10-Q 1 vstm-20180930x10q.htm 10-Q vstm_Current Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              

Commission file number: 001‑35403

Verastem, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

27-3269467
(I.R.S. Employer
Identification Number)

117 Kendrick Street, Suite 500
Needham, MA
(Address of principal executive offices)

02494
(Zip Code)

(781) 292-4200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non‑accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

As of November 2, 2018, there were 73,740,167 shares of Common Stock, $0.0001 par value per share, outstanding.

 

 


 

2


 

FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements related to present facts or current conditions or historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. Such statements relate to, among other things, the development and activity of our lead product, COPIKTRA and our Phosphoinositide 3-kinase (PI3K) and Focal Adhesion Kinase (FAK) programs generally, our intent to commercialize COPIKTRA, the potential commercial success of COPIKTRA, the anticipated adoption of COPIKTRA by patients and physicians, the structure of our planned and pending clinical trials, and the timeline and indications for clinical development, regulatory  submissions and commercialization of activities. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements we make. Applicable risks and uncertainties include the risks, among other things, uncertainties regarding the launch timing and commercial success of COPIKTRA in the United States; uncertainties regarding physician and patient adoption of COPIKTRA, including those related to the safety and efficacy of COPIKTRA; the uncertainties inherent in research and development of COPIKTRA, such as negative or unexpected results of clinical trials; whether and when any applications for COPIKTRA may be filed with regulatory authorities in any other jurisdictions; whether and when regulatory authorities in any other jurisdictions may approve any such other applications that may be filed for COPIKTRA, which will depend on the assessment by such regulatory authorities of the benefit-risk profile suggested by the totality of the efficacy and safety information submitted and, if approved, whether COPIKTRA will be commercially successful in such jurisdictions; our ability to obtain, maintain and enforce patent and other intellectual property protection for COPIKTRA and our other product candidates; the scope, timing, and outcome of any legal proceedings; decisions by regulatory authorities regarding labeling and other matters that could affect the availability or commercial potential of COPIKTRA; that regulatory authorities in the U.S. or other jurisdictions, if approved, could withdraw approval; whether  preclinical testing of our product candidates and preliminary or interim data from clinical trials will be predictive of the results or success of ongoing or later clinical trials; that the timing, scope and rate of reimbursement for our product candidates is uncertain; the risk that third-payors (including government agencies) will not reimburse for COPIKTRA; that there may be competitive developments affecting our product candidates; that data may not be available when expected; that enrollment of clinical trials may take longer than expected; that COPIKTRA or our other product candidates will cause unexpected safety events, experience manufacturing or supply interruptions or failures, or result in unmanageable safety profiles as compared to their levels of efficacy; that COPIKTRA will be ineffective at treating patients with lymphoid malignancies; that we will be unable to successfully initiate or complete the clinical development and eventual commercialization of our product candidates; that the development and commercialization of our product candidates will take longer or cost more than planned; that we may not have sufficient cash to fund our contemplated operations; that we or Infinity Pharmaceuticals, Inc. will fail to fully perform under the duvelisib license agreement; that we may be unable to make additional draws under our debt facility or obtain adequate financing in the future through product licensing, co-promotional arrangements, public or private equity, debt financing or otherwise; that we will not pursue or submit regulatory filings for our product candidates, including for duvelisib in patients with chronic lymphocytic leukemia/small lymphocytic lymphoma (CLL/SLL) or indolent non-Hodgkin lymphoma (iNHL) in other jurisdictions; and that our product candidates will not receive regulatory approval, become commercially successful products, or result in new treatment options being offered to patients. Other risks and uncertainties include those identified under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (SEC) on March 13, 2018 and in any subsequent filings with the SEC.

As a result of these and other factors, we may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date hereof. We do not assume and specifically disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

3


 

PART I—FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements (unaudited).

