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Item 5. Market for Registrant’s Common Equity

2021-03-18 compared with 2020-03-11 · 15 added, 595 removed, 39 unchanged (94% of the section changed)

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities

MARKET INFORMATION

Our common stock is publicly traded on The Nasdaq Global Market under the symbol “VSTM.”

As of February 26, 2021 there were 10 holders of record of our common stock and the closing price of our common stock on The Nasdaq Global Market as of that date was $2.35.

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PERFORMANCE GRAPH

The following performance graph and related information shall not be deemed to be “soliciting material”

or to be “filed”

with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, except to the extent that we specifically incorporate it by reference into such filing.

The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, except to the extent that we specifically incorporate it by reference into such filing.

The following graph compares the performance of our common stock to the Nasdaq Composite Index and to the Nasdaq Biotechnology Index from December 31, 2015 through December 31, 2020.

The comparison assumes $100 was invested after the market closed on December 31, 2015 in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any.

* $100 invested on 12/31/14 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31, 2019.

Cumulative Total Return Comparison

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Selected Financial Data

You should read the following selected financial data together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10‑K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

section of this Annual Report on Form 10‑K.

You should read the following selected financial data together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K.

The selected historical financial information in this section is not intended to replace our financial statements and the related notes therein.

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License and collaboration revenue

Sale of COPIKTRA license and related assets

Transition services revenue

Total revenue

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Cost of sales - intangible amortization

Cost of sales - sale of COPIKTRA license and related assets

Research and development

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Interest expense

Net loss per share—basic

Net loss per share—diluted

Loss on debt extinguishment

Net loss before income taxes

Income tax expense

Net loss per share—basic

Net loss per share—diluted

Weighted average common shares outstanding used in computing:

Net loss per share—basic

Net loss per share—diluted

Net loss per share—basic

Net loss per share—diluted

As of December 31,

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Accumulated deficit

Total stockholders’

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10‑K.

The following discussion contains forward‑looking statements that involve risks and uncertainties.

Our actual results and the timing of certain events could differ materially from those anticipated in these forward‑looking statements as a result of certain factors, including those discussed below and as set forth under “Risk Factors.”

Please also refer to the section under the heading “Forward‑Looking Statements.”

We are a biopharmaceutical company focused on developing and commercializing medicines to improve the survival and quality of life of cancer patients.

Our marketed product, COPIKTRA ®

(duvelisib) capsules, and most advanced product candidates, defactinib and CH5126766 also referred to as VS-6766 , utilize a multi-faceted approach to treat cancers originating either in the blood or major organ systems.

We are currently developing duvelisib and our product candidates in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, head and neck cancer, ovarian cancer, colorectal cancer, lung cancer, pancreatic cancer, and mesothelioma.

We believe that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents, other pathway inhibitors or other current and emerging standard of care treatments in aggressive cancers that do not adequately respond to currently available therapies.

Our operations to date have been organizing and staffing our company, business planning, raising capital, identifying and acquiring potential product candidates, undertaking preclinical studies and clinical trials for duvelisib and our product candidates and initiating U.S.

commercial operations following the approval of COPIKTRA.

We have financed our operations to date primarily through public offerings of our common stock, sales of common stock under our at-the-market equity offering programs, our loan and security agreement executed with Hercules Capital, Inc.

(Hercules) in March 2017, as amended, the upfront payments under our license and collaboration agreements with Sanofi, Yakult and CSPC, and the issuance of $150.0 million aggregate principal amount of 2018 Notes in October 2018.

With our U.S.

commercial launch of COPIKTRA on September 24, 2018, we have recently begun financing a portion of our operations through product revenue.

As of December 31, 2019, we had an accumulated deficit of $524.8 million.

Our net loss was $149.2 million, $72.4 million, and $67.8 million the years ended December 31, 2019, 2018 and 2017 respectively.

We expect to incur significant expenses and operating losses for the foreseeable future as a result of our commercialization of COPIKTRA and the continued research and development of all of our product candidates.

