
|
15
|
|
$
|
15
|
|
$
|
324
|
Change in fair value of conversion option of Notes on exchange
|
|
$
|
13,640
|
|
$
|
—
|
|
$
|
—
|
Conversion of Notes into common stock
|
|
$
|
9,517
|
|
$
|
—
|
|
$
|
—
|
See accompanying notes to the consolidated financial statements.
1. Nature of business
Verastem, Inc. (the Company) is a biopharmaceutical company focused on developing and commercializing medicines to improve the survival and quality of life of cancer patients. On September 24, 2018, the Company’s first commercial product, COPIKTRA® (duvelisib), was approved by the U.S. Food and Drug Administration (the FDA) for the treatment of adult patients with certain hematologic cancers including relapsed or refractory chronic lymphocytic leukemia/ small lymphocytic lymphoma (CLL/SLL) after at least two prior therapies and relapsed or refractory follicular lymphoma (FL) after at least two prior systemic therapies. Its marketed product, COPIKTRA, and most advanced product candidates, defactinib and CH5126766, utilize a multi-faceted approach designed to treat cancers originating either in the blood or major organ systems. The Company is currently developing its product candidates in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, lung cancer, head and neck cancer, ovarian cancer, colorectal cancer, lung cancer, pancreatic cancer, and mesothelioma. The Company believes that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents, other pathway inhibitors or other current and emerging standard of care treatments in aggressive cancers that do not adequately respond to currently available therapies.
The consolidated financial statements include the accounts of Verastem Securities Company and Verastem Europe GmbH, wholly-owned subsidiaries of the Company. All financial information presented has been consolidated and includes the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Company is subject to the risks associated with other life science companies, including, but not limited to, possible failure of preclinical testing or clinical trials, competitors developing new technological innovations, market acceptance and the commercial success of COPIKTRA, or any of the Company’s investigational product candidates following receipt of regulatory approval, protection of proprietary technology and the continued ability to obtain adequate financing to fund the Company’s future operations. If the Company does not successfully commercialize COPIKTRA or any of its other product candidates, it will be unable to generate product revenue or achieve profitability and may need to raise additional capital.
The Company has historical losses from operations and anticipates that it will continue to incur losses as it continues the research and development of its product candidates and commercialization of COPIKTRA. As of December 31, 2019, the Company had cash, cash equivalents, restricted cash and short-term investments of $111.3 million, inclusive of $35.7 million of restricted cash, and accumulated deficit of $524.8 million. On March 3, 2020, the Company received gross proceeds of approximately $100.0 million from the sale of 46,511,628 shares of Common Stock (see Note 19). The Company expects its existing cash resources, including the proceeds from the sale of Common Stock in March 2020, along with revenue the Company expects to generate from sales of COPIKTRA, will be sufficient to fund its planned operations through 12 months from the date of issuance of these consolidated financial statements.
The Company expects to finance the future development costs of its clinical product portfolio with its existing cash, cash equivalents and short-term investments, or through strategic financing opportunities that could include, but are not limited to collaboration agreements, future offerings of its equity, or the incurrence of debt. However, there is no guarantee that any of these strategic or financing opportunities will be executed or executed on favorable terms, and some could be dilutive to existing stockholders. If the Company fails to obtain additional future capital, it may be unable to complete its planned preclinical studies and clinical trials and obtain approval of certain investigational product candidates from the FDA or foreign regulatory authorities.
2. Significant accounting policies
Basis of presentation
The accompanying financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) under the assumption that the Company will continue as a going
concern for the next twelve months. Accordingly, they do not include any adjustments that might result from the uncertainty related to the Company’s ability to continue as a going concern.
Use of estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including estimates related to revenue recognition, including returns, rebates, and other pricing adjustments, accruals and stock‑based compensation expense. The Company bases its estimates on historical experience and other market‑specific or other relevant assumptions that it believes to be reasonable. Actual results could differ from such estimates.
Segment and geographic information
Operating segments are defined as components of an enterprise about which separate discrete information is available and regularly reviewed by the chief operating decision maker, or decision‑making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing drugs for the treatment of cancer. All material long-lived assets of the Company reside in the United States.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of a U.S. Government money market funds and corporate bonds and commercial paper of publicly traded companies. Cash equivalents are reported at fair value.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Cash and cash equivalents
|
|
$
|
43,514
|
|
$
|
129,867
|
Restricted cash
|
|
|
35,748
|
|
|
741
|
Total cash, cash equivalents and restricted cash
|
|
$
|
79,262
|
|
$
|
130,608
|
Amounts included in restricted cash as of December 31, 2019 represent cash that the Company is contractually obligated to maintain in accordance with the terms of the 2019 Term Loan Agreement, cash received pursuant to a funded research and development agreement with the Leukemia and Lymphoma Society (LLS) (the “LLS Research Funding Agreement”) restricted for future expenditures for specific R&D studies and cash held to collateralize outstanding letters of credit provided as a security deposit for the Company’s office space located in Needham, Massachusetts in the amount of approximately $35.0 million, $0.5 million, and $0.2 million respectively. Restricted cash related to 2019 Term Loan Agreement and letters of credit are included in non-current restricted cash on the consolidated balance sheet, while cash related to LLS Research Funding Agreement is included in prepaid and other current assets on the consolidated balance sheet. Amounts included in restricted cash as of December 31, 2018 represent cash received pursuant to the LLS Research Funding Agreement of $0.5 million, which is included in prepaid and other currents on the consolidated balance sheet and cash held to collateralize outstanding letters of credit provided as a security deposit for the Company’s office space located in Needham of $0.2 million, which is included in non-current restricted cash on the consolidated balance sheet.
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
|
|
Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.
|
|
Level 2 inputs
|
|
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
|
|
Level 3 inputs
|
|
Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Description
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
77,176
|
|
$
|
75,678
|
|
$
|
1,498
|
|
$
|
—
|
|
Short-term investments
|
|
|
31,992
|
|
|
—
|
|
|
31,992
|
|
|
—
|
|
Total financial assets
|
|
$
|
109,168
|
|
$
|
75,678
|
|
$
|
33,490
|
|
$
|
—
|
|
Derivative liability
|
|
$
|
450
|
|
|
—
|
|
|
—
|
|
$
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Description
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
127,689
|
|
$
|
60,092
|
|
$
|
67,597
|
|
$
|
—
|
|
Short-term investments
|
|
|
119,786
|
|
|
—
|
|
|
119,786
|
|
|
—
|
|
Total financial assets
|
|
$
|
247,475
|
|
$
|
60,092
|
|
$
|
187,383
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investments and cash equivalents 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 December 31, 2019 and 2018.
During 2019, a derivative liability was recorded as a result of the issuance of the 2019 Notes. (see note 12). The Company initially determined fair value of the liability upon issuance, and then again at the balance sheet date. The fair value measurement of the derivative liability is classified as Level 3 under the fair value hierarchy and it has been valued using unobservable inputs. These inputs include: (1) a simulated share price at the time of conversion of the 2019 Notes, (2) assumed timing of conversion of the 2019 Notes, (3) risk-adjusted discount rate to present value the probability-weighted cash flows, and (4) entity specific cost of equity. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.
The fair value of the derivative liability was determined using a Monte-Carlo simulation by calculating fair value of the 2019 Interest Make-Whole Payment to 2019 Note holders based on assumed timing of conversion of the 2019 Notes. At November 14, 2019 the risk-adjusted discount rate was determined to be 12.06% and entity specific
cost of equity was determined to be 17.05%. At December 31, 2019, the risk-adjusted discount rate was determined to be 13.08% and entity specific cost of equity was determined to be 16.54%.
The following table represents a reconciliation of the derivative liability recorded in connection with the issuance of the 2019 Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2019
|
|
$
|
—
|
Fair value recognized upon issuance of 2019 Notes
|
|
|
247
|
Fair value adjustment
|
|
|
641
|
Derivative liability extinguished upon conversion
|
|
|
(438)
|
December 31, 2019
|
|
$
|
450
|
During 2018, a derivative liability was initially recorded as a result of the issuance of the 2018 Notes. (see note 12). The Company initially determined fair value of the liability upon issuance, and then again upon the determination that the derivative instrument met the criteria to be reclassified into equity. The fair value measurement of the derivative liability is classified as Level 3 under the fair value hierarchy as it has been valued using unobservable inputs. These inputs include: (1) a simulated share price at the time of conversion of the Notes, (2) assumed timing of conversion of the Notes, and (3) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.
The fair value of the derivative liability was determined using a binomial lattice model by calculating the fair value of the Notes with the conversion feature as compared to the fair value of the Notes without the conversion feature, with the difference representing the value of the conversion feature, or the derivative liability. The fair value of the Notes with the conversion feature at issuance was assumed to equal the issuance par value of $150.0 million with an implied discount rate of 12.1% which was determined by discounting the cash flows generated by the binomial lattice model back to the issuance par value. The fair value of the Notes without the conversion feature was calculated based on cash payment for the full par value of the Notes and was discounted by the implied discount rate of 12.1%. The fair value of the Notes with and without the conversion feature upon the Company’s shareholders increasing the number of authorized shares of common stock was determined using a similar approach with an implied discount rate of 16.2%, which was determined be evaluating the increase in credit spreads of publicly traded debt over a similar time period.
The following table represents a reconciliation of the derivative liability recorded in connection with the issuance of the 2018 Notes (in thousands):
|
|
|
|
January 1, 2018
|
|
$
|
—
|
Fair value recognized upon issuance of 2018 Notes
|
|
|
51,531
|
Fair value adjustment
|
|
|
(25,556)
|
Reclassification to equity
|
|
|
(25,975)
|
December 31, 2018
|
|
$
|
—
|
Fair Value of Financial Instruments
The fair value of the Company’s long-term debt is determined using a discounted cash flow analysis with current applicable rates for similar instruments as of the consolidated balance sheet dates. The carrying value of the Company’s long-term debt, including the current portion, at December 31, 2019 and 2018, was approximately $35.1 million and $25.2 million, respectively. At December 31, 2019 and 2018, the Company estimates that the fair value of its long-term debt, including the current portion, was approximately $37.0 and $26.9 million, respectively. The fair value of the Company’s long-term debt was determined using Level 3 inputs.
The fair value of the 2018 Notes and 2019 Notes was approximately $12.5 million and $50.5 million, respectively, as of December 31, 2019, which differs from the carrying value of the Notes. The fair value of the Notes is influenced by our stock price and stock price volatility. The fair value of the 2018 Notes and 2019 Notes was determined using Level 2 inputs.
Investments
Investments and cash equivalents consist of investments in a U.S. Government money market funds, overnight repurchase agreements collateralized by government agency securities or U.S. Treasury securities, corporate bonds and commercial paper of publicly traded companies that are classified as available‑for‑sale pursuant to Accounting Standards Codification (ASC) Topic 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its consolidated balance sheets. Investments are carried at fair value with unrealized gains and losses included as a component of accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity, until such gains and losses are realized. The fair value of these securities is based on quoted prices for identical or similar assets. If a decline in the fair value is considered other‑than‑temporary, based on available evidence, the unrealized loss is transferred from other comprehensive loss to the consolidated statements of operations and comprehensive loss.
The Company reviews investments for other‑than‑temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other‑than‑temporary, the Company considers the intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to year end. Realized gains and losses are determined using the specific identification method and are included in interest income in the consolidated statements of operations and comprehensive loss.
There were no realized gains or losses on investments for the years ended December 31, 2019, 2018 or 2017. There were two debt securities and fourteen debt securities in an unrealized loss position as of December 31, 2019 and December 31, 2018, respectively. None of these investments had been in an unrealized loss position for more than 12 months as of December 31, 2019 or December 31, 2018, respectively. The fair value of these securities as of December 31, 2019 and December 31, 2018 was $5.8 million and $46.9 million, respectively, and the aggregate unrealized loss was immaterial. 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 December 31, 2019 and December 31, 2018, respectively.