 

Verastem, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2018

    

2017

 

Assets

 

(unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,727

 

$

82,176

 

Short-term investments

 

 

14,912

 

 

4,496

 

Accounts receivable, net

 

 

10,562

 

 

 —

 

Inventory

 

 

131

 

 

 —

 

Prepaid expenses and other current assets

 

 

2,397

 

 

1,115

 

Total current assets

 

 

158,729

 

 

87,787

 

Property and equipment, net

 

 

1,210

 

 

861

 

Intangible assets, net

 

 

21,969

 

 

 —

 

Restricted cash

 

 

242

 

 

162

 

Other assets

 

 

1,005

 

 

981

 

Total assets

 

$

183,155

 

$

89,791

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

11,249

 

$

9,186

 

Accrued expenses

 

 

38,664

 

 

7,942

 

Current portion of long-term debt

 

 

3,528

 

 

 —

 

Total current liabilities

 

 

53,441

 

 

17,128

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

21,535

 

 

14,828

 

Other non-current liabilities

 

 

566

 

 

151

 

Total liabilities

 

 

75,542

 

 

32,107

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized, no shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 100,000 shares authorized, 73,703 and 50,801 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

 7

 

 

 5

 

Additional paid-in capital

 

 

471,831

 

 

360,823

 

Accumulated other comprehensive income (loss)

 

 

 2

 

 

(2)

 

Accumulated deficit

 

 

(364,227)

 

 

(303,142)

 

Total stockholders’ equity

 

 

107,613

 

 

57,684

 

Total liabilities and stockholders’ equity

 

$

183,155

 

$

89,791

 

 

See accompanying notes to the condensed consolidated financial statements.

4


 

Verastem, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

License revenue

 

$

15,000

 

$

 —

 

$

25,000

 

$

 —

 

Product revenue, net

 

 

508

 

 

 —

 

 

508

 

 

 —

 

Total revenue

 

 

15,508

 

 

 —

 

 

25,508

 

 

 —

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of revenues, excluding amortization of acquired intangible assets

 

 

49

 

 

 —

 

 

49

 

 

 —

 

Research and development

 

 

11,571

 

 

17,743

 

 

34,886

 

 

35,170

 

Selling, general and administrative

 

 

25,426

 

 

5,394

 

 

51,066

 

 

14,582

 

Amortization of acquired intangible assets

 

 

31

 

 

 —

 

 

31

 

 

 —

 

Total operating expenses

 

 

37,077

 

 

23,137

 

 

86,032

 

 

49,752

 

Loss from operations

 

 

(21,569)

 

 

(23,137)

 

 

(60,524)

 

 

(49,752)

 

Interest income

 

 

763

 

 

121

 

 

1,297

 

 

416

 

Interest expense

 

 

(862)

 

 

(110)

 

 

(1,858)

 

 

(231)

 

Net loss

 

$

(21,668)

 

$

(23,126)

 

$

(61,085)

 

$

(49,567)

 

Net loss per share—basic and diluted

 

$

(0.29)

 

$

(0.61)

 

$

(0.99)

 

$

(1.33)

 

Weighted-average number of common shares used in net loss per share—basic and diluted

 

 

73,644

 

 

37,630

 

 

61,995

 

 

37,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(21,668)

 

$

(23,126)

 

$

(61,085)

 

$

(49,567)

 

Unrealized (loss) gain on available-for-sale securities

 

 

(2)

 

 

 7

 

 

 4

 

 

(27)

 

Comprehensive loss

 

$

(21,670)

 

$

(23,119)

 

$

(61,081)

 

$

(49,594)

 

 

See accompanying notes to the condensed consolidated financial statements.

5


 

 

Verastem, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

    

2018

    

2017

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(61,085)

 

$

(49,567)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

892

 

 

428

 

Amortization of acquired intangible assets

 

 

31

 

 

 —

 

Stock-based compensation expense

 

 

4,908

 

 

4,070

 

Amortization of deferred financing costs, debt discounts and premiums and discounts on available-for-sale marketable securities

 

 

335

 

 

170

 

Gain on sale of fixed assets

 

 

(79)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(10,562)

 

 

 —

 

Inventory

 

 

(131)

 

 

 —

 

Prepaid expenses, other current assets and other assets

 

 

(1,145)

 

 

(571)

 

Accounts payable

 

 

2,108

 

 

3,268

 

Accrued expenses and other liabilities

 

 

9,401

 

 

5,219

 

Net cash used in operating activities

 

 

(55,327)

 

 

(36,983)

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,244)

 

 

 —

 

Sales of property and equipment

 

 

82

 

 

 —

 

Purchases of investments

 

 

(14,912)

 

 

(6,461)

 

Maturities of investments

 

 

4,500

 

 

45,905

 

Net cash (used in) provided by investing activities

 

 

(11,574)

 

 

39,444

 

Financing activities

 

 

 

 

 

 

 

Proceeds from long-term debt, net

 

 

9,900

 

 

2,386

 

Deferred debt financing costs

 