We will need to generate significant revenues to achieve profitability, and we may never do so.

As of December 31, 2019, we had cash, cash equivalents, restricted cash and short-term investments of $111.3 million, inclusive of $35.7 million of restricted cash.

On March 3, 2020, we received gross proceeds of $100.0 million from the sale of 46,511,628 shares of Common Stock.

We expect our existing cash resources including proceeds from the sale of Common Stock in March 2020, along with revenue we expect to generate from sales of COPIKTRA, will be sufficient to fund our planned operations through 12 months from the date of issuance of these consolidated financial statements.

We expect to finance the future development costs of our clinical product portfolio with our existing cash, cash equivalents and short-term investments, or through strategic financing opportunities that could include, but are not limited to collaboration agreements, future offerings of our equity, or the incurrence of debt.

However, there is no guarantee that any of these strategic or financing opportunities will be executed or executed on favorable terms, and some could be dilutive to existing stockholders.

If we fail to obtain additional future capital, we may be unable to complete our planned preclinical studies and clinical trials and obtain approval of certain investigational product candidates from the FDA or foreign regulatory authorities.

FINANCIAL OPERATIONS OVERVIEW

Product revenue, net represents the gross sales of COPIKTRA in the United States less provisions for product sales allowances and accruals.

These provisions include trade allowances, rebates, chargebacks and discounts, product returns and other incentives.

We sell COPIKTRA to a limited number of specialty pharmacies and specialty distributors.

Although we expect net product revenues to increase over time, the provisions for product sales and allowances may fluctuate based on the mix of sales to either specialty pharmacy or specialty distributor customers.

See “Critical Accounting Policies and Significant Judgements and Estimates”

below for more information on the components of net U.S.

product sales of COPIKTRA.

License and collaboration revenue to date has been generated through our license and collaboration agreements for the development and commercialization of duvelisib with Sanofi in the Sanofi Territory, CSPC in China and Yakult in Japan.

The terms of these agreements contain multiple deliverables which may include (i) licenses, (ii) research and development activities, and (iii) the manufacture of finished drug product, active pharmaceutical ingredient (API), or development materials for a partner, which are reimbursed at a contractually determined rate.

Payments to us may include (i) up‑front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API or development materials, (iv) payments based upon the achievement of certain milestones, and (v) royalties on product sales.

Duvelisib has not received regulatory approval for commercial sale in the Sanofi Territory, China or Japan.

Costs of sales - product

Cost of sales - product consist of costs of COPIKTRA on which product revenue was recognized, royalties owed to Healthcare Royalty Partners (HCR) and Infinity we incur as a result of such sales of COPIKTRA, and certain period costs.

We expensed the manufacturing costs of COPIKTRA as operating expenses in the periods prior to July 1, 2018.

In the third quarter of 2018, we began capitalizing inventory costs for COPIKTRA manufactured in preparation for our launch in the United States based on our evaluation of, among other factors, the status of the COPIKTRA New Drug Application (NDA) in the United States and the ability of our third-party suppliers to successfully manufacture commercial quantities of COPIKTRA.

Certain of the costs of COPIKTRA units recognized as revenue during 2019 were expensed prior to the September 2018 FDA marketing approval and, therefore, are not included in cost of sales during this period.

We expect cost of sales - product to increase in relation to product revenues as we deplete these inventories.

Research and development expenses

Research and development expenses consist of costs associated with our research activities, including the development of our product candidates.

Our research and development expenses consist of:

employee‑related expenses, including salaries, benefits, travel and stock‑based compensation expense;

external research and development expenses incurred under arrangements with third parties, such as contract research organizations (CROs), clinical sites, manufacturing organizations and consultants, including our scientific advisory board;

license fees;

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies;

costs associated with COPIKTRA prior to us concluding that regulatory approval is probable and that its net realizable value is recoverable.

We expense research and development costs to operations as incurred.