Cash, cash equivalents and investments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cash, cash equivalents & restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
77,764
|
|
$
|
—
|
|
$
|
—
|
|
$
|
77,764
|
|
Corporate bonds and commercial paper (due within 90 days)
|
|
|
1,498
|
|
|
—
|
|
|
—
|
|
|
1,498
|
|
Total cash and cash equivalents
|
|
$
|
79,262
|
|
$
|
—
|
|
$
|
—
|
|
$
|
79,262
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and commercial paper (due within 1 year)
|
|
$
|
31,979
|
|
$
|
14
|
|
$
|
—
|
|
$
|
31,993
|
|
Total investments
|
|
$
|
31,979
|
|
$
|
14
|
|
$
|
—
|
|
$
|
31,993
|
|
Total cash, cash equivalents and investments
|
|
$
|
111,241
|
|
$
|
14
|
|
$
|
—
|
|
$
|
111,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market accounts
|
|
$
|
62,270
|
|
$
|
—
|
|
$
|
—
|
|
$
|
62,270
|
|
Corporate bonds and commercial paper (due within 90 days)
|
|
|
67,590
|
|
$
|
8
|
|
$
|
(1)
|
|
$
|
67,597
|
|
Total cash and cash equivalents
|
|
$
|
129,860
|
|
$
|
8
|
|
$
|
(1)
|
|
$
|
129,867
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and commercial paper (due within 1 year)
|
|
$
|
119,666
|
|
$
|
132
|
|
$
|
(12)
|
|
$
|
119,786
|
|
Total investments
|
|
$
|
119,666
|
|
$
|
132
|
|
$
|
(12)
|
|
$
|
119,786
|
|
Total cash, cash equivalents and investments
|
|
$
|
249,526
|
|
$
|
140
|
|
$
|
(13)
|
|
$
|
249,653
|
|
Concentrations of credit risk and off‑balance sheet risk
Cash and cash equivalents, investments, and trade accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk. The Company mitigates this risk by maintaining its cash and cash equivalents and investments with high quality, accredited financial institutions. The management of the Company’s investments is not discretionary on the part of these financial institutions. As of December 31, 2019, the Company’s cash, cash equivalents and investments were deposited at three financial institutions and it has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
As of December 31, 2019 and 2018, there were two customers that cumulatively made up more than 50% of the Company’s trade accounts receivable balance. The Company assesses the creditworthiness of all its customers and sets and reassesses customer credit limits to ensure collectability of any trade accounts receivable balances are assured.
For the year ended December 31, 2019 and 2018, four customers and two customers, respectively, individually accounted for greater than 10% of the Company’s total revenues.
Property and equipment
Property and equipment consist of laboratory equipment, office furniture, computer equipment and leasehold improvements. Expenditures for repairs and maintenance are recorded to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Depreciation and amortization are calculated using the straight‑line method over the following estimated useful lives of the assets:
|
|
|
|
Laboratory equipment
|
|
5 years
|
|
Furniture
|
|
5 years
|
|
Computer equipment
|
|
3 years
|
|
Leasehold improvements
|
|
Lesser of useful life or life of lease
|
|
Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.
The Company reviews its long‑lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of assets may not be recoverable. Recoverability is measured by comparison of the asset’s book value to future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. No impairment losses have been recorded through December 31, 2019.
Other assets
Other assets primarily consist of prepayments made to contract research organizations (CROs). As of December 31, 2019 and 2018, other assets were primarily comprised of approximately $755,000 of prepaid CRO expenses that the Company assumed and paid to Infinity pursuant to the license agreement between the Company and Infinity.
Research and development costs
The Company expenses research and development costs to operations as incurred. Research and development expenses consist of:
|
·
|
|
employee‑related expenses, including salaries, benefits, travel and stock‑based compensation expense;
|
|
·
|
|
external research and development expenses incurred under arrangements with third parties, such as CROs, clinical trial sites, manufacturing organizations and consultants, including the scientific advisory board;
|
|
·
|
|
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of equipment, and laboratory supplies; and
|
|
·
|
|
costs associated with COPIKTRA prior to the Company concluding that regulatory approval is probable and that its net realizable value is recoverable.
|
The Company accounts for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the services have been performed or when the goods have been received rather than when the payment is made.
Stock‑based compensation
The Company recognizes stock‑based compensation expense for stock options, and restricted stock units (RSUs) issued to employees and directors based on the grant date fair value of the awards on a straight‑line basis over the requisite service period, which typically is the vest period. The Company recognized stock-based compensation for shares issued to employees under our employee stock purchase plan (ESPP) plan Historically, the Company recorded stock‑based compensation expense for stock options and RSUs issued to non‑employees based on the estimated fair value of the services received or of the equity instruments issued, whichever is more reliably measured, based on the vesting date fair value of the awards on a straight‑line basis over the vesting period. Effective January 1, 2019, the Company recognizes stock-based compensation expense for stock options and RSUs issued to non-employees based on the grant date fair value of the awards on the straight-line basis over the requisite service period. Awards subject to performance-based vesting requirements are expensed utilizing an accelerated attribution model if achievement of the performance criteria is determined to be probable.
The grant date fair value of stock options is estimated using the Black‑Scholes option pricing model that takes into account the fair value of its common stock, the exercise price, the expected life of the option, the expected volatility of its common stock, expected dividends on its common stock, and the risk-free interest rate over the expected life of the option. The Company applies the simplified method described in the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) Topic 14.D.2 to calculate the expected term as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post‑vesting termination behavior among its population. The Company has not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero.
The Company issues shares under the Company’s employee stock purchase plan (ESPP) to employees. Stock-based compensation expense for discounted purchases under the ESPP is measured using the Black-Scholes
model to compute the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the offering period.
For annual periods ending on or before December 31, 2017, the computation of expected volatility is based on the historical volatility of five companies, including the Company and a representative group of four public biotechnology and life sciences companies with similar characteristics to the Company, including similar stage of product development and therapeutic focus. As of the first quarter of 2018, the Company had sufficient company-specific historical and implied volatility information. As such, for the annual period ending December 31, 2018, the computation of expected volatility is based only on the historical volatility of the Company’s common stock. The risk‑free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options.
The Company accounts for forfeitures as they occur. Stock‑based awards issued to non-employees, including directors for non‑board related services, are accounted for based on the fair value of such services received or of the equity instruments issued, whichever is more reliably measured. Stock option awards to non-employees are revalued at each reporting date and upon vesting using the Black‑Scholes option pricing model and are expensed on a straight‑line basis over the vesting period.
Leases
Effective January 1, 2019, the Company adopted FASB ASC Topic 842, Leases (ASC 842). This standard 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.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances within the arrangement. A lease is identified where an arrangement conveys the right to control the use of identified property, plant, and equipment for a period of time in exchange for consideration. Leases which are identified within the scope of ASC 842 and which have a term greater than one year are recognized on the Company’s consolidated balance sheets as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize leases with terms of one year or less on its consolidated balance sheets. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates to calculate the present value of lease payments. Incremental borrowing rates are the rates the Company incurs to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
In accordance with ASC 842, components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). The fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the consolidated balance sheets and amortized on a straight-line basis as lease expense.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services, in accordance with ASC 606 Revenue from Contracts with Customers. To determine revenue recognition contracts with its customers, the Company performs the following five step assessment: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Revenue, Net – The Company sells COPIKTRA to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resell COPIKTRA either directly to patients, or to community hospitals or oncology clinics with in-office dispensaries who in turn distribute COPIKTRA to patients. In addition to distribution agreements with customers, the Company also enters into arrangements with (1) certain government agencies and various private organizations (Third-Party Payers), which may provide for chargebacks or discounts with respect to the purchase of COPIKTRA, and (2) Medicare and Medicaid, which may provide for certain rebates with respect to the purchase of COPIKTRA.
The Company recognizes revenue on sales of COPIKTRA when a customer obtains control of the product, which occurs at a point in time (typically upon delivery). Product revenues are recorded at the wholesale acquisition costs, net of applicable reserves for variable consideration. Components of variable consideration include trade discounts and allowances, Third-Party Payer chargebacks and discounts, government rebates, other incentives, such as voluntary co-pay assistance, product returns, and other allowances that are offered within contracts between the Company and customers, payors, and other indirect customers relating to the Company’s sale of COPIKTRA. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes based upon relevant factors such as, customer contract terms, information received from third parties regarding the anticipated payor mix for COPIKTRA, known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled with respect to sales made.
The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period. The Company’s analyses contemplate the application of the constraint in accordance with ASC 606. For the year ended December 31, 2019, the Company determined a material reversal of revenue would not occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances: The Company generally provides customers with invoice discounts on sales of COPIKTRA for prompt payment, which are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates its specialty distributor customers for sales order management, data, and distribution services. The Company has determined such services are not distinct from the Company’s sale of COPIKTRA to the specialty distributor customers and, therefore, these payments have also been recorded as a reduction of revenue within the consolidated statements of operations and comprehensive loss through December 31, 2019.
Third-Party Payer Chargebacks, Discounts and Fees: The Company executes contracts with Third-Party Payers which allow for eligible purchases of COPIKTRA at prices lower than the wholesale acquisition cost charged to customers who directly purchase the product from the Company. In some cases, customers charge the Company for the difference between what they pay for COPIKTRA and the ultimate selling price to the Third-Party Payers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable, net. Chargeback amounts are generally determined at the time of resale to
the qualified Third-Party Payer by customers, and the Company generally issues credits for such amounts within a few weeks of the customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at the end of each reporting period that the Company expects will be sold to Third-Party Payers, and chargebacks that customers have claimed, but for which the Company has not yet issued a credit. In addition, the Company compensates certain Third-Party Payers for administrative services, such as account management and data reporting. These administrative service fees have also been recorded as a reduction of product revenue within the consolidated statements of operations and comprehensive loss through December 31, 2019.
Government Rebates: The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Other Incentives: Other incentives which the Company offers include voluntary co-pay assistance programs, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses on the consolidated balance sheets.
Product Returns: Consistent with industry practice, the Company generally offers customers a limited right of return for product that has been purchased from the Company. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.
Subject to certain limitations, the Company’s return policy allows for eligible returns of COPIKTRA for credit under the following circumstances:
|
·
|
|
Receipt of damaged product;
|
|
·
|
|
Shipment errors that were a result of an error by the Company;
|
|
·
|
|
Expired product that is returned during the period beginning three months prior to the product’s expiration and ending six months after the expiration date;
|
|
·
|
|
Product subject to a recall; and
|
|
·
|
|
Product that the Company, at its sole discretion, has specified can be returned for credit.
|
As of December 31, 2019, the Company has not received any returns.
If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from product revenue. The Company expenses incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that the Company would have recognized is one year or less. However, no such costs were incurred during the year ended December 31, 2019.
Exclusive Licenses of Intellectual Property - The Company may enter into collaboration and licensing arrangements for research and development, manufacturing, and commercialization activities with collaboration partners for the development and commercialization of its product candidates, which have components within the scope of ASC 606. The arrangements generally contain multiple elements or deliverables, which may include (i) licenses, or options to obtain licenses, to the Company's intellectual property, (ii) research and development
activities performed for the collaboration partner, (iii) participation on joint steering committees, and (iv) the manufacturing of commercial, clinical or preclinical material. Payments pursuant to these arrangements typically include non-refundable, upfront payments, milestone payments upon the achievement of significant development events, research and development reimbursements, sales milestones, and royalties on product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period. The contracts into which the Company enters generally do not include significant financing components.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its collaboration and license agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract within the scope of ASC 606; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and d) the measure of progress in step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below.
If a license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other elements, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of its associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining elements, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress of each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, is subject to estimates by management and may change over the course of the arrangement. Such a change could have a material impact on the amount of revenue the Company records in future periods.
Customer Options: If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services such as research and development services or manufacturing services, the goods and services underlying the customer options are not considered to be performance obligations at the inception of the arrangement; rather, such goods and services are contingent on exercise of the option, and the associated option fees are not included in the transaction price. The Company evaluates customer options for material rights or options to acquire additional goods or services for free or at a discount. If a customer option is determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the estimated probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.
Milestone Payments: At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of
being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.
Collaborative Arrangements: Contracts are considered to be collaborative arrangements when they satisfy the following criteria defined in ASC 808, Collaborative Arrangements: (i) the parties to the contract must actively participate in the joint operating activity and (ii) the joint operating activity must expose the parties to the possibility of significant risk and rewards, based on whether or not the activity is successful. Payments received from or made to a partner that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction or increase to research and development expense, respectively.
For a complete discussion of the Company’s accounting for its license and collaboration agreements, see Note 16, License and collaboration agreements.
Accounts Receivable, Net
Accounts receivable, net consists of amounts due from customers, net of applicable revenue reserves. Accounts receivable have standard payments that generally require payment within 30 to 90 days. The Company analyzes accounts that are past due for collectability and provides an allowance for receivables when collection becomes doubtful. Given the nature and limited history of collectability of the Company’s accounts receivable, an allowance for doubtful accounts is not deemed necessary at December 31, 2019.
Inventory
The Company capitalizes inventories manufactured in preparation for initiating sales of a product candidate when the related product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories. In determining whether or not to capitalize such inventories, the Company evaluates, among other factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated competitive drugs and the availability of reimbursement. In addition, the Company evaluates risks associated with manufacturing the product candidate, including the ability of the Company’s third-party suppliers to complete the validation batches and the remaining shelf life of the inventories. Costs associated with manufacturing product candidates prior to satisfying the inventory capitalization criteria are charged to research and development expense as incurred.
The Company values its inventories at the lower of cost or estimated net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded within cost of sales - product. 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 sales - product in the consolidated statements of operations and comprehensive loss.
Shipping and handling costs for product shipments are recorded as incurred in cost of sales - product along with costs associated with manufacturing the product, and any inventory write-downs.
Intangible Assets
The Company records finite-lived intangible assets related to certain capitalized milestone payments related to commercial products at their fair value. These assets are amortized on a straight-line basis over their remaining useful lives, which are estimated based on the shorter of the remaining underlying patent life or the estimated useful life of the underlying product.