 

 —

 

 

(138)

 

Proceeds from the exercise of stock options

 

 

637

 

 

91

 

Proceeds from the issuance of common stock, net

 

 

105,156

 

 

14,121

 

Net cash provided by financing activities

 

 

115,693

 

 

16,460

 

Increase in cash, cash equivalents and restricted cash

 

 

48,792

 

 

18,921

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

82,338

 

 

32,511

 

Cash, cash equivalents and restricted cash at end of period

 

$

131,130

 

$

51,432

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

Acquired intangible assets included in intangible assets, net and accrued expenses

 

$

22,000

 

$

 —

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

Common stock issuance costs included in accounts payable and accrued expenses

 

$

15

 

$

 —

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

6


 

Verastem, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

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 patients with hematologic cancers including chronic lymphocytic leukemia and small lymphocytic lymphoma (CLL/SLL) and follicular lymphoma (FL). Both its marketed product, COPIKTRA, and most advanced product candidate, defactinib, 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, ovarian cancer, mesothelioma, and pancreatic cancer. The Company believes that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents or other current and emerging standard of care treatments in aggressive cancers that are poorly served by currently available therapies. 

The Company is subject to a number of risks similar to 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 successful commercialization of COPIKTRA, or any of the Company’s investigational product candidates following receipt of regulatory approval and protection of proprietary technology. 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 for the foreseeable future as it continues the commercialization of COPIKTRA and the research and development of its product candidates. As of September 30, 2018, the Company had cash, cash equivalents and investments of $145.6 million and accumulated deficit of $364.2 million. In October 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 Notes), for net proceeds of approximately $145.1 million. The Company expects that its cash, cash equivalents and investments will be sufficient to fund its obligations for at least twelve months from the date of issuance of these condensed consolidated financial statements.

2. Summary of significant accounting policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2018. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (SEC) on March 13, 2018.

7


 

Significant Accounting Policies

 

The significant accounting policies identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 that require the Company to make estimates and assumptions include accrued research and development expenses and stock-based compensation. During the nine months ended September 30, 2018, there were no material changes to the significant accounting policies, except for the adoption of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, issued by the Financial Accounting Standards Board (the FASB), as well as significant accounting policies over revenue recognition, collaborative arrangements, accounts receivable, inventory and intangible assets, each of which is detailed below.

Revenue Recognition

 Effective January 1, 2018, the Company adopted ASC 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity 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 (collectively, Customers). 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 three and nine months ended September 30, 2018, the Company determined a material reversal of revenue would not occur in a future period for the estimates detailed

8


 

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 condensed consolidated statements of operations and comprehensive loss through September 30, 2018.

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 condensed consolidated statements of operations and comprehensive loss through September 30, 2018.

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 condensed 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 condensed 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.

9


 

The Company’s limited 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.

 

The Company has not received any returns to date and believes that returns of its products will be minimal.

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 three and nine months ended September 30, 2018.

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 (1) licenses, or options to obtain licenses, to the Company's intellectual property, (2) research and development activities performed for the collaboration partner, (3) participation on joint steering committees, and (4) 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 future 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 

10


 

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 14, License and collaboration agreements.

Accounts Receivable, Net

Accounts receivable, net primarily relates to amounts due from Customers, net of applicable revenue reserves, or from the Company’s license and collaboration partners. Accounts receivable are typically due within 31 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 September 30, 2018.

11


 

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 product revenues. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required which would be recorded as a cost of product revenues in the condensed consolidated statements of operations and comprehensive loss.

 

Shipping and handling costs for product shipments are recorded as incurred in cost of product revenues 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 at their fair value. These assets are amortized 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. Intangible assets are amortized using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when future revenues cannot be reasonably estimated.

 

The Company assesses its finite-lived intangible assets for impairment at least annually, or if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, 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 condensed 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.

 

12


 

Recently Issued Accounting Standards Updates

 

In August 2018, the FASB issued Accounting Standards 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 condensed 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 condensed consolidated financial statements and related disclosures.

 

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 is 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 has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the guidance under FASB Accounting Standards Codification (ASC) Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. ASU 2016-02 requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. The guidance also eliminates the current real estate-specific provisions for all entities.  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 has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its condensed consolidated financial statements and related disclosures.  The Company’s analysis includes, but is not limited to, reviewing existing leases, reviewing other service agreements for embedded leases, establishing policies and procedures, assessing potential disclosures and evaluating the impact of adoption on the Company’s condensed consolidated financial statements.