We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

On September 24, 2018, COPIKTRA was approved by the FDA and is now indicated for the treatment of adult patients with relapsed or refractory CLL/SLL after at least two prior therapies and relapsed or refractory FL after at least two prior systemic therapies.

Due to long-lead time requirements for manufacturing our product, manufacturing constraints and the desire to have COPIKTRA commercially available as soon as possible following regulatory approval, we contracted with our third-party supplier to manufacture commercial quantities of COPIKTRA drug substance prior to final approval by regulators.

We expensed all pre-validation and validation manufacturing costs of drug product as research and development expenses in the periods prior to July 1, 2018.

Total costs of manufacturing COPIKTRA drug product expensed as research and development through June 30, 2018 was approximately $1.8 million.

Beginning July 1, 2018, we began capitalizing COPIKTRA related drug product costs for validation and post-validation (i.e.

commercial) lots as regulatory approval became probable.

For the periods beginning on July 1, 2018 and beyond, we have capitalized any COPIKTRA drug product costs incurred for commercial use as inventory.

We allocate the expenses related to external research and development services, such as CROs, clinical sites, manufacturing organizations and consultants by project.

The table below summarizes our external allocation of research and development expenses to our clinical programs, including COPIKTRA and defactinib, for the years ended December 31, 2019, 2018 and 2017.

We use our employee and infrastructure resources across multiple research and development projects.

Our project costing methodology does not allocate personnel and other indirect costs to specific clinical programs.

These unallocated research and development expenses are summarized in the table below and include $11.3 million, $9.2 million and $5.8 million of personnel costs for the years ended December 31, 2019, 2018 and 2017, respectively.

Year ended December 31,

(in thousands)

Unallocated and other research and development expense

Unallocated stock-based compensation expense

Total research and development expense

Our research and development expenses may increase significantly in future periods as we undertake costlier development activities for our existing and future product candidates, including larger and later‑stage clinical trials.

The successful development of our product candidates is highly uncertain.

At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material net cash inflows from our product candidates may commence.

This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

clinical trial results;

the scope, rate of progress and expense of our research and development activities, including preclinical research and clinical trials;

the potential benefits of our product candidates over other therapies;

our ability to market, commercialize and achieve market acceptance for COPIKTRA or any of our other product candidates that we receive regulatory approval for;

the terms and timing of regulatory approvals;

the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate.

For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those

which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of salaries and related costs for personnel, including stock‑based compensation expense, in our executive, finance, legal, information technology, commercial, communication, human resources, and business development functions.

Other selling, general and administrative expenses include allocated facility costs, commercial costs, professional fees for legal, patent, investor and public relations, consulting, insurance premiums, audit, tax and other public company costs.

Other, interest income and interest expense

Other expense in 2019 consists entirely of the mark-to-market adjustment of the bifurcated make-whole interest provision derivative liability related to the 2019 Notes.

Other income in 2018 consists entirely of the mark-to-market adjustment of the bifurcated conversion option derivative liability related to the 2018 Notes.

Interest income reflects interest earned on our cash, cash equivalents and available-for-sale securities.

Interest expense reflects interest expense due under both our term loan facility executed with Hercules and the Notes, as well as non-cash interest related to the amortization of debt discount and issuance costs.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with U.S.

generally accepted accounting principles (GAAP).

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements.

On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, stock‑based compensation, revenue recognition, collaborative agreements, accounts receivable, inventory and intangible assets described in greater detail below.

We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10‑K.

However, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services in accordance with ASC 606 Revenue from Contracts with Customers .

To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine which goods or services are performance obligations, and assess whether each promised good or service is distinct.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Revenue, Net –

We sell COPIKTRA to a limited number of specialty pharmacies and specialty distributors in the United States.

These customers subsequently resell COPIKTRA either directly to patients, or to community hospitals or oncology clinics with in-office dispensaries who in turn distribute COPIKTRA to patients.

In addition to distribution agreements with customers, we also enter into arrangements with (1) certain government agencies and various private organizations (Third-Party Payers), which may provide for chargebacks or discounts with respect to the purchase of COPIKTRA, and (2) Medicare and Medicaid, which may provide for certain rebates with respect to the purchase of COPIKTRA.