The Company assesses its finite-lived intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each finite-lived intangible asset to its carrying value on the consolidated balance sheets. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the finite-lived intangible asset and recognize an impairment loss if the carrying value of the finite-lived intangible asset exceeds its fair value.
Income taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized.
Net loss per share
Basic net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is calculated by increasing the denominator by the weighted-average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options, restricted stock units and warrants (using the “treasury stock” method) and Notes (using the “if-converted” method), unless their effect on net loss per share is antidilutive. The effect of computing diluted net loss per common share was antidilutive for any potentially issuable shares of common stock from the conversion of stock options, restricted stock units and warrants and, as such, have been excluded from the calculation. However, under the “if-converted” method, convertible instruments that are-in-the-money, are assumed to have been converted as of the beginning of the period or when issued, if later. Additionally, the effects of any interest expense and changes in fair value of bifurcated derivatives shall be added back to the numerator of the diluted net loss per share calculation. Refer to Note 13 for further details related to the calculation of net loss per share.
Recently Issued Accounting Standards Updates
In November 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which makes targeted improvements for collaborative arrangements to clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, adds unit of account guidance in Topic 808 to align with guidance in Topic 606, and clarifies presentation of certain revenues with a collaborative arrangement participant which are not directly related to a third party. ASU 2018-18 is effective for annual and interim periods beginning after December 15, 2019, 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 August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, 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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. ASU 2018-13 is effective for all entities for annual and interim periods beginning after December 15, 2019. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. 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 June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 will replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives (Topic 815), and Leases (Topic 842). This ASU delayed the required adoption for SEC filers that are smaller reporting companies as of their determination on November 15, 2019, until annual and interim periods beginning after December 15, 2022, with early adoption permitted. The Company has determined that as of November 15, 2019, it is a smaller reporting company and has not elected to early adopt this standard. The Company is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No 2019-12, Simplifying Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation, calculating income taxes in interim periods and adds certain guidance to remove complexity in certain areas. ASU 2019-12 is effective for all entities for annual and interim periods beginning after December 15, 2020. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. 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 June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based
payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions accounted for under ASC 606. ASU 2018-07 was effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, but no earlier than the date on which ASC 606 is adopted. The Company adopted this standard prospectively effective January 1, 2019. The adoption of this ASU did not have an effect on the Company’s consolidated financial statements or 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 (ASC 842). 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02. Under the amendments in ASU 2018-11, entities may elect not to restate the comparative periods presented when transitioning to ASC 842 (optional transition method) and lessors may elect not to separate lease and non-lease components when certain conditions are met (lessor relief practical expedient). The optional transition method applies to entities that have not yet adopted ASU 2016-02, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted.
The Company adopted this standard using the optional transition method effective January 1, 2019. Upon adoption of this standard, the Company recognized a lease liability and a corresponding right-of use asset of $4.0 million and $3.4 million, respectively, and derecognized a deferred rent liability and a corresponding lease incentive obligation of $0.4 million and $0.2 million, respectively. The Company did not record any cumulative effect adjustment to accumulated deficit as a result of adopting this standard. The Company also elected to adopt the practical expedients upon transition, which permit companies to not reassess lease identification, classification, and initial direct costs under ASU 2016-02 for leases that commenced prior to the effective date.
3. Inventory
During the third quarter of 2018, the Company began capitalizing inventory costs for COPIKTRA manufactured in preparation for its launch in the United States based on its evaluation of, among other factors, the status of the COPIKTRA NDA in the United States and the ability of its third-party suppliers to successfully manufacture commercial quantities of COPIKTRA, which provided the Company with reasonable assurance that the net realizable value of the inventory would be recoverable.
Inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Raw materials
|
|
$
|
955
|
|
$
|
—
|
|
Work in process
|
|
|
2,040
|
|
|
63
|
|
Finished goods
|
|
|
101
|
|
|
264
|
|
Total inventories
|
|
$
|
3,096
|
|
$
|
327
|
|
Costs incurred prior to the quarter-ended September 30, 2018 to manufacture COPIKTRA were expensed as operating expenses as incurred.
4. Property and equipment, net
Property and equipment and related accumulated depreciation are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Leasehold improvements
|
|
$
|
146
|
|
$
|
146
|
|
Furniture and fixtures
|
|
|
1,074
|
|
|
1,074
|
|
Computer equipment
|
|
|
665
|
|
|
658
|
|
|
|
|
1,885
|
|
|
1,878
|
|
Less: accumulated depreciation
|
|
|
(938)
|
|
|
(509)
|
|
Total property and equipment, net
|
|
$
|
947
|
|
$
|
1,369
|
|
During the year ended December 31, 2018, an amendment to the Company’s existing office space lease was executed whereby the Company relocated from its previous 15,197 rentable square foot location to an adjacent 27,810 rentable square foot location within the same building. As a result of this amendment, the Company shortened the useful life of the leasehold improvements related to the original location and depreciated this balance through the date which it vacated the original space. Upon vacating the original 15,197 rentable office space, the Company disposed of the leasehold improvements related to this location. No gain or loss from the disposal of leasehold improvements was recognized during the year ended December 31, 2018.
The Company recorded approximately $0.4 million, $1.0 million, and $0.6 million in depreciation expense for the years ended December 31, 2019, 2018 and 2017, respectively.
5. Intangible assets
The Company’s intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Estimated useful life
|
|
Acquired and in-licensed rights
|
|
$
|
22,000
|
|
14 years
|
|
Less: accumulated amortization
|
|
|
(1,992)
|
|
|
|
Total intangible assets, net
|
|
$
|
20,008
|
|
|
|
Acquired and in-licensed rights as of December 31, 2019, consist of a $22.0 million milestone payment which became payable upon the FDA marketing approval on September 24, 2018 pursuant to the amended and restated license agreement with Infinity. The Company made a milestone payment of $22.0 million to Infinity in November 2018.
The Company recorded approximately $1.6 million and $0.4 million in amortization expense related to finite-lived intangible assets during the year ended December 31, 2019 and December 31, 2018, respectively, using straight-line methodology. Estimated future amortization expense for finite-lived intangible assets as of December 31, 2019 is approximately $1.6 million per year thereafter.
6. Accrued expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Compensation and related benefits
|
|
|
7,399
|
|
|
8,749
|
|
Contract research organization costs
|
|
|
5,467
|
|
|
6,682
|
|
Commercialization costs
|
|
|
3,028
|
|
|
1,979
|
|
Interest
|
|
|
897
|
|
|
1,786
|
|
Consulting fees
|
|
|
1,610
|
|
|
494
|
|
Professional fees
|
|
|
573
|
|
|
482
|
|
Other
|
|
|
391
|
|
|
936
|
|
Total accrued expenses
|
|
$
|
19,365
|
|
$
|
21,108
|
|
7. Long-term debt
On March 21, 2017 (Closing Date), the Company entered into a term loan facility of up to $25.0 million with Hercules Capital, Inc. (Hercules). The term loan facility is governed by a loan and security agreement, dated March 21, 2017 (the Original Loan Agreement), which originally provided for up to four separate advances, of which an aggregate of $15.0 million were drawn down during the year ended December 31, 2017. The Original Loan Agreement was amended on January 4, 2018, March 6, 2018, and October 11, 2018, (the Amended Loan Agreement) to increase the total borrowing limit under the Original Loan Agreement from $25.0 million up to $50.0 million (the Amended Term Loan), pursuant to certain conditions of funding.
On April 23, 2019 (the Fourth Amendment Date) and November 14, 2019 (the Fifth Amendment Date), the Company entered into the Fourth Amendment and Fifth Amendment (together the Amendments) to the Original Loan Agreement with Hercules. The Amendments amend the Amended Loan Agreement (together, with the Amendments, the 2019 Term Loan Agreement).
Per the terms of the 2019 Term Loan Agreement, the Company may borrow up to an aggregate of $75.0 million, of which $35.0 million was outstanding immediately as of the Fourth Amendment Date (2019 Term A Loan) as a result of the existing outstanding principal of term loans of $25.0 million under the Amended Loan Agreement being converted into the 2019 Term A Loan, and an additional $10.0 million being drawn on the Fourth Amendment Date. The remaining $40.0 million of borrowing capacity may be drawn in multiple tranches comprised of (i) a term loan in an amount of up to $15.0 million upon us generating cumulative net product revenues (as defined in the 2019 Term Loan Agreement) of either (a) $37.5 million on or before April 30, 2020 or (b) $50.0 million on or before June 30, 2020 (2019 Term B Loan), and (ii) a term loan in an amount of up to $25.0 million available through December 31, 2021, subject to Hercules’ approval and certain other conditions specified in the 2019 Term Loan Agreement (the 2019 Term C Loan, and together with the 2019 Term A Loan and 2019 Term B Loan, the 2019 Term Loan). As of December 31, 2019, The Company has borrowed a total of $35.0 million in term loans.
The Fifth Amendment modified the financial covenants and collateral requirements. As of the Fifth Amendment Date, the Company must maintain cash in an aggregate amount greater than or equal to 100% of the outstanding term loans as collateral, until the Company’s receipt of Net Product Revenues (as defined in the 2019 Term Loan Agreement) of at least $20 million on or before December 31, 2020, measured on a trailing six month basis (Initial Net Product Revenue Threshold). As of December 31, 2019 the Company has not met the Initial Net Product Revenue Threshold and has recorded $35.0 million as non-current restricted cash on the consolidated balance sheet.
The 2019 Term Loan will mature on December 1, 2022 (2019 Term Loan Maturity Date). Each advance accrues interest at a floating per annum rate equal to the greater of (a) 9.75% or (b) the lesser of (i) 12.00% and (ii) the sum of (x) 9.75% plus (y) (A) the prime rate minus (B) 5.50%. The 2019 Term Loan provides for interest-only payments until April 1, 2021, which may be extended to December 1, 2021 pursuant to us generating $40.0 million
in net product revenue on a trailing six-month basis on or prior to December 31, 2020 provided that no event of default has occurred. Thereafter, amortization payments will be payable monthly in equal installments of principal and interest (subject to recalculation upon a change in prime rates).
The 2019 Term Loan is secured by a lien on substantially all of our assets, other than intellectual property and contains customary covenants and representations, including a liquidity covenant, minimum net revenue covenant, financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.
On the Fourth Amendment Date, the Company was required to pay any outstanding accrued interest as well as the final payment fee equal to 4.5% on the outstanding principal balance of the Amended Term Loan, or $1.1 million. No prepayment charges were due as a result of executing the Amendment or conversion of the existing term loans into 2019 Term A Loans.
The events of default under the 2019 Term Loan Agreement include, without limitation, and subject to customary grace periods, (i) any failure by us to make any payments of principal or interest under 2019 Term Loan Agreement, promissory notes or other loan documents, (ii) any breach or default in the performance of any covenant under the 2019 Term Loan Agreement, (iii) any making of false or misleading representations or warranties in any material respect, (iv) our insolvency or bankruptcy, (v) certain attachments or judgments on the assets of Verastem, Inc., or (vi) the occurrence of any material default under certain agreements or obligations of ours involving indebtedness, or (vii) the occurrence of a material adverse effect. If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the 2019 Term Loan Agreement.
The 2019 Term Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. Hercules has indemnification rights and the right to assign the 2019 Term Loan.
The Company assessed all terms and features of the 2019 Term 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 2019 Term Loan Agreement, including put and call features. The Company determined that all features of the 2019 Term 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 consolidated financial statements. The Company reassesses the features on a quarterly basis to determine if they require separate accounting. There have been no changes to the Company’s original assessment through December 31, 2019.
The future principal payments under the 2019 Term Loan Agreement are as follows as of December 31, 2019 (in thousands):
|
|
|
|
2021
|
|
$
|
14,234
|
2022
|
|
|
20,766
|
Total principal payments
|
|
$
|
35,000
|
8. Product revenue reserves and allowances
As of December 31, 2019, the Company’s sole source of product revenue has been from sales of COPIKTRA in the United States, which it began shipping to customers on September 25, 2018. The following table summarizes activity in each of the product revenue allowance and reserve categories for the year ended December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
Payer
|
|
Government
|
|
|
|
|
|
|
|
|
discounts
|
|
chargebacks,
|
|
rebates and
|
|
|
|
|
|
|
|
|
and
|
|
discounts
|
|
other
|
|
|
|
|
|
|
|
|
allowances
|
|
and fees
|
|
incentives
|
|
Returns
|
|
Total
|
Beginning Balance at December 31, 2017
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Provision related to sales in the current year
|
|
|
69
|
|
|
120
|
|
|
157
|
|
|
2
|
|
|
348
|
Adjustments related to prior period sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Credits and payments made
|
|
|
(40)
|
|
|
(32)
|
|
|
—
|
|
|
—
|
|
|
(72)
|
Balance at December 31, 2018
|
|
$
|
29
|
|
$
|
88
|
|
$
|
157
|
|
$
|
2
|
|
$
|
276
|
Provision related to sales in the current year
|
|
|
512
|
|
|
1,306
|
|
|
608
|
|
|
74
|
|
|
2,500
|
Adjustments related to prior period sales
|
|
|
—
|
|
|
—
|
|
|
(76)
|
|
|
—
|
|
|
(76)
|
Credits and payments made
|
|
|
(430)
|
|
|
(1,139)
|
|
|
(317)
|
|
|
—
|
|
|
(1,886)
|
Ending balance at December 31, 2019
|
|
$
|
111
|
|
$
|
255
|
|
$
|
372
|
|
$
|
76
|
|
$
|
814
|
Trade discounts and Third-Party Payer chargebacks and discounts are recorded as a reduction to accounts receivable, net on the consolidated balance sheets. Trade allowances and Third-Party Payer fees, government rebates, other incentives and returns are recorded as a component of accrued expenses on the consolidated balance sheets.