13


 

Recently Adopted Accounting Standards Updates

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting under Topic 718.  Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after a modification.  ASU 2017-09 was effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted.  The Company adopted this standard prospectively effective January 1, 2018.  The adoption of this ASU did not have an effect on the Company’s condensed consolidated financial statements or related disclosures.

   

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted.  The Company adopted this standard effective January 1, 2018.  Upon adoption of ASU 2016-18, the Company applied the retrospective transition method for each period presented and included approximately $162,000 of restricted cash in the beginning-of-period and end-of-period cash, cash equivalents and restricted cash balance reflected in the condensed consolidated statements of cash flows for the nine months ended September 30, 2017.  A reconciliation of cash, cash equivalents and restricted cash for each period presented is provided in Note 3 to the condensed consolidated financial statements.

   

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard was effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard effective January 1, 2018.  The adoption of this ASU did not have an effect on the Company’s condensed consolidated financial statements or related disclosures.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. In 2015 and 2016, the FASB issued additional ASUs related to ASC 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients. The Company adopted this new standard on January 1, 2018 using the full retrospective method. There was no change to the Company’s condensed consolidated financial statements as a result of the adoption.

 

3. Cash, cash equivalents and restricted cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

Cash and cash equivalents

 

$

130,727

 

$

82,176

Restricted cash (included in prepaid expenses and other current assets)

 

 

161

 

 

 —

Restricted cash

 

 

242

 

 

162

Total cash, cash equivalents and restricted cash

 

$

131,130

 

$

82,338

 

14


 

Amounts included in restricted cash represent cash held to collateralize outstanding letters of credit in the amount of approximately $403,000 and $162,000 as of September 30, 2018 and December 31, 2017, respectively, provided as a security deposit for the Company’s office space located in Needham, Massachusetts.

4. 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

Description

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

129,309

 

$

100,006

 

$

29,303

 

$

 —

 

Short-term investments

 

 

14,912

 

 

 —

 

 

14,912

 

 

 —

 

Total financial assets

 

$

144,221

 

$

100,006

 

$

44,215

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Description

 

Total

    

Level 1

    

Level 2

    

Level 3

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

80,894

 

$

75,478

 

$

5,416

 

$

 —

 

Short-term investments

 

 

4,496

 

 

 —

 

 

4,496

 

 

 —

 

Total financial assets

 

$

85,390

 

$

75,478

 

$

9,912

 

$

 —

 

 

The Company’s cash equivalents and investments are comprised of U.S. Government money market funds, government-sponsored enterprise securities, and corporate bonds and commercial paper of publicly traded companies. These 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 September 30, 2018 and December 31, 2017.

 

15


 

Fair Value of Financial Instruments

 

The fair value of the Company’s long-term debt is determined using a discounted cash flow analysis using current applicable rates for similar instruments as of the condensed consolidated balance sheet dates. The carrying value of the Company’s long-term debt, including the current portion, at September 30, 2018 and December 31, 2017 was approximately $25.1 million and $14.8 million, respectively.  At September 30, 2018, the Company estimates that the fair value of its long-term debt, including the current portion, was approximately $26.9 million. The fair value of the Company’s long-term debt was determined using Level 3 inputs.

5. Investments

 

Cash, cash equivalents, and investments consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2018

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market accounts

 

$

101,424

 

$

 —

 

$

 —

 

$

101,424

 

Government-sponsored enterprise securities (due within 90 days)

 

 

9,987

 

 

 —

 

 

 —

 

 

9,987

 

Corporate bonds and commercial paper (due within 90 days)

 

 

19,318

 

 

 —

 

 

(2)

 

 

19,316

 

Total cash and cash equivalents

 

$

130,729

 

$

 —

 

$

(2)

 

$

130,727

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and commercial paper (due within 1 year)

 

$

14,908

 

$

 4

 

$

 —

 

$

14,912

 

Total investments

 

$

14,908

 

$

 4

 

$

 —

 

$

14,912

 

Total cash, cash equivalents and investments

 

$

145,637

 

$

 4

 

$

(2)

 

$

145,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2017

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market accounts

 

$

76,760

 

$

 —

 

$

 —

 

$

76,760

 

Corporate bonds and commercial paper (due within 90 days)

 

 

5,418

 

$

 —

 

$

(2)

 

$

5,416

 