We recognize revenue on sales of COPIKTRA when a customer obtains control of the product, which occurs at a point in time (typically upon delivery).

Product revenues are recorded at the wholesale acquisition costs, net of applicable reserves for variable consideration.

Components of variable consideration include trade discounts and allowances, Third-Party Payer chargebacks and discounts, government rebates, other incentives, such as voluntary co-pay assistance, product returns, and other allowances that are offered within contracts between us and customers, payors, and other indirect customers relating to our sale of COPIKTRA.

These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability.

These estimates take into consideration a range of possible outcomes based upon relevant factors such as, customer contract terms, information received from third-parties regarding the anticipated payor mix for COPIKTRA, known market events and trends, industry data, and forecasted customer buying and payment patterns.

Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled with respect to sale made.

The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period.

Our analyses contemplate the application of the constraint in accordance with ASC 606.

For the year ended December 31, 2019, we determined a material reversal of revenue would not occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further.

Actual amounts of consideration ultimately received may differ from our estimates.

If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Trade Discounts and Allowances:

We generally provide customers with invoice discounts on sales of COPIKTRA for prompt payment, which are explicitly stated in our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.

In addition, we compensate our specialty distributor customers for sales order management, data, and distribution services.

We have determined such services are not distinct from our sale of COPIKTRA to the specialty distributor customers and, therefore, these payments have also been recorded as a reduction of revenue within the consolidated statements of operations and comprehensive loss through December 31, 2019.

Third-Party Payer Chargebacks, Discounts and Fees:

We execute contracts with Third-Party Payers which allow for eligible purchases of COPIKTRA at prices lower than the wholesale acquisition cost charged to customers who directly purchase the product from us.

In some cases, customers charge us for the difference between what they pay for COPIKTRA and the ultimate selling price to the Third-Party Payers.

These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable, net.

Chargeback amounts are generally determined at the time of resale to the qualified Third-Party Payer by customers, and we generally issue credits for such amounts within a few weeks of the customer’s notification to us of the resale.

Reserves for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at the end of each reporting period that we expect will be sold to Third-Party Payers, and chargebacks that customers have claimed, but for which we have not yet issued a credit.

In addition, we compensate certain Third-Party Payers for administrative services, such as account management and data reporting.

These administrative service fees have also been recorded as a reduction of product revenue within the consolidated statements of operations and comprehensive loss through December 31, 2019.

Government Rebates:

We are subject to discount obligations under state Medicaid programs and Medicare.

These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheets.

For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program.

Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Other Incentives:

Other incentives which we offer include voluntary co-pay assistance programs, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors.

The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.

The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses on the consolidated balance sheets.

Product Returns:

Consistent with industry practice, we generally offer customers a limited right of return for product that has been purchased from us.

We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized.

We estimate product return liabilities using available industry data and our own sales information, including our visibility into the inventory remaining in the distribution channel.

Subject to certain limitations, our return policy allows for eligible returns of COPIKTRA for credit under the following circumstances:

Receipt of damaged product;

Shipment errors that were a result of an error by us;

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;

Product that we, at our sole discretion, have specified can be returned for credit.

As of December 31, 2019, we have not received any returns.

If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from product revenue.

We expense incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that we would have recognized is one year or less.

However, no such costs were incurred during the year ended December 31, 2019.

Exclusive Licenses of Intellectual Property - We may enter into collaboration and licensing arrangements for research and development, manufacturing, and commercialization activities with collaboration partners for the development and commercialization of our product candidates, which have components within the scope of ASC 606.

The arrangements generally contain multiple elements or deliverables, which may include (i) licenses, or options to obtain licenses, to our intellectual property, (ii) research and development activities performed for the collaboration partner, (iii) participation on joint steering committees, and (iv) the manufacturing of commercial, clinical or preclinical material.