9. Leases
On April 15, 2014, the Company entered into a lease agreement for approximately 15,197 square feet of office and laboratory space in Needham, Massachusetts. The lease term commenced on April 15, 2014 and was scheduled to expire on September 30, 2019. Effective February 15, 2018, the Company amended its lease agreement to relocate within the facility to another location consisting of 27,810 square feet of office space (the Amended Lease Agreement). The Amended Lease Agreement extends the expiration date of the lease from September 2019 through May 2025. Pursuant to the Amended Lease Agreement, the initial annual base rent amount is approximately $660,000, which increases during the lease term to $1.1 million for the last twelve-month period.
The Company has accounted for its Needham, Massachusetts office space as an operating lease. The Company’s lease contains an option to renew and extend the lease terms and an option to terminate the lease prior to the expiration date. The Company has not included the lease extension or the termination options within the right-of-use asset and lease liability on the consolidated balance sheets as neither option is reasonably certain to be exercised. The Company’s lease includes variable non-lease components (e.g., common area maintenance, maintenance, consumables, etc.) that are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred. The Company does not have any other operating or finance leases.
In calculating the present value of future lease payments, the Company has elected to utilize its incremental borrowing rate based on the remaining lease term at the date of adoption of ASC 842. The Company has elected to account for lease components and associated non-lease components as a single lease component and has allocated all of the contract consideration to the lease components only. This will potentially result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied.
As of December 31, 2019 a right-of-use asset of $3.1 million and lease liability of $3.9 million are reflected on the consolidated balance sheets. The elements of lease expense were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31, 2019
|
Lease Expense
|
|
|
|
|
Operating lease expense
|
|
|
$
|
885
|
Total Lease Expense
|
|
|
$
|
885
|
Other Information - Operating Leases
|
|
|
|
|
Operating cash flows paid for amounts included in measurement of lease liabilities
|
|
|
$
|
703
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Other Balance Sheet Information - Operating Leases
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
5.5
|
Weighted average discount rate
|
|
|
|
14.60%
|
Maturity Analysis
|
|
|
|
|
2020
|
|
|
$
|
955
|
2021
|
|
|
|
1,019
|
2022
|
|
|
|
1,039
|
2023
|
|
|
|
1,060
|
2024
|
|
|
|
1,081
|
Thereafter
|
|
|
|
546
|
Total
|
|
|
$
|
5,700
|
Less: Present value discount
|
|
|
|
(1,791)
|
Lease Liability
|
|
|
$
|
3,909
|
The Company adopted ASU 2016-02 effective January 1, 2019 using the optional transition method permitted under ASU 2018-11. Accordingly, periods presented prior to January 1, 2019 were not restated to reflect the accounting principles adopted under ASU 2016-02. Prior to adoption, the Company recorded rent expense from its Needham office on a straight-line basis over the term of the lease with the deferred rent obligation included in accrued expenses (current portion) and other liabilities (noncurrent portion) in the consolidated balance sheet as of December 31, 2018. The Company amortized any leasehold improvements over the lesser of the useful life of those improvements or the life of the lease. For the year ended December 31, 2018, the Company recorded rent expense of $0.8 million.
At December 31, 2018, future minimum lease payments under non-cancelable leases under ASC 840 were as follows (in thousands):
|
|
|
|
2019
|
|
$
|
716
|
2020
|
|
|
971
|
2021
|
|
|
1,020
|
2022
|
|
|
1,041
|
2023
|
|
|
1,062
|
Thereafter
|
|
|
1,538
|
Total
|
|
$
|
6,348
|
10. Common stock
As of December 31, 2019 and 2018, the Company had reserved the following shares of common stock for the issuance of common stock for vested restricted stock units, the exercise of stock options, and an outstanding warrant (in thousands):
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Shares reserved under equity compensation plans
|
|
15,389
|
|
15,572
|
|
Shares reserved for inducement grants
|
|
6,331
|
|
6,381
|
|
Shares reserved for 2018 Notes
|
|
3,950
|
|
20,937
|
|
Shares reserved for 2019 Notes
|
|
34,796
|
|
—
|
|
Total shares reserved
|
|
60,466
|
|
42,890
|
|
Each share of common stock is entitled to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors.
At-the-market equity offering programs
On March 30, 2017, the Company established an at-the-market equity offering program (ATM) pursuant to which it was 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, as sales agent. On August 28, 2017, the Company amended its sales agreement with Cantor to increase the maximum aggregate offering price of shares of common stock that can be sold under the ATM to $75.0 million. Through December 31, 2018, the Company sold 11,518,354 shares under the ATM for net proceeds of approximately $47.3 million (after deducting commissions and other offering expenses). During the year ended December 31, 2019, there were no sales under the ATM. As of December 31, 2019 we can issue an additional $26.6 million of gross proceeds under this program.
Equity offering
On May 16, 2018, the Company entered into an underwriting agreement with Cantor relating to the underwritten offering of 7,777,778 shares (the Shares) of the Company’s common stock (the Underwriting Agreement). Cantor agreed to purchase the Shares pursuant to the Underwriting Agreement at a price of $4.31 per share. In addition, the Company granted Cantor an option to purchase, at the public offering price less any underwriting discounts and commissions, an additional 1,166,666 shares of the Company’s common stock, exercisable for 30 days from the date of the prospectus supplement. The option was exercised by Cantor in full on May 23, 2018. The aggregate proceeds from Cantor, net of underwriting discounts and offering costs, were approximately $38.3 million.
On June 14, 2018, the Company entered into a purchase agreement with Consonance Capital Master Account L.P. and P Consonance Opportunities Ltd. (collectively, Consonance) relating to the registered offering of 7,166,666 shares of its common stock at a price of $6.00 per share. The aggregate proceeds from Consonance, net of offering costs, were approximately $42.9 million.
On December 14, 2017, the Company entered into an underwriting agreement with BTIG, LLC relating to the underwritten offering of 8,422,877 shares of its common stock at a price of $2.97 per share, for aggregate proceeds, net of underwriting discounts and offering costs, of approximately $24.7 million.
11. Stock‑based compensation
Stock‑based compensation expense as reflected in the Company’s consolidated statements of operations and comprehensive loss was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Research and development
|
|
$
|
1,501
|
|
$
|
2,043
|
|
$
|
1,381
|
|
Selling, general and administrative
|
|
|
7,038
|
|
|
4,628
|
|
|
3,652
|
|
Total stock-based compensation expense
|
|
$
|
8,539
|
|
$
|
6,671
|
|
$
|
5,033
|
|
All of the $8.5 million, $6.7 million, and $5.0 million of stock-based compensation expense recorded during the years ended December 31, 2019, 2018 and 2017, respectively, was recorded to additional paid-in capital.
The Company has awards outstanding under two equity compensation plans, the Amended and Restated 2012 Incentive Plan (the 2012 Plan) and the 2010 Equity Incentive Plan (the 2010 Plan), as well as the inducement award program. Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the individual plans. To date, most options granted by the Company vest twenty-five percent (25%) one year from vesting start date and six and a quarter percent (6.25%) for each successive three-month period, thereafter (subject to acceleration of vesting in the event of certain change of control transactions) and are exercisable for a period of ten years from the date of grant.
2012 Incentive Plan
The 2012 Plan became effective immediately upon the closing of the Company’s IPO in February 2012. Upon effectiveness of the 2012 Plan, the Company ceased making awards under the 2010 Plan. The 2012 Plan initially allowed the Company to grant awards for up to 3,428,571 shares of common stock, plus the number of shares of common stock available for grant under the 2010 Plan as of the effectiveness of the 2012 Plan (which was an additional 30,101 shares), plus that number of shares of common stock related to awards outstanding under the 2010 Plan which terminate by expiration, forfeiture, cancellation or otherwise. The 2012 Plan included an “evergreen provision” that allowed for an annual increase in the number of shares of common stock available for issuance under the 2012 Plan. The annual increase was added on the first day of each year from 2013 through 2018 and was equal to the lesser of 1,285,714 shares of common stock and 4.0% of the number of shares of common stock outstanding, or a lesser amount as determined by the board of directors. On each of January 1, 2018, January 1, 2017 and January 1, 2016, the number of shares available for issuance under the 2012 Plan increased by 1,285,714 under this provision. On December 18, 2018, the shareholders of the Company approved the Amended and Restated 2012 Incentive Plan which increased the maximum number of shares available for issuance under the 2012 Plan to 16,628,425 and eliminated the evergreen provision.
Awards under the 2012 Plan may include the following award types: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units (RSUs), other stock‑based or cash‑based awards and any combination of the foregoing. As of December 31, 2019, under the 2012 Plan, the Company has granted stock options for 19,733,446 shares of common stock, of which 5,644,811 have been forfeited and 456,865 have been exercised, and granted restricted stock units for 1,922,622 shares of common stock, of which 443,277 have been forfeited and 851,256 have vested. The exercise price of each option has been equal to the closing price of a share of our common stock on the grant date.
Inducement Award Program
In December 2014, the Company established an inducement award program (in accordance with Nasdaq Listing Rule 5635(c)(4)) under which it may grant non-statutory stock options to purchase, and RSUs in respect of up to an aggregate of 750,000 shares of common stock to new or prospective employees as inducement to enter into employment with the Company. In December 2016, the Board of Directors authorized and reserved 580,000 additional shares of common stock under this program. In December 2017, the Board of Directors authorized and reserved 2,500,000 additional shares of common stock under this program. In June and December 2018, the Board
of Directors authorized and reserved 1,700,000 and 1,250,000 additional shares of common stock under this program, respectively. The program is governed by the terms of the 2012 Plan, but shares issued pursuant to the program are not issued under the 2012 Plan. As of December 31, 2019, the Company had granted options for 6,094,671 shares of common stock under the program, of which 2,212,738 have been forfeited and 323,750 have been exercised, and granted restricted stock units for 162,200 shares, of which 62,200 have been forfeited and 50,000 have vested. As of December 31, 2019, 3,608,183 remain available for future issuance.
Stock Options
A summary of the Company’s stock option activity and related information for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
remaining
|
|
Aggregate
|
|
|
|
|
|
exercise price per
|
|
contractual term
|
|
intrinsic value
|
|
|
|
Shares
|
|
share
|
|
(years)
|
|
(in thousands)
|
|
Outstanding at December 31, 2018
|
|
12,522,867
|
|
$
|
5.42
|
|
7.8
|
|
$
|
6,909
|
|
Granted
|
|
8,280,682
|
|
$
|
2.09
|
|
|
|
|
|
|
Exercised
|
|
(91,907)
|
|
$
|
1.41
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
(3,453,118)
|
|
$
|
4.67
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
17,258,524
|
|
$
|
4.00
|
|
7.3
|
|
$
|
185
|
|
Vested at December 31, 2019
|
|
7,641,065
|
|
$
|
5.45
|
|
5.3
|
|
$
|
121
|
|
Vested and expected to vest at December 31, 2019(1)
|
|
16,728,024
|
|
$
|
4.00
|
|
7.3
|
|
$
|
185
|
|
|
(1)
|
|
This represents the number of vested options as of December 31, 2019, plus the number of unvested options expected to vest as of December 31, 2019.
|
The fair value of each stock option was estimated using a Black‑Scholes option‑pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
|
1.98
|
%
|
|
2.65
|
%
|
|
2.02
|
%
|
Volatility
|
|
87
|
%
|
|
81
|
%
|
|
78
|
%
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected term (years)
|
|
5.9
|
|
|
5.8
|
|
|
5.8
|
|
The Company recorded stock‑based compensation expense associated with employee stock options of $7.1 million, $5.6 million, and $4.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. The weighted‑average grant date fair value of options granted in the years ended December 31, 2019, 2018, and 2017 was $1.44, $3.72, and $1.83 per share, respectively. The fair value of options that vested during the years ended December 31, 2019, 2018, and 2017 was $7.3 million, $4.7 million, and $4.8 million, respectively. The aggregate intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by employees to exercise the option) during the years ended December 31, 2019 and 2018 was $0.1 million and $1.8 million, respectively.