Total cash and cash equivalents

 

$

82,178

 

$

 —

 

$

(2)

 

$

82,176

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and commercial paper (due within 1 year)

 

$

4,496

 

$

 —

 

$

 —

 

$

4,496

 

Total investments

 

$

4,496

 

$

 —

 

$

 —

 

$

4,496

 

Total cash, cash equivalents and investments

 

$

86,674

 

$

 —

 

$

(2)

 

$

86,672

 

 

There were no realized gains or losses on investments for the three and nine months ended September 30, 2018 or 2017, respectively.  There were seven and five investments in an unrealized loss position as of September 30, 2018 and December 31, 2017, respectively. None of these investments had been in an unrealized loss position for more than 12 months as of September 30, 2018 and December 31, 2017, respectively. The aggregate unrealized loss on these securities as of September 30, 2018 and December 31, 2017 was approximately $2,000 and $2,000, respectively, and the fair value was $18.3 million and $9.9 million, respectively. The Company considered the decline in the market value for these investments 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 investments 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 September 30, 2018 and December 31, 2017, respectively.

16


 

6. 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 New Drug Application (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):

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

    

September 30, 2018

    

December 31, 2017

 

Raw materials

 

$

 —

 

$

 —

 

Work in process

 

 

108

 

 

 —

 

Finished goods

 

 

23

 

 

 —

 

Total inventories

 

$

131

 

$

 —

 

 

Costs incurred prior to the quarter-ended September 30, 2018 to manufacture COPIKTRA  were expensed as operating expenses as incurred.

7. Intangible assets

The Company’s intangible assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

    

 

    

 

 

 

    

September 30, 2018

    

Estimated useful life

 

Acquired and in-licensed rights

 

$

22,000

 

14 years

 

Less: accumulated amortization

 

 

(31)

 

 

 

Total intangible assets, net

 

$

21,969

 

 

 

Acquired and in-licensed rights as of September 30, 2018, 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 Pharmaceuticals, Inc. (Infinity).  The Company made a milestone payment of $22.0 million to Infinity in November 2018.

The Company recorded approximately $31,000 in amortization expense related to finite-lived intangible assets during the three and nine months ended September 30, 2018 using the straight-line methodology. Estimated future amortization expense for finite-lived intangible assets as of September 30, 2018 is approximately $392,000 for the remainder of 2018 and approximately $1.6 million per year thereafter.

8. Accrued expenses

 

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

    

September 30, 2018

    

December 31, 2017

 

Infinity milestone

 

$

22,000

 

$

 —

 

Contract research organization costs

 

 

7,301

 

 

3,774

 

Compensation and related benefits

 

 

5,916

 

 

2,622

 

Commercialization costs

 

 

1,673

 

 

131

 

Professional fees

 

 

720

 

 

617

 

Consulting fees

 

 

519

 

 

448

 

Other

 

 

535

 

 

350

 

Total accrued expenses

 

$

38,664

 

$

7,942

 

 

17


 

 

9. Long-term debt

 

On March 21, 2017 (Closing Date), Verastem, Inc. (the Borrower) entered into a term loan facility of up to $25.0 million with Hercules. The term loan facility is governed by a loan and security agreement, dated March 21, 2017 (the Original Loan Agreement), which was amended on January 4, 2018 and March 6, 2018 (the Amended Loan Agreement) to increase the total borrowing limit under the Original Loan Agreement from up to $25.0 million to up to $50.0 million (the Term Loan), pursuant to certain conditions of funding.

As of September 30, 2018, the Company has borrowed a total of $25.0 million in term loans. The availability of the remaining $25.0 million of borrowing capacity under the Amended Loan Agreement is subject to Hercules’ sole discretion and may be drawn as term loans (each a Term F Loan Advance) in minimum increments of $5.0 million.

 

The Term Loan will mature on December 1, 2020 (Loan Maturity Date).  Each advance accrues interest at a floating per annum rate equal to the greater of either (a) 10.5% or (b) the lesser of (i) 12.75% and (ii) the sum of (x) 10.5% plus (y) (A) the prime rate minus (B) 4.5%.  The Term Loan provided for interest-only payments until November 1, 2018, which was extended to May 1, 2019 pursuant to the Amended Loan Agreement upon the Borrower’s receipt of a minimum of $20.0 million in cash proceeds from a sale of equity securities in December 2017. Thereafter, amortization payments will be payable monthly in 20 installments of principal and interest (subject to recalculation upon a change in prime rates).