Payments pursuant to these arrangements typically include non-refundable, upfront payments, milestone payments upon the achievement of significant development events, research and development reimbursements, sales milestones, and royalties on product sales.

The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period.

The contracts into which we enter generally do not include significant financing components.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our collaboration and license agreements, we perform the following steps:

(i) identification of the promised goods or services in the contract within the scope of ASC 606;

(ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) we satisfy each performance obligation.

As part of the accounting for these arrangements, we must use significant judgment to determine:

a) the number of performance obligations based on the determination under step (ii) above;

b) the transaction price under step (iii) above;

c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above;

and d) the measure of progress in step (v) above.

We use judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below.

If a license to our intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

In assessing whether a promise or performance obligation is distinct from the other elements, we consider factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of its associated expertise in the general marketplace.

In addition, we consider whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining elements, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise.

For licenses that are combined with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue.

We evaluate the measure of progress as of each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

The measure of progress, and thereby periods over which revenue should be recognized, is subject to estimates by management and may change over the course of the arrangement.

Such a change could have a material impact on the amount of revenue we record in future periods.

Customer Options:

If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services such as research and development services or manufacturing services, the goods and services underlying the customer options are not considered to be performance obligations at the inception of the arrangement;

rather, such goods and services are contingent on exercise of the option, and the associated option fees are not included in the transaction price.

We evaluate customer options for material rights or options to acquire additional goods or services for free or at a discount.

If a customer option is determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement.

We allocate the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the estimated probability that the customer will exercise the option.

Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.

Milestone Payments:

At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method.

If it is probable that a significant revenue reversal would not

occur, the associated milestone value is included in the transaction price.

Milestone payments that are not within the control of us or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the respective milestone in making this assessment.

There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur.

At the end of each subsequent reporting period, we reevaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjust our estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.

Collaborative Arrangements:

Contracts are considered to be collaborative arrangements when they satisfy the following criteria defined in ASC 808, Collaborative Arrangements :

(i) the parties to the contract must actively participate in the joint operating activity and (ii) the joint operating activity must expose the parties to the possibility of significant risks and rewards, based on whether or not the activity is successful.

Payments received from or made to a partner that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction or increase to research and development expense, respectively.

Accrued research and development expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses.

This process involves reviewing contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met.

We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.

The significant estimates in our accrued research and development expenses include fees paid to CROs in connection with research and development activities for which we have not yet been invoiced.

We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct research and development on our behalf.

The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows.

There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense.

In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period.

If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.

Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period.

To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock‑based compensation

We recognize stock‑based compensation expense for stock options, and restricted stock units (RSUs) issued to employees and directors based on the grant date fair value of the awards on a straight‑line basis over the requisite service period.

Historically, we recorded stock‑based compensation expense for stock options and RSUs issued to non‑employees based on the estimated fair value of the services received or of the equity instruments issued, whichever is more reliably measured, based on the vesting date fair value of the awards on a straight‑line basis over the vesting period.

Effective January 1, 2019, we adopted Accounting Standard Updated (ASU) 2018-

09, Compensation –

Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services to be used or consumed in its own operations by issuing share-based payment awards.

Upon adoption, we recognize stock-based compensation expense for stock options and RSUs issued to non-employees based on the grant date fair value of the awards on the straight-line basis over the requisite service period.

We estimate the fair value of stock option awards using the Black‑Scholes option‑pricing model.

Determining the fair value of stock options requires the use of subjective assumptions, including the expected term of the award and expected stock price volatility.

The assumptions used in determining the fair value of stock options represent management’s best estimates, which involve inherent uncertainties and the application of management judgment.

As a result, if factors change, and we use different assumptions, our stock‑based compensation could be materially different in the future.

The risk‑free interest rate used for each grant is based on a U.S.

Treasury instrument whose term is consistent with the expected term of the stock option.

Because we do not have a sufficient history to estimate the expected term, we use the simplified method as described in Securities and Exchange Commission Staff Accounting Bulletin Topic 14.D.2 for estimating the expected term.