During the first quarter of 2018, the Company granted stock options to purchase a total of 582,500 shares of common stock to certain executives that vest only upon the achievement of specified performance conditions. The Company determined that two of the performance conditions had been achieved as of December 31, 2018. The Company has recognized approximately $0.1 million and $0.7 million of stock-based compensation expense during the year ended December 31, 2019 and 2018, respectively, related to awards that vest upon the achievement of performance conditions. As December 31, 2019, a total of 260,000 performance-based options remain unvested which are expected to vest, which have a weighted average exercise price of $1.52 per share, weighted average remaining contractual term of 9.6 years and $0 aggregate intrinsic value.
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 Company determined that 50% of performance conditions had been achieved during the year ended December 31, 2016. As a result, 250,000 shares vested in October 2016 and the Company recognized stock-based compensation expense related to these awards of approximately $0.2 million for the year ended December 31, 2016. In September 2017, the Company determined that the remaining performance conditions had been achieved and as a result the remaining 250,000 shares vested and the Company recognized stock-based compensation expense of approximately $0.4 million during the year ended December 31, 2017. The increase in stock-based compensation expense recognized for the awards which vested during the year ended December 31, 2017, as compared to the awards which vested during the year ended December 31, 2016, is a result of the revaluation of an award held by a non-employee to fair value on the vesting date.
At December 31, 2019, there was $14.0 million of total unrecognized compensation cost related to unvested stock options and the Company expects to recognize this cost over a remaining weighted-average period of 2.8 years.
Restricted Stock Units (RSUs)
The Company awards RSUs to employees under its 2012 Incentive Plan and Inducement Award Program. Each RSU entitles the holder to receive one share of the Company’s common stock when the RSU vests. The RSUs generally vest in either (i) four substantially equal installments on each of the first four anniversaries of the vesting commencement date, or (ii) 100 percent on the first anniversary of the vesting commencement date, subject to the employee’s continued employment with, or service to, the Company on such vesting date. Compensation expense is recognized on a straight-line basis.
A summary of RSU activity during the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average grant date fair value per share
|
|
Outstanding at December 31, 2018
|
|
|
306,750
|
|
$
|
5.24
|
|
Granted
|
|
|
798,904
|
|
$
|
2.57
|
|
Vested
|
|
|
(141,439)
|
|
$
|
6.93
|
|
Forfeited/cancelled
|
|
|
(286,126)
|
|
$
|
3.86
|
|
Outstanding at December 31, 2019
|
|
|
678,089
|
|
$
|
2.36
|
|
The Company recorded stock‑based compensation expense associated with employee RSUs of $1.0 million, $0.4 million, and less than $0.1 million for the years ended December 31, 2019, 2018, and 2017, respectively. No RSUs were granted during the years ended December 31, 2017. The total fair value of restricted stock units vested during the years ended December 31, 2019, 2018, and 2017 was approximately $0.3 million, $0.0 million, and $0.0 million, respectively.
At December 31, 2019, there was $1.2 million of total unrecognized compensation cost related to unvested RSUs and the Company expects to recognize this cost over a remaining weighted-average period of 2.6 years.
Employee stock purchase plan
At the Special Meeting of Stockholders, held on December 18, 2018, the stockholders approved the 2018 Employee Stock Purchase Plan (2018 ESPP). On June 21, 2019, the board of directors of the Company amended and restated the 2018 ESPP, to account for certain non-material changes to the plan’s administration (the Amended and Restated 2018 ESPP). The Amended and Restated 2018 ESPP provides eligible employees with the opportunity, through regular payroll deductions, to purchase shares of the Company’s common stock at 85% of the lesser of the fair market value of the common stock (a) on the date the option is granted, which is the first day of the purchase period, and (b) on the exercise date, which is the last business day of the purchase period. The Amended and Restated 2018 ESPP generally allows for two six-month purchase periods per year beginning in January and July, or such other periods as determined by the compensation committee of our board of directors. The Company has
reserved 2,000,000 shares of common stock for the administration of the Amended and Restated 2018 ESPP. The fair value of shares expected to be purchased under the Amended and Restated 2018 ESPP was calculated using the Black-Scholes model with the following assumptions:
|
|
|
|
|
|
|
|
Six Months ended June 30,
|
|
|
Six Months ended December 31,
|
|
2019
|
|
|
2019
|
Risk-free interest rate
|
2.46
|
%
|
|
|
2.10
|
%
|
Volatility
|
79
|
%
|
|
|
95
|
%
|
Dividend yield
|
—
|
|
|
|
—
|
|
Expected term (years)
|
0.4
|
|
|
|
0.5
|
|
For the year ended December 31, 2019, the Company has recognized $0.4 million of stock-based compensation expense under the Amended and Restated 2018 ESPP. During the year ended December 31, 2019, the Company issued 341,701 shares of common stock for proceeds of $0.4 million under the Amended and Restated 2018 ESPP.
12. Convertible Senior Notes
On October 17, 2018, the Company closed a registered direct public offering of $150.0 million aggregate principal amount of the Company’s 5.00% Convertible Senior Notes due 2048 (the 2018 Notes), for net proceeds of approximately $145.3 million. The 2018 Notes are governed by the terms of a base indenture for senior debt securities (the Base Indenture), as supplemented by the first supplemental indenture thereto (the Supplemental Indenture and together with the 2018 Base Indenture, the 2018 Indenture), each dated October 17, 2018, by and between the Company and Wilmington Trust, National Association, as trustee. The 2018 Notes are senior unsecured obligations of the Company and bear interest at a rate of 5.00% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2019. The 2018 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with their terms.
The 2018 Notes are convertible into shares of the Company’s common stock, par value $0.0001 per share, together, if applicable, with cash in lieu of any fractional share, at an initial conversion rate of 139.5771 shares of common stock per $1,000 principal amount of the Notes, which corresponds to an initial conversion price of approximately $7.16 per share of common stock and represents a conversion premium of approximately 15.0% above the last reported sale price of the common stock of $6.23 per share on October 11, 2018. Upon conversion, converting noteholders will be entitled to receive accrued interest on their converted 2018 Notes. To the extent the Company has insufficient authorized but unissued shares to settle conversions in shares of common stock, the Company would be required to settle the deficiency in cash.
The Company will have the right, exercisable at its option, to cause all Notes then outstanding to be converted automatically if the “Daily VWAP” (as defined in the 2018 Indenture) per share of the Company’s common stock equals or exceeds 130% of the conversion price on each of at least 20 VWAP Trading Days (as defined in the 2018 Indenture), whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date the Company first issued the 2018 Notes.
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends, but will not be adjusted for any accrued and unpaid interest.
Prior to November 1, 2022, the Company will not have the right to redeem the 2018 Notes. On or after November 1, 2022, the Company may elect to redeem the 2018 Notes, in whole or in part, at a cash redemption price equal to the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest, if any.
Unless the Company has previously called all outstanding 2018 Notes for redemption, the 2018 Notes will be subject to repurchase by the Company at the holders’ option on each of November 1, 2023, November 1, 2028, November 1, 2033, November 1, 2038 and November 1, 2043 (or, if any such date is not a business day, on the next
business day) at a cash repurchase price equal to the principal amount of the 2018 Notes to be repurchased, plus accrued and unpaid interest, if any.
If a “Fundamental Change” (as defined in the 2018 Indenture) occurs at any time, subject to certain conditions, holders may require the Company to purchase all or any portion of their 2018 Notes at a purchase price equal to 100% of the principal amount of the 2018 Notes to be purchased, plus accrued and unpaid interest. If a “Fundamental Change” occurs on or before November 1, 2022 and a holder elects to convert its Notes in connection with such change, such holder may be entitled to an increase in the conversion rate in certain circumstances as set forth in the Indenture.
The 2018 Notes are the Company’s senior, unsecured obligations and will be senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2018 Notes; equal in right of payment with the Company’s existing and future indebtedness that is not so subordinated, and effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. The 2018 Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
The 2018 Indenture includes customary covenants and set forth certain events of default after which the 2018 Notes may be declared immediately due and payable and set forth certain types of bankruptcy or insolvency events of default involving the Company or certain of its subsidiaries after which the 2018 Notes become automatically due and payable
The Company assessed all terms and features of the 2018 Notes in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the 2018 Notes, including the conversion, put and call features. Per the terms of the 2018 Indenture, upon conversion of the 2018 Notes, a portion of the principal may be settled in cash until the date upon which the Company’s stockholders approve an increase in the number of authorized shares of common stock, or the Authorized Share Effective Date, as defined. In consideration of this provision, the Company concluded the conversion feature required bifurcation as a derivative. The fair value of the conversion feature derivative was determined based on the difference between the fair value of the 2018 Notes with the conversion option and the fair value of the 2018 Notes without the conversion option. The Company determined that the fair value of the derivative upon issuance of the 2018 Notes was $51.5 million and recorded this amount as a derivative liability and the offsetting amount as a debt discount as a reduction to the carrying value of the 2018 Notes on the closing date, or October 17, 2018.
On December 18, 2018, the Authorized Share Effective Date was achieved as the Company’s stockholders approved an increase in the number of authorized shares of Common Stock. Following this approval, no portion of the 2018 Notes are settleable in cash upon conversion. As such, the Company determined that the conversion feature no longer met the definition of a derivative following the increase in the number of authorized shares of common stock. As of December 18, 2018, the Company determined the fair value of the conversion feature was $25.9 million. The Company recorded the change in the fair value of the conversion feature for the period from October 17, 2018 to December 18, 2018 of $25.6 million as other income on the consolidated statements of operations and comprehensive loss. As of December 18, 2018, the fair value of the conversion option was reclassified to additional paid-in capital on the consolidated balance sheets as it qualified for a scope exception from derivative accounting. Accordingly, the conversion feature will no longer be measured at fair value on the Company’s financial statements.
On November 14, 2019 and December 23, 2019, we entered into privately negotiated agreements to exchange approximately $114.3 million and $7.4 million, respectively, aggregate principal amount of the 2018 Notes for (i) approximately $62.9 million and $4.0 million, respectively, aggregate principal amount of 5.00% Convertible Senior Second Lien Notes due 2048 (the 2019 Notes) (ii) an aggregate of approximately $11.4 million and $0.7 million in 2018 Notes principal repayment and (iii) accrued interest on the 2018 Notes through November 14, 2019 and December 23, 2019, respectively. The 2019 Notes are governed by the terms of an indenture (the 2019 Indenture). The 2019 Notes are senior secured obligations of the Company and bear interest at 5.00% per annum,
payable semi-annually in arrears on May 1 and November 1 of each year. The 2019 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with the terms.
The Company determined 2019 Notes exchange met the definition of a troubled debt restructuring under ASC 470-60, Troubled Debt Restructurings by Debtors, as the Company was experiencing financial difficulties and the lenders granted a concession. The future undiscounted cash flows of the 2019 Notes after the exchange exceeded the carrying value of the converted 2018 Notes prior to the exchange. As such no gain was recognized as a result of the exchange. The Company reduced the carrying value of the Notes by the cash given and the change in fair value of the conversion option driven by the reduction in conversion price. The change in fair value of the conversion option was determined to be $13.6 million.
The 2019 Notes are convertible into shares of our common stock, par value $0.0001 per share, together, if applicable, with cash in lieu of any fractional share, at an initial conversion rate of 606.0606 shares of common stock per $1,000 principal amount of the 2019 Notes, which corresponds to an initial conversion price of approximately $1.65 per share of common stock and represents a conversion premium of approximately 52.8% above the last reported sale price of our common stock of $1.08 per share on November 11, 2019.
We will have the right, exercisable at our option, to cause all 2019 Notes then outstanding to be converted automatically if the “Daily VWAP” (as defined in the 2019 Indenture) per share of our common stock equals or exceeds 121% of the conversion price on each of at least 20 VWAP Trading Days, whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date we first issued the 2019 Notes. (Company’s Mandatory Conversion Option)
Upon conversion, converting noteholders will be entitled to receive accrued interest on their converted 2019 Notes. In addition, if the 2019 Notes are converted with a conversion date that is on or prior to November 1, 2020, other than in connection with the Company’s exercise of the Company’s Mandatory Conversion Option then the consideration due upon any such conversion will also include a cash interest make-whole payment for all future scheduled interest payments on the converted 2019 Notes through November 1, 2020 (2019 Notes Interest Make-Whole Provision).
The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends, but will not be adjusted for any accrued and unpaid interest.