The Term Loan is secured by a lien on substantially all of the assets of the Borrower, other than intellectual property, and contains customary covenants and representations.

The Company assessed all terms and features of the Amended 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 Amended Loan Agreement, including put and call features. The Company determined that all features of the Amended 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 condensed 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 September 30, 2018.

The future principal payments under the Amended Loan Agreement are as follows as of September 30, 2018 (in thousands):

 

 

 

 

Remainder of 2018

 

$

 —

2019

 

 

5,984

2020

 

 

19,016

Total principal payments

 

$

25,000

 

18


 

10. Product revenue reserves and allowances

As of September 30, 2018, 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 nine months ended September 30, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

 

 

    

 

 

 

    

Trade discounts and allowances

    

Third-Party Payer chargebacks, discounts and fees

 

Government rebates and other incentives

 

Returns

    

Total

 

Beginning balance at December 31, 2017

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Provision related to sales in the current year

 

 

27

 

 

72

 

 

29

 

 

 1

 

 

129

 

Adjustments related to prior period sales

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Credits and payments made

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Ending balance at September 30, 2018

 

$

27

 

$

72

 

$

29

 

$

 1

 

$

129

 

Trade discounts and Third-Party Payer chargebacks and discounts are recorded as a  reduction to accounts receivable, net on the condensed 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 condensed consolidated balance sheets.

11. Net loss per share

 

Basic and diluted 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, without consideration for common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options and restricted stock units (RSUs), are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

 

The following potentially dilutive securities were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Outstanding stock options

 

12,915,463

 

8,431,355

 

12,915,463

 

8,431,355

 

Outstanding restricted stock units

 

316,875

 

 —

 

316,875

 

 —

 

Total potentially dilutive securities

 

13,232,338

 

8,431,355

 

13,232,338

 

8,431,355

 

 

 

 

19


 

12. Stock‑based compensation

 

Stock options

 

A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2018 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, 2017

 

8,719,978

 

$

5.19

 

7.9

 

$

6,150

 

Granted

 

5,250,121

 

$

5.29

 

 

 

 

 

 

Exercised

 

(331,851)

 

$

2.09

 

 

 

 

 

 

Forfeited/cancelled

 

(722,785)

 

$

5.43

 

 

 

 

 

 

Outstanding at September 30, 2018

 

12,915,463

 

$

5.30

 

8.1

 

$

37,095

 

Vested at September 30, 2018

 

5,782,349

 

$

6.13

 

6.7

 

$

16,154

 

Vested and expected to vest at September 30, 2018(1)

 

12,472,463

 

$

5.32

 

8.0

 

$

35,661

 


(1)

This represents the number of vested options as of September 30, 2018, plus the number of unvested options expected to vest as of September 30, 2018.

The fair value of each stock option granted during the nine months ended September 30, 2018 and 2017 was estimated on the grant date using the Black-Scholes option-pricing model using the following weighted-average assumptions:

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2018

 

2017

Risk-free interest rate

 

2.63

%  

 

1.98

%  

Volatility

 

81

%  

 

79

%  

Dividend yield

 

 —

 

 

 —

 

Expected term (years)

 

6.0

 

 

5.9

 

 

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 September 30, 2018. As a result, the Company has recognized approximately $161,000 and $669,000 of stock-based compensation expense during the three and nine months ended September 30, 2018, respectively, related to awards that vest upon the achievement of performance conditions.

 

At September 30, 2018, there was $21.0 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 approximately 4 years.

 

Restricted stock units

 

The Company awards RSUs to employees under its 2012 Incentive Plan. 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.

 

20


 

A summary of RSU activity during the nine months ended September 30, 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

Shares

    

Weighted-average grant date fair value per share

 

Outstanding at December 31, 2017

 

 

 —

 

$

 —

 

Granted

 

 

336,000

 

$

5.51

 

Vested

 

 

 —

 

$

 —

 

Forfeited

 

 

(19,125)

 

$

3.00

 

Outstanding at September 30, 2018

 

 

316,875

 

$

5.66

 

 

At September 30, 2018, there was approximately $1.6 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 approximately 2 years.

13. Common stock

 

At-the-market equity offering programs

 

In March 2017, the Company terminated the at-the-market equity offering program established in December 2013 and established a new at-the-market equity offering program pursuant to which it 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 Fitzgerald & Co. (Cantor) as sales agent. In August 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 at-the-market equity offering program to $75.0 million.