We assessed all terms and features of the 2019 Notes in order to identify any potential embedded features that would require bifurcation. As part of this analysis, we assessed the economic characteristics and risks of the 2019 Notes, including the conversion, put and call features. In consideration of the 2019 Notes Interest Make-Whole Provision, we concluded the provision required bifurcation as a derivative. The fair value of the 2019 Interest Make-Whole Provision was determined using a Monte Carlo model. It was determined that the fair value of the derivative upon the November 14, 2019 and December 23, 2019 issuance of the 2019 Notes was $0.2 million in aggregate; and recorded this amount as a derivative liability and the offsetting amount as a debt discount as a reduction to the carrying value of the 2019 Notes on the closing dates. During the period November 14, 2019 to December 31, 2019, the Company paid out approximately $0.4 million in 2019 Interest Make-Whole payments which was recorded as a reduction of the derivative liability. As of December 31, 2019, we determined the fair value of the 2019 Interest Make-Whole Provision was $0.5 million. The Company recorded the change in the fair value of the 2019 Interest Make-Whole Provision for the period from November 14, 2019 to December 31, 2019 of $0.6 million as other expense on the consolidated statements of operations and comprehensive loss.
The Company determined that all other features of the 2018 Notes and 2019 Notes 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 consolidated financial statements. The Company reassesses the features on a quarterly basis to determine if they require separate accounting. There have been no changes to the Company’s original assessment through December 31, 2019.
The Company determined that the expected life of the 2018 Notes and 2019 Notes was equal to the period through November 1, 2023 as this represents the point at which the 2018 Notes and 2019 Notes are initially subject to repurchase by the Company at the option of the holders. Accordingly, the total debt discount, inclusive of the fair value of the embedded conversion feature derivative at issuance, is being amortized using the effective interest method through November 1, 2023. For the year ended December 31, 2019, the Company recognized an aggregate of $16.0 million of interest expense related to the 2018 and 2019 Notes. For the year ended December 31, 2019, 2019 Note holders converted $9.5 million aggregate principal of 2019 Notes in exchange for 5,767,872 shares of common stock and $0.4 million of cash for 2019 Interest Make-Whole Provision.
13. Net Loss per Share
ASC 260 “Earnings Per Share” requires the Company to calculate its net loss per share based on basic and diluted net loss per share, as defined. Basic EPS excludes dilution and is computed by dividing net loss by the weighted average number of shares outstanding for the period. For the years ended December 31, 2019 and 2017 net loss, basic and diluted EPS are the same as the assumed exercise of stock options, restricted stock units, and the Notes are anti-dilutive. For the year ended December 31, 2018, the dilutive effect of the outstanding Notes issued by the Company is reflected in diluted EPS using the if-converted method.
The computation of basic and diluted net income (loss) per share attributable to common stockholders consists of the following:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Net loss
|
|
(149,209)
|
|
(72,434)
|
|
(67,802)
|
Less: Other income
|
|
—
|
|
(25,556)
|
|
—
|
Add: Interest expense
|
|
—
|
|
3,071
|
|
—
|
Adjusted diluted net loss
|
|
(149,209)
|
|
(94,919)
|
|
(67,802)
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
74,578
|
|
64,962
|
|
38,422
|
Add: Dilutive effect of the Notes
|
|
—
|
|
4,359
|
|
—
|
Weighted average diluted shares outstanding
|
|
74,578
|
|
69,321
|
|
38,422
|
|
|
|
|
|
|
|
Net loss per share - basic
|
|
(2.00)
|
|
(1.12)
|
|
(1.76)
|
Net loss per share - diluted
|
|
(2.00)
|
|
(1.37)
|
|
(1.76)
|
For the year ended December 31, 2018, in calculating the effect of the Notes on diluted net loss per share, the change in fair value of the bifurcated derivative of $25.6 million is subtracted while the interest expense of $3.1 million is added to the Company’s net loss. As of December 31, 2018, upon conversion of all outstanding Notes, the Company would be required to issue 20,936,548 shares. Under the “if-converted” method, convertible instruments are assumed to have been converted as of the beginning of the period or when issued, if later. Accordingly, the weighted average number of potentially issuable shares upon conversion of the Notes was determined by weighting the number of shares potentially issuable as of December 31, 2018, 20,936,548 shares, over the total number of days the Notes were outstanding for the period, 76 days, to calculate an additional 4,359,391 shares to be added to the denominator.
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Outstanding stock options
|
|
17,258,524
|
|
12,522,867
|
|
8,719,978
|
|
Outstanding restricted stock units
|
|
678,089
|
|
306,750
|
|
—
|
|
2018 Notes
|
|
3,950,032
|
|
—
|
|
—
|
|
2019 Notes
|
|
34,796,363
|
|
—
|
|
—
|
|
Total potentially dilutive securities
|
|
56,683,008
|
|
12,829,617
|
|
8,719,978
|
|
14. Income Taxes
As of December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $371.7 million and $392.3 million, respectively, which are available to reduce future taxable income. The Company also had federal and state tax credits of $20.6 million and $3.0 million, respectively, which may be used to offset future tax liabilities. The net operating loss (NOL) and tax credit carryforwards will expire at various dates through 2039, except for $136.3 million of federal net operating loss carryforwards which may be carried forward indefinitely. NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three‑year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years.
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Income tax benefit using U.S. federal statutory rate
|
|
21.00
|
%
|
21.00
|
%
|
State tax benefit, net of federal benefit
|
|
4.26
|
%
|
6.38
|
%
|
Research and development tax credits
|
|
1.67
|
%
|
5.61
|
%
|
Cancellation of debt
|
|
(4.76)
|
%
|
—
|
%
|
Permanent items
|
|
(1.41)
|
%
|
(0.65)
|
%
|
Change in the valuation allowance
|
|
(20.33)
|
%
|
(31.82)
|
%
|
Other
|
|
(0.43)
|
%
|
(0.52)
|
%
|
|
|
—
|
%
|
—
|
%
|
The principal components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
101,039
|
|
$
|
88,829
|
|
Capitalized research and development
|
|
|
2,230
|
|
|
2,545
|
|
Research and development credits
|
|
|
22,944
|
|
|
19,725
|
|
Stock-based compensation
|
|
|
4,445
|
|
|
3,756
|
|
Other
|
|
|
1,451
|
|
|
543
|
|
Total deferred tax assets
|
|
|
132,109
|
|
|
115,398
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Debt discount
|
|
|
(3,702)
|
|
|
(13,617)
|
|
Total deferred tax liabilities
|
|
|
(3,702)
|
|
|
(13,617)
|
|
Net deferred tax asset prior to valuation allowance
|
|
|
128,407
|
|
|
101,781
|
|
Valuation allowance
|
|
|
(128,407)
|
|
|
(101,781)
|
|
Net deferred tax asset
|
|
$
|
—
|
|
$
|
—
|
|
The Company has recorded a valuation allowance against its deferred tax assets at December 31, 2019 and 2018 because the Company’s management believes that it is more likely than not that these assets will not be fully realized. The increase in the valuation allowance of approximately $26.6 million in the year ended December 31, 2019 primarily relates to the generation of net operating losses and research and development credits.
The Company’s reserves related to taxes are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. From inception and through December 31, 2019, the Company had no unrecognized tax benefits or related interest and penalties accrued. The Company has not conducted a study of research and development (R&D) credit carryforwards. This study may result in an adjustment to the Company’s R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s R&D credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required. The Company would recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. The Company’s uncertain tax positions are related to years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.
15. Commitments and contingencies
The Company has entered into a lease agreement for approximately 27,810 square feet of office space in Needham, Massachusetts. Please refer to Note 9 for further details regarding the minimum aggregate future lease commitments as of December 31, 2019. In conjunction with the execution of the Amended Lease Agreement, the Company has provided a security deposit in the form of a letter of credit in the amount of $0.2 million as of December 31, 2019 and December 31, 2018. The amount is included in non-current restricted cash on the consolidated balance sheets as of December 31, 2019.
Pursuant to the terms of various agreements, the Company may be required to pay various development, regulatory and commercial milestones. In addition, if any products related to these agreements are approved for sale, the Company may be required to pay significant royalties on future sales. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurring.
16. License and collaboration agreements
Infinity Pharmaceuticals, Inc. (Infinity)
In November 2016, the Company entered into an amended and restated license agreement with Infinity under which it acquired an exclusive worldwide license for the research, development, commercialization, and manufacture of products in oncology indications containing duvelisib. In connection with the license agreement, the Company assumed operational and financial responsibility for certain activities that were part of Infinity’s duvelisib program, including the DUO study for patients with relapsed/refractory CLL, and Infinity maintained a portion of the financial responsibility for the shutdown of certain other clinical studies. The Company is obligated to use diligent efforts to develop and commercialize a product in an oncology indication containing duvelisib. During the term of the license agreement, Infinity has agreed not to research, develop, manufacture or commercialize duvelisib in any other indication in humans or animals.
Pursuant to the terms of the license agreement, the Company was required to make the following payments to Infinity in cash or, at the Company’s election, in whole or in part, in shares of the Company’s common stock: (i) $6.0 million upon the completion of the DUO study if the results of the DUO study met certain pre-specified criteria, which was paid in cash by the Company to Infinity in October 2017 and recorded as research and development expense in the consolidated statements of operations and comprehensive loss, and (ii) $22.0 million upon the approval of a NDA in the United States or an application for marketing authorization with a regulatory authority outside of the United States for a product in an oncology indication containing duvelisib, which was paid in cash by the Company to Infinity in November 2018 and recorded as an intangible asset in the consolidated balance sheets.
The Company is also obligated to pay Infinity royalties on worldwide net sales of any products in an oncology indication containing duvelisib ranging from the mid-single digits to the high single-digits. The royalties will expire on a product-by-product and country-by-country basis until the latest to occur of (i) the last-to-expire patent right covering the applicable product in the applicable country, (ii) the last-to-expire patent right covering the manufacture of the applicable product in the country of manufacture of such product, (iii) the expiration of non-patent regulatory exclusivity in such country and (iv) ten years following the first commercial sale of a product in a country, provided that if royalties on net sales for a product in the United States are payable solely on the basis of non-patent regulatory exclusivity, the applicable royalty on net sales for such product in the United States will be reduced by 50%. The royalties are also subject to reduction by 50% of certain third-party royalty payments or patent litigation damages or settlements which might be required to be paid by the Company if litigation were to arise, with any such reductions capped at 50% of the amounts otherwise payable during the applicable royalty payment period.
In addition to the foregoing, the Company is obligated to pay Infinity an additional royalty of 4% on worldwide net sales of any products in an oncology indication containing duvelisib to cover the reimbursement of research and development costs owed by Infinity to Mundipharma International Corporation Limited (MICL) and Purdue Pharmaceutical Products L.P. (Purdue). Once Infinity has fully reimbursed MICL and Purdue, the royalty obligations will be reduced to 1% of net sales in the United States. These trailing MICL royalties are payable until the later to occur of the last-to-expire of specified patent rights and the expiration of non-patent regulatory exclusivities in a country. Each of the above royalty rates is reduced by 50% on a product-by-product and country-by-country basis if the applicable royalty is payable solely on the basis of non-patent regulatory exclusivity. In addition, the trailing MICL royalties are subject to reduction by 50% of certain third-party royalty payments or patent litigation damages or settlements which might be required to be paid by the Company if litigation were to arise, with any such reductions capped at 50% of the amounts otherwise payable during the applicable royalty payment period.
On March 5, 2019, Infinity and Healthcare Royalty Partners III, L.P. (HCR) entered into a purchase and sale agreement, in which HCR paid Infinity a $30.0 million upfront payment and is entitled to receive up to $20.0 million in potential milestone payments from Infinity. In exchange HCR has received the right to receive the royalties due to Infinity from us under the license agreement. As a result, we now pay royalties previously due to Infinity to HCR. We will continue to pay Infinity for the royalties due to MICL and Purdue described above.
The Company evaluated the license agreement with Infinity under ASC Topic 805, Business Combinations, and ASU 2017-01 and concluded that as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar assets, the transaction did not meet the requirements to be accounted for as a business combination and therefore was accounted for as an asset acquisition. All consideration to be paid
under the license agreement is contingent in nature and will be recognized when the respective contingency is resolved.
During the year ended December 31, 2019 and 2018, the Company recorded royalty expense of $1.0 million, and $0.1 million, respectively related to the HCR, Infinity, MICL, and Purdue royalty payments, which are included in costs of sales - product within the consolidated statements of operation. There were no royalties paid to Infinity or HCR during the year ended December 31, 2017.
Pfizer Inc. (Pfizer)
On July 11, 2012, the Company entered into a license agreement with Pfizer Inc. (Pfizer), under which Pfizer granted the Company worldwide, exclusive rights to research, develop, manufacture and commercialize products containing certain of Pfizer’s inhibitors of focal adhesion kinase (the FAK Products) for all therapeutic, diagnostic and prophylactic uses in humans. The Company is solely responsible, at its expense, for the clinical development of the FAK Products, which is to be conducted in accordance with an agreed upon development plan. The Company is also responsible for all manufacturing and commercialization activities at its own expense. Pfizer is required to provide the Company with an initial quantity of clinical supply of one of the FAK Products for an agreed upon price. Under the agreement, the Company made a one-time cash payment to Pfizer in the amount of $1.5 million and issued 192,012 shares of its common stock. Pfizer is also eligible to receive up to $2.0 million in developmental milestones and up to an additional $125.0 million based on the successful attainment of regulatory and commercial sales milestones. Pfizer is also eligible to receive high single to mid-double-digit royalties on future net sales of the FAK Products. The Company’s royalty obligations with respect to each FAK Product in each country begin on the date of first commercial sale of the FAK Product in that country, and end on the later of 10 years after the date of first commercial sale of the FAK Product in that country or the date of expiration or abandonment of the last claim contained in any issued patent or patent application licensed by Pfizer to the Company that covers the FAK Product in that country. The Company accounted for the license agreement as the licensing of in process research and development with no alternative future use.
Yakult Honsha Co., Ltd. (Yakult)
On June 5, 2018, the Company entered into a license and collaboration agreement (the Yakult Agreement) with Yakult, under which the Company granted exclusive rights to Yakult to develop and commercialize products containing duvelisib in Japan for the treatment, prevention, palliation or diagnosis of all oncology indications in humans or animals.
Under the terms of the Yakult Agreement, Yakult received an exclusive right to develop and commercialize products containing duvelisib in Japan under mutually agreed upon development and commercialization plans at its own cost and expense. Yakult also received certain limited manufacturing rights in the event that the Company is unable to manufacture or supply sufficient quantities of duvelisib or products containing duvelisib to Yakult during the term of the Yakult Agreement. The Company retained all rights to duvelisib outside of Japan.
Yakult paid the Company an upfront, non-refundable payment of $10.0 million in June 2018. The Company is also entitled to receive aggregate payments of up to $90.0 million if certain development, regulatory and commercial milestones are successfully achieved. Yakult is obligated to pay the Company a double-digit royalty on net sales of products containing duvelisib in Japan, subject to reduction in certain circumstances, and to fund certain global development costs related to worldwide clinical trials conducted by the Company in which Yakult has opted to participate (Global Clinical Trials) on a pro-rata basis.
Unless earlier terminated by either party, the Yakult Agreement will expire upon the fulfillment of Yakult’s royalty obligations to the Company for the sale of any products containing duvelisib in Japan, which royalty obligations expire, on a product-by-product basis, upon the last to occur of (a) expiration of valid claims covering such product, (b) expiration of regulatory exclusivity for such product or (c) 10 years from first commercial sale of such product. Yakult may terminate the Yakult Agreement in its entirety at any time with 180 days’ written notice. Either party may terminate the Yakult Agreement in its entirety with 60 days’ written notice for the other party’s material breach if such party fails to cure the breach. The Company may terminate the Yakult Agreement if (i)
Yakult fails to use commercially reasonable efforts to develop and commercialize products containing duvelisib in Japan or (ii) Yakult challenges any patent licensed by the Company to Yakult under the Yakult Agreement. Either party may terminate the Yakult Agreement in its entirety upon certain insolvency events involving the other party.
Subsequently, on February 28, 2019, the Company entered into a supply agreement with Yakult (the Yakult Supply Agreement), under which the Company agreed to provide Yakult with drug product for clinical and commercial use in accordance with the Yakult Agreement. Under the terms of the Yakult Supply Agreement, the Company also granted to Yakult a limited manufacturing license to fill, finish, package, and label the drug product solely for clinical and commercial purposes in Japan.
The Company first assessed the Yakult Agreement under ASC 808 to determine whether the Yakult Agreement (or part of the Yakult Agreement) represents a collaborative arrangement based on the risks and rewards and activities of the parties pursuant to the Yakult Agreement. The Company accounts for collaborative arrangements (or elements within the contract that are deemed part of a collaborative arrangement), which represent a collaborative relationship and not a customer relationship, outside the scope of ASC 606. For a component of the Yakult Agreement, the Company concluded that both the Company and Yakult are exposed to significant risks while developing duvelisib and ultimately would share in the reward upon successful commercialization of duvelisib. The Company then considered each remaining component in the Yakult Agreement to determine if ASC 606 should be applied to those components. Generally, the components in the Yakult Agreement fall under one of two potential research and development activities: (i) the parties’ joint participation in Global Clinical Trials and (ii) the territory-specific development of duvelisib.
For the parties’ participation in the Global Clinical Trials, the Company concluded that the research and development activities and payments related to such activities are not within the scope of ASC 606 as Yakult is not a customer of the Company with regards to these activities in the context of the Yakult Agreement. As such, costs incurred to execute the Global Clinical Trials will be recorded as research and development expense and payments received from Yakult related to such will be recorded as a reduction of research and development expense.
For Territory-specific activities, the Company concluded that Yakult is a customer with regard to this component in the context of the Yakult Agreement. As such, the Territory-specific component and all related payments are within the scope of ASC 606.
The Company determined that there were two material promises associated with the territory-specific activities: (i) an exclusive license to develop and commercialize duvelisib in the territory and (ii) the initial technology transfer. The Company determined that the exclusive license and initial technology transfer were not distinct from another, as the license has limited value without the initial technology. Therefore, the exclusive license and initial technology transfer are combined as a single performance obligation. The Company evaluated the option rights for manufacturing and supply services to determine whether they represent material rights to Yakult and concluded that the options were not issued at a significant and incremental discount and therefore do not represent material rights. As such, they are not performance obligations at the outset of the arrangement. Based on this assessment, the Company concluded one performance obligation exists at the outset of the Yakult Agreement: the exclusive license combined with the initial technology transfer.
The Company determined that the upfront payment of $10.0 million constitutes the transaction price as of the outset of the Yakult Agreement. Future potential milestone payments were fully constrained as the risk of significant revenue reversal related to these amounts has not yet been resolved. The achievement of the future potential milestones is not within the Company’s control and is subject to certain research and development success or regulatory approvals and therefore carry significant uncertainty. The Company will reevaluate the likelihood of achieving future milestones at the end of each reporting period. As all performance obligations have been satisfied, if the risk of significant revenue reversal is resolved, any future milestone revenue from the arrangement will be added to the transaction price (and thereby recognized as revenue) in the period the risk is relieved.
The Company has recognized $0.1 million of collaboration revenue under the Yakult Supply Agreement for the year ended December 31, 2019. The Company satisfied the performance obligation upon delivery of the license and
initial technology transfer and recognized the upfront payment of $10.0 million as license revenue during year ended December 31, 2018.
CSPC Pharmaceutical Group Limited (CSPC)
On July 26, 2018, the Company and CSPC entered into an Exclusivity Agreement which granted CSPC the exclusive right to negotiate a licensing agreement with the Company for duvelisib in China. CSPC paid the Company a non-refundable exclusivity fee of $5.0 million in August 2018 (Exclusivity Fee) which was creditable against any payments agreed to under the terms of a potential definitive license agreement.
Subsequently, on September 25, 2018, the Company entered into a license and collaboration agreement with CSPC (the CSPC Agreement), under which the Company granted exclusive rights to CSPC to develop and commercialize products containing duvelisib in the People’s Republic of China (China), Hong Kong, Macau and Taiwan (collectively, the CSPC Territory) for the treatment, prevention, palliation or diagnosis of all oncology indications in humans.
Under the terms of the CSPC Agreement, CSPC received an exclusive right to develop and commercialize products containing duvelisib in the CSPC Territory under mutually agreed upon development and commercialization plans at its own cost and expense. CSPC also received certain limited manufacturing rights in the event that the Company is unable to manufacture or supply sufficient quantities of duvelisib or products containing duvelisib to CSPC during the term of the CSPC Agreement. The Company retained all rights to duvelisib outside of the CSPC Territory.
CSPC paid the Company an aggregate upfront, non-refundable payment of $15.0 million, less the previously paid $5.0 million Exclusivity Fee. The Company is also entitled to receive aggregate payments of up to $160.0 million if certain development, regulatory and commercial milestones are successfully achieved. CSPC is obligated to pay the Company a double-digit royalty on net sales of products containing duvelisib in the CSPC Territory, subject to reduction in certain circumstances, and to fund certain global development costs related to worldwide clinical trials conducted by the Company in which CSPC has opted to participate (Global Clinical Trials) on a pro-rata basis.
Unless earlier terminated by either party, the CSPC Agreement will expire upon the fulfillment of CSPC’s royalty obligations to the Company for the sale of any products containing duvelisib in the CSPC Territory, which royalty obligations expire, on a product-by-product basis, upon the last to occur of (a) expiration of valid claims covering such product, (b) expiration of regulatory exclusivity for such product or (c) 10 years from first commercial sale of such product. CSPC may terminate the CSPC Agreement in its entirety at any time with 180 days’ written notice. Either party may terminate the CSPC Agreement in its entirety with 60 days’ written notice for the other party’s material breach if such party fails to cure the breach. The Company may terminate the CSPC Agreement if (i) CSPC fails to use commercially reasonable efforts to develop and commercialize products containing duvelisib in the CSPC Territory or (ii) CSPC challenges any patent licensed by the Company to CSPC under the CSPC Agreement. Either party may terminate the CSPC Agreement in its entirety upon certain insolvency events involving the other party.
The Company first assessed the CSPC Agreement under ASC 808 to determine whether the CSPC Agreement (or part of the CSPC Agreement) represents a collaborative arrangement based on the risks and rewards and activities of the parties pursuant to the CSPC Agreement. The Company accounts for collaborative arrangements (or elements within the contract that are deemed part of a collaborative arrangement), which represent a collaborative relationship and not a customer relationship, outside the scope of ASC 606. For a component of the CSPC Agreement, the Company concluded that both the Company and CSPC are exposed to significant risks while developing duvelisib and ultimately would share in the reward upon successful commercialization of duvelisib. The Company then considered each remaining component in the CSPC Agreement to determine if ASC 606 should be applied to those components. Generally, the components in the CSPC Agreement fall under one of two potential research and development activities: (i) the parties’ joint participation in Global Clinical Trials and (ii) the territory-specific development of duvelisib.
For the parties’ participation in the Global Clinical Trials, the Company concluded that the research and development activities and payments related to such activities are not within the scope of ASC 606 as CSPC is not a customer of the Company with regards to these activities in the context of the CSPC Agreement. As such, costs incurred to execute the Global Clinical Trials will be recorded as research and development expense and payments received from CSPC related to such will be recorded as a reduction of research and development expense.
For CSPC Territory-specific activities, the Company concluded that CSPC is a customer with regard to this component in the context of the CSPC Agreement. As such, the CSPC Territory-specific component and all related payments are within the scope of ASC 606.
The Company determined that there were two material promises associated with the territory-specific activities: (i) an exclusive license to develop and commercialize duvelisib in the territory and (ii) the initial technology transfer. The Company determined that the exclusive license and initial technology transfer were not distinct from another, as the license has limited value without the initial technology. Therefore, the exclusive license and initial technology transfer are combined as a single performance obligation. The Company evaluated the option rights for manufacturing and supply services to determine whether they represent material rights to CSPC and concluded that the options were not issued at a significant and incremental discount and therefore do not represent material rights. As such, they are not performance obligations at the outset of the arrangement. Based on this assessment, the Company concluded one performance obligation exists at the outset of the CSPC Agreement: the exclusive license combined with the initial technology transfer.
The Company determined that the upfront payment of $15.0 million constitutes the transaction price as of the outset of the CSPC Agreement. Future potential milestone payments were fully constrained as the risk of significant revenue reversal related to these amounts has not yet been resolved. The achievement of the future potential milestones is not within the Company’s control and is subject to certain research and development success or regulatory approvals and therefore carry significant uncertainty. The Company will reevaluate the likelihood of achieving future milestones at the end of each reporting period. As all performance obligations have been satisfied, if the risk of significant revenue reversal is resolved, any future milestone revenue from the arrangement will be added to the transaction price (and thereby recognized as revenue) in the period the risk is relieved.
For the year ended December 31, 2019 there have been no additional milestones achieved under the CSPC Agreement. The Company satisfied the performance obligation upon delivery of the license and initial technology transfer and recognized the upfront payment of $15.0 million as license revenue during the year ended December 31, 2018.
Sanofi
On July 25, 2019, the Company entered into a license and collaboration agreement with Sanofi (the Sanofi Agreement), under which the Company granted exclusive rights to Sanofi to develop and commercialize products containing duvelisib in Russia, the Commonwealth of Independent States (CIS), Turkey, the Middle East and Africa (collectively the “Sanofi Territory”) for the treatment, prevention, palliation or diagnosis of any oncology indication in humans or animals.
Under the terms of the Sanofi Agreement, Sanofi received the exclusive right to develop and commercialize products containing duvelisib in the Sanofi Territory under mutually agreed upon development and commercialization plans at Sanofi’s own cost and expense. In addition, Sanofi received certain limited manufacturing rights in the event the Company is unable to manufacture or supply sufficient quantities of duvelisib or products containing duvelisib to Sanofi during the term of the Sanofi Agreement. The Company retained all rights to duvelisib outside the Sanofi Territory, except for those territories previously and exclusively licensed to other partners.