 

During the three months ended September 30, 2018, there were no sales under the at-the-market equity program.  During the nine months ended September 30, 2018, the Company sold 6,481,475 shares under this program for net proceeds of approximately $24.3 million (after deducting commissions and other offering expenses). Through September 30, 2018, the Company has sold a total of 11,518,354 shares under this program for net proceeds of approximately $47.3 million (after deducting commissions and other offering expenses).

Equity offerings

 

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 (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 $42.8 million.

21


 

14. License and collaboration agreements

Yakult Honsha Co., Ltd. (Yakult)

On June 5, 2018, the Company entered into a license and collaboration agreement (the 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 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 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 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 Agreement in its entirety at any time with 180 days’ written notice. Either party may terminate the 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 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 Agreement. Either party may terminate the Agreement in its entirety upon certain insolvency events involving the other party.

The Company first assessed the Agreement under ASC 808 to determine whether the Agreement (or part of the Agreement) represents a collaborative arrangement based on the risks and rewards and activities of the parties pursuant to the 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 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 Agreement to determine if ASC 606 should be applied to those components. Generally, the components in the 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 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 Agreement.  As such, the Territory-specific component and all related payments are within the scope of ASC 606. 

22


 

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 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 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 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 the three months ended June 30, 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.

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.

As of September 30, 2018, CSPC became obligated to pay the Company an aggregate upfront, non-refundable payment of $15.0 million, less the previously paid $5.0 million Exclusivity Fee, resulting in an outstanding payment due of $10.0 million, which is included in accounts receivable, net within the condensed consolidated balance sheets.  The remaining $10.0 million upfront payment was paid in full in November 2018. 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

23


 

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.

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 three months ended September 30, 2018.

24


 

15. Income taxes

The Company did not record a federal or state income tax provision or benefit for the three and nine months ended September 30, 2018 and 2017 due to the expected loss before income taxes to be incurred for the years ended December 31, 2018 and 2017, as well as the Company’s continued maintenance of a full valuation allowance against its net deferred tax assets.

16. Commitments and contingencies

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. 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 deferred rent obligation is included in accrued expenses (current portion) and other liabilities (noncurrent portion) in the condensed consolidated balance sheets. The Company has also agreed to pay its proportionate share of increases in operating expenses and property taxes for the building in which the leased space is located.

The minimum aggregate future lease commitments as of September 30, 2018 are as follows (in thousands):

 

 

 

 

 

Remainder of 2018

    

$

165

 

2019

 

 

716

 

2020

 

 

971

 

2021

 

 

1,020

 

2022

 

 

1,041

 

Thereafter

 

 

2,600

 

Total

 

$

6,513

 

In conjunction with the execution of the Amended Lease Agreement, the Company increased its security deposit by increasing its existing letter of credit to approximately $403,000.  The amount is included in prepaid expenses and other current assets and restricted cash on the condensed consolidated balance sheets as of September 30, 2018.

17. Subsequent events

 

The Company reviews all activity subsequent to the end of the quarter but prior to issuance of the condensed consolidated financial statements for events that could require disclosure or that could impact the carrying value of assets or liabilities as of the balance sheet date. The Company is not aware of any material subsequent events other than the following:

 

Hercules Amendment

 

On October 11, 2018, the Company entered into Amendment No. 3 to the Amended Loan Agreement (the Third Amendment). The Third Amendment permits the Company to issue convertible notes in an aggregate principal amount of not more than $175.0 million, provided that such convertible notes meet certain stipulations.

 

5.00% Convertible Senior Notes Due 2048

 

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 Notes), for net proceeds of approximately $145.1 million.  The 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 Indenture), each dated October 17, 2018, by and between the Company and Wilmington

25


 

Trust, National Association, as trustee. The 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 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with their terms.

 

The Notes are convertible into shares of the Company’s common stock, par value $0.0001 per share (the Common Stock), 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 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 Indenture)  per share of the Common Stock equals or exceeds 130% of the conversion price on each of at least 20 VWAP Trading Days (as defined in the Indenture), whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date the Company first issued the 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.

The Notes are the Company’s senior, unsecured obligations and are senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 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 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 Indenture includes customary covenants and set forth certain events of default after which the 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 Notes become automatically due and payable.

 

26


 

Item 2.  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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10‑Q. The following discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward‑looking statements as a result of certain factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017.  Please also refer to the sections under headings “Forward‑Looking Statements” and “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017.

OVERVIEW

We are a biopharmaceutical company focused on developing and commercializing medicines to improve the survival and quality of life of cancer patients. Both our marketed product, COPIKTRA™ (duvelisib) capsules, and most advanced product candidate, defactinib, utilize a multi-faceted approach designed to treat cancers originating either in the blood or major organ systems. We are currently developing our product candidates in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, lung cancer, ovarian cancer, mesothelioma, and pancreatic cancer. We believe that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents or other current and emerging standard of care treatments in aggressive cancers that are poorly served by currently available therapies.

        COPIKTRA is an oral inhibitor of phosphoinositide 3-kinase (PI3K) and the first approved dual inhibitor of PI3K-delta and PI3K-gamma, two enzymes known to help support the growth and survival of malignant B-cells and T-cells. PI3K signaling may lead to the proliferation of malignant B-cells and is thought to play a role in the formation and maintenance of the supportive tumor microenvironment. COPIKTRA is indicated for the treatment of adult patients with 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. The indication in FL is approved under accelerated approval based on overall response rate and continued approval for this indication may be contingent upon verification and description of clinical benefits in confirmatory trials. Subsequently, on November 2, 2018, the U.S. Food and Drug Administration (FDA) confirmed that as the first sponsor to obtain marketing approval for COPIKTRA (duvelisib) for the above-referenced indications, we are entitled to seven years of orphan-drug exclusive approval pursuant to section 527 of the Federal Food, Drug and Cosmetic Act (21 U.S.C. 360cc).

COPIKTRA is also being developed by us for the treatment of peripheral T-cell lymphoma (PTCL), which has Fast Track status with the FDA, and is being investigated in combination with other agents through investigator-sponsored studies (ISTs). During 2019, we plan to continue to advance our development of COPIKTRA through the initiation of a confirmatory study of patients with FL and other sponsored trials, and the expansion of our study in patients with PTCL. Furthermore, we plan to report interim data for several ongoing ISTs and to enter into additional partnerships or collaborations for the potential commercialization of COPIKTRA outside of the United States.

We have entered into license and collaboration agreements with Yakult Honsha Co., Ltd. (Yakult) and CSPC Pharmaceutical Group Limited (CSPC), under which we granted Yakult and CSPC exclusive rights to develop and commercialize products containing duvelisib in specified territories including Japan and China, respectively, for the treatment, prevention, palliation or diagnosis of cell oncology indications in humans and animals, and we intend to enter into additional partnerships or collaborations for the potential commercialization of duvelisib outside of the United States.

        Defactinib is a targeted inhibitor of the Focal Adhesion Kinase (FAK) signaling pathway. FAK is a non-receptor tyrosine kinase encoded by the Protein Tyrosine Kinase-2 (PTK-2) gene that is involved in cellular adhesion and, in cancer, metastatic capability. Similar to COPIKTRA, defactinib is also delivered orally and designed to be a potential therapy for patients to take at home under the advice of their physician. Defactinib is currently being investigated in

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combination with immunotherapeutic and other agents through ISTs. During 2019, we plan to report the results from several ongoing dose escalation combination studies.

  Our operations to date have consisted of organizing and staffing our company, business planning, raising capital, identifying and acquiring potential product candidates and undertaking preclinical studies and clinical trials for our product candidates. 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 Yakult and CSPC, and the issuance of $150.0 million aggregate principal amount of 5.00% Convertible Senior Notes due 2048 in October 2018.  Following 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 September 30, 2018, we had an accumulated deficit of $364.2 million. Our net loss was $21.7 million, $61.1 million, $23.1 million and $49.6 million for the three and nine months ended September 30, 2018 and 2017, respectively. We expect to incur significant expenses 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.

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

 

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as “critical” because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used, which would have resulted in different financial results.

 

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2017 related to accrued research and development expenses and stock-based compensation. During the nine months ended September 30, 2018, there were no material changes to the significant accounting policies, except for the adoption of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, issued by the Financial Accounting Standards Board (the FASB), as well as significant accounting policies over revenue recognition, collaborative arrangements, accounts receivable, inventory and intangible assets, each of which is detailed below. 

 

Revenue Recognition 

Effective January 1, 2018, we adopted ASC 606. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. 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 it transfers 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 those that 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 (collectively, Customers). 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

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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 three and nine months ended September 30, 2018, 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 h