Sanofi paid the Company an upfront, non-refundable payment of $5.0 million in August 2019. The Company is also entitled to receive aggregate payments of up to $42.0 million if certain regulatory and commercial milestones are successfully achieved. Sanofi is obligated to pay the Company double-digit royalties on net sales of products containing duvelisib in the Sanofi Territory, subject to reduction in certain circumstances.
Unless earlier terminated by either party, the Sanofi Agreement will expire upon the fulfillment of Sanofi’s royalty obligations to the Company for the sale of any products containing duvelisib in the Sanofi Territory, which royalty obligations expire, on a product-by-product and country-by-country basis, upon the last to occur, in each specific country, of (a) expiration of valid patent claims covering such product, (b) expiration of regulatory exclusivity for such product or (c) 10 years from the first commercial sale of such product in such country. Sanofi may terminate the Sanofi Agreement on a product-by-product basis or on a country-by country basis at any time with 180 days’ written notice. Either party may terminate the Sanofi Agreement in its entirety with 60 days’ written notice for the other party’s material breach if such party fails to cure the breach. Subject to certain limitations, the Company may terminate the Sanofi Agreement immediately if Sanofi challenges any patent covering a product or compound licensed by the Company to Sanofi under the Sanofi Agreement. The Company also has the right to terminate Sanofi’s rights to products containing duvelisib in any specific country if Sanofi fails to use certain efforts to develop and commercialize products containing duvelisib in such country. Either party may terminate the Sanofi Agreement in its entirety upon certain insolvency events involving the other party.
The Company first assessed the Sanofi Agreement under ASC 808 to determine whether the Sanofi Agreement (or part of the Sanofi Agreement) represents a collaborative arrangement based on the respective risks, rewards and activities of the parties. The Company accounts for collaborative arrangements (or elements within the contract that are deemed part of a collaborative arrangement), which represent a collaborative relationship and not a customer relationship, outside the scope of ASC 606. The Company concluded that the Sanofi Agreement (or part of the Sanofi Agreement) does not represent a collaborative arrangement under ASC 808. The Company then considered each component in the Sanofi Agreement to determine if ASC 606 should be applied to those components. Generally, the component in the Sanofi Agreement that falls under potential research and development activities is the development of duvelisib specifically in the Sanofi Territory.
For development of duvelisib specifically in the Sanofi Territory, the Company has concluded that Sanofi is a customer with regard to this component in the context of the Sanofi Agreement. As such, the Sanofi Territory component and all related payments are within the scope of ASC 606.
The Company determined that there were two material promises associated with the Sanofi territory-specific activities: (i) an exclusive license to develop and commercialize duvelisib in the Sanofi Territory and (ii) the initial technology transfer. The Company determined that the exclusive license and initial technology transfer were not distinct from one another, as the license has limited value without the initial technology transfer. Therefore, the exclusive license and initial technology transfer are combined as a single performance obligation. The Company evaluated the option rights for manufacturing and supply services to determine whether they represent material rights to Sanofi and concluded that the options were not issued at a significant and incremental discount and therefore do not represent material rights. As such, they are not performance obligations at the outset of the arrangement. Based on this assessment, the Company concluded that one performance obligation exists at the outset of the Sanofi Agreement, which is the exclusive license combined with the initial technology transfer.
The Company has determined that the upfront payment of $5.0 million constituted the transaction price at the outset of the Sanofi Agreement. Future potential milestone payments were fully constrained as the risk of significant revenue reversal related to these amounts has not yet been resolved. The achievement of the future potential milestones is not within the Company’s control and is subject to certain regulatory approvals and therefore carry significant uncertainty. The Company will reevaluate the likelihood of achieving future milestones at the end of each reporting period. As all performance obligations have been satisfied, if the risk of significant revenue reversal is resolved, any future milestone revenue from the arrangement will be added to the transaction price (and thereby recognized as revenue) in the period the risk is relieved.
The Company satisfied the performance obligation upon delivery of the license and initial technology transfer and recognized the upfront payment of $5.0 million as license and collaboration revenue during the year ended December 31, 2019.
17. Employee benefit plan
In June 2011, the Company adopted a 401(k) retirement and savings plan (the 401(k) Plan) covering all employees. The 401(k) Plan allows employees to make pre‑tax or post‑tax contributions up to the maximum allowable amount set by the Internal Revenue Service. Under the 401(k) Plan, the Company may make discretionary contributions as approved by the board of directors. The Company made contributions to the 401(k) Plan of approximately $1.3, $0.8 million, and $0.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
18. Quarterly financial information (unaudited, in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
1,671
|
|
$
|
3,019
|
|
$
|
4,032
|
|
$
|
3,617
|
|
License and collaboration revenue
|
|
|
—
|
|
|
117
|
|
|
5,000
|
|
|
—
|
|
Total revenue
|
|
|
1,671
|
|
|
3,136
|
|
|
9,032
|
|
|
3,617
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - product
|
|
$
|
158
|
|
$
|
377
|
|
$
|
371
|
|
$
|
332
|
|
Cost of sales - intangible amortization
|
|
|
392
|
|
|
392
|
|
|
392
|
|
|
393
|
|
Research and development
|
|
|
9,758
|
|
|
11,346
|
|
|
12,219
|
|
|
12,455
|
|
Selling, general and administrative
|
|
|
26,033
|
|
|
29,298
|
|
|
22,153
|
|
|
23,728
|
|
Total operating expenses
|
|
|
36,341
|
|
|
41,413
|
|
|
35,135
|
|
|
36,908
|
|
Loss from operations
|
|
|
(34,670)
|
|
|
(38,277)
|
|
|
(26,103)
|
|
|
(33,291)
|
|
Other income/(expense)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(641)
|
|
Interest income
|
|
|
1,497
|
|
|
1,268
|
|
|
1,005
|
|
|
611
|
|
Interest expense
|
|
|
(4,929)
|
|
|
(5,185)
|
|
|
(5,041)
|
|
|
(5,453)
|
|
Net loss
|
|
$
|
(38,102)
|
|
$
|
(42,194)
|
|
$
|
(30,139)
|
|
$
|
(38,774)
|
|
Net loss per share —basic
|
|
$
|
(0.52)
|
|
$
|
(0.57)
|
|
$
|
(0.41)
|
|
$
|
(0.51)
|
|
Net loss per share —diluted
|
|
$
|
(0.52)
|
|
$
|
(0.57)
|
|
$
|
(0.41)
|
|
$
|
(0.51)
|
|
Weighted-average number of common shares used in net loss per share —basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share —basic
|
|
|
73,854
|
|
|
73,877
|
|
|
74,228
|
|
|
76,331
|
|
Net loss per share —diluted
|
|
|
73,854
|
|
|
73,877
|
|
|
74,228
|
|
|
76,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
2018
|
|
2018
|
|
2018
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue, net
|
|
$
|
—
|
|
$
|
—
|
|
$
|
508
|
|
$
|
1,210
|
|
License and collaboration revenue
|
|
|
—
|
|
|
10,000
|
|
|
15,000
|
|
|
—
|
|
Total revenue
|
|
|
—
|
|
|
10,000
|
|
|
15,508
|
|
|
1,210
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales - product
|
|
$
|
—
|
|
$
|
—
|
|
$
|
49
|
|
$
|
116
|
|
Cost of sales - intangible amortization
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
392
|
|
Research and development
|
|
|
10,934
|
|
|
12,381
|
|
|
11,571
|
|
|
8,762
|
|
Selling, general and administrative
|
|
|
9,827
|
|
|
15,813
|
|
|
25,426
|
|
|
26,199
|
|
Total operating expenses
|
|
|
20,761
|
|
|
28,194
|
|
|
37,077
|
|
|
35,469
|
|
Loss from operations
|
|
|
(20,761)
|
|
|
(18,194)
|
|
|
(21,569)
|
|
|
(34,259)
|
|
Other income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,556
|
|
Interest income
|
|
|
191
|
|
|
343
|
|
|
763
|
|
|
1,306
|
|
Interest expense
|
|
|
(480)
|
|
|
(516)
|
|
|
(862)
|
|
|
(3,952)
|
|
Net loss
|
|
$
|
(21,050)
|
|
$
|
(18,367)
|
|
$
|
(21,668)
|
|
$
|
(11,349)
|
|
Net loss per share —basic
|
|
$
|
(0.41)
|
|
$
|
(0.30)
|
|
$
|
(0.29)
|
|
$
|
(0.15)
|
|
Net loss per share —diluted
|
|
$
|
(0.41)
|
|
$
|
(0.30)
|
|
$
|
(0.29)
|
|
$
|
(0.37)
|
|
Weighted-average number of common shares used in net loss per share —basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share —basic
|
|
|
50,835
|
(a)
|
|
61,256
|
(a)(b)
|
|
73,644
|
|
|
73,766
|
|
Net loss per share —diluted
|
|
|
50,835
|
(a)
|
|
61,256
|
(a)(b)
|
|
73,644
|
|
|
91,061
|
(c)
|
|
(a)
|
|
In the first and second quarters of 2018, the Company sold 167,065 and 6,314,410 shares of its common stock under the Company’s at-the-market equity offering program, which resulted in net proceeds of $0.6 million and $23.7 million, respectively.
|
|
(b)
|
|
In the second quarter of 2018, the Company closed underwritten offerings in which it sold 8,944,444 shares and 7,166,666 shares of its common stock at a price of $4.31 per share and $6.00 per share, respectively, for aggregate proceeds, net of underwriting discounts and offering costs, of $38.3 million and $42.9 million, respectively
|
|
(c)
|
|
In the fourth quarter of 2018, utilizing the “if-converted” method, the Company’s Notes are assumed to have been converted as of the issuance date. Accordingly, the weighted average number of potentially issuable shares upon conversion of the Notes was determined by weighting the number of shares issuable upon conversion at December 31, 2018, or 20,936,548, over the total days outstanding, 76 days, to calculate an additional 17,295,409 shares to be added to the weighted-average number of shares.
|
19. Subsequent events
The Company reviews all activity subsequent to year end but prior to the issuance of the consolidated financial statements for events that could require disclosure or that could impact the carrying value of assets or liabilities as of the consolidated balance sheet date. The Company is not aware of any material subsequent events other than the following:
Chugai Pharmaceutical Co., Ltd. (Chugai) Agreement
On January 7, 2020, the Company entered into a license agreement (the Chugai Agreement) with Chugai Pharmaceutical Co., Ltd. (Chugai) whereby Chugai granted the Company an exclusive worldwide license for the development, commercialization and manufacture of products containing CH5126766, a dual RAF/MEK inhibitor.
Under the terms of the Chugai Agreement, the Company received an exclusive right to develop and commercialize products containing CH5126766 at the Company’s cost and expense. Upon execution of the Chugai Agreement, the Company is required to pay Chugai a non-refundable payment of $3.0 million which was paid in February 2020. The Company is further obligated to pay Chugai double-digit royalties on net sales of products containing CH5126766, subject to reduction in certain circumstances. Chugai also obtained opt back rights to develop and commercialize CH5126766 (a) in the European Union, which option may be exercised through the date the Company submits a NDA to the FDA for a product which contains CH5126766 as the sole active pharmaceutical ingredient and (b) in Japan and Taiwan, which option may be exercised through the date the Company receives marketing authorization from the FDA for a product which contains CH5126766 as the sole active pharmaceutical ingredient. As consideration for executing either option, Chugai would have to make a payment to the Company calculated on the Company’s development costs to date.
Restructuring
On February 27, 2020, the Company committed to an operational plan to reduce overall operating expenses, including the elimination of approximately 31 positions across the Company and other cost-saving measures (the “Restructuring”). The Restructuring is designed to streamline operations, speed execution of the Company’s clinical development of defactinib and CH5126766, and reflect a focused, account-based approach in the field. The Company expects to substantially complete the workforce reduction by the end of the first quarter of 2020.
The Company expects the Restructuring to reduce annualized operating expenses to a range of approximately $70 million to $85 million beginning in the first quarter of 2020.
The Company expects to record a charge of approximately $1.9 million in the first quarter of 2020 as a result of the Restructuring, consisting of one-time termination benefits for employee severance, benefits, and related
costs, all of which are expected to result in cash expenditures and substantially all of which will be paid out over the next three months.
Issuance of Common Stock
On March 3, 2020, the Company sold 46,511,628 shares of Common Stock at a purchase price of $2.15 per share for aggregate gross proceeds of approximately $100.0 million, before deducting fees to the placement agents and other offering expenses payable by the Company pursuant to a securities purchase agreement.
2019 Notes Conversion
From January 1, 2020 through the date of issuance of these consolidated financial statements, the aggregate principal amount of $51.2 million of the Company’s 2019 Notes have been converted into 31,044,835 shares of common stock. As a result, as of the date the issuance of these consolidated financials the Company has $6.2 million aggregate principal amount outstanding of 2019 Notes. On March 9, 2020, the Company exercised the Company’s Mandatory Conversion Option for the remaining $6.2 million of 2019 Notes outstanding which will require the remaining 2019 Notes to be converted into approximately 3.8 million shares of common stock in March 2020.
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