The simplified method is based on the average of the vesting tranches and the contractual life of each grant.

Because there was no public market for our common stock prior to our initial public offering, we lacked company‑specific historical and implied volatility information prior to December 31, 2017.

Therefore, for annual periods ending on or before December 31, 2017, we used the historical volatility of a representative group of public biotechnology and life sciences companies with similar characteristics to us.

The computation of expected volatility for these annual periods is based on the historical volatility of five companies, including our own and a representative group of four public biotechnology and life sciences companies with similar characteristics to us, including similar stage of product development and therapeutic focus.

As of the first quarter of 2018, there was sufficient company-specific historical and implied volatility information.

As such, for the annual period ending December 31, 2019, the computation of expected volatility is based only on the historical volatility of our common stock.

We have not paid and do not anticipate paying cash dividends on our shares of common stock;

therefore, the expected dividend yield is assumed to be zero.

Historically, we have recognized stock-based compensation net of estimated forfeitures over the vesting period of the respective grant.

Effective January 1, 2017, we adopted Accounting Standard Updated (ASU) 2016-09, Compensation –

Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting , which simplified the accounting for stock-based compensation arrangements, including the accounting for forfeitures.

Upon adoption, we elected to begin accounting for forfeitures as they occur, rather than estimating a forfeiture rate, and recorded an immaterial cumulative-effect adjustment to opening accumulated deficit.

We issue shares under the Company’s employee stock purchase plan (ESPP) to employees.

Stock-based compensation expense for discounted purchases under the ESPP is measured using the Black-Scholes model to compute the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the offering period .

We have also granted performance‑based restricted stock units (RSUs) and stock options with terms that allow the recipients to vest in a specific number of shares based upon the achievement of performance‑based milestones as specified in the grants.

Stock‑based compensation expense associated with these performance‑based RSUs and stock options is recognized if the performance condition is considered probable of achievement using management’s best estimates of the time to vesting for the achievement of the performance‑based milestones.

If the actual achievement of the performance‑based milestones varies from our estimates, stock-based compensation expense could be materially different than what is recorded in the period.

The cumulative effect on current and prior periods of a change in the estimated time to vesting for performance‑based RSUs and stock options will be recognized as compensation cost in the period of the revision, and recorded as a change in estimate.

While the assumptions used to calculate and account for stock-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment.

As a result, if revisions are made to our underlying assumptions and estimates, our stock‑based compensation expense could vary significantly from period to period.

As of December 31, 2019, there was approximately $14.0 million of unrecognized stock‑based compensation related to stock options, which are expected to be recognized over a weighted‑average period of 2.8 years.

As of December 31, 2019, there was approximately $1.2 million of unrecognized stock-based compensation

related to RSUs, which are expected to be recognized over a weighted-average period of 2.6 years.

See Notes 2 and 11 to our consolidated financial statements located in this Annual Report on Form 10‑K for further discussion of stock‑based compensation.

Accounts Receivable, Net

Accounts receivable, net relates to amounts due from customers, net of applicable revenue reserves.

Accounts receivable are typically due within 31 days.

We analyze accounts that are past due for collectability and provide an allowance for receivables when collection becomes doubtful.

Given the nature and limited history of collectability of our accounts receivable, an allowance for doubtful accounts is not deemed necessary at December 31, 2019.

We capitalize inventories manufactured in preparation for initiating sales of a product candidate when the related product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories.

In determining whether or not to capitalize such inventories, we evaluate, among other factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated competitive drugs and the availability of reimbursement.

In addition, we evaluate risks associated with manufacturing the product candidate, including the ability of our third-party suppliers to complete the validation batches, and the remaining shelf life of the inventories.

Costs associated with manufacturing product candidates prior to satisfying the inventory capitalization criteria are charged to research and development expense as incurred.

We value our inventories at the lower of cost or estimated net realizable value.

We determine the cost of our inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis.

We perform an assessment of the recoverability of capitalized inventory during each reporting period, and we write down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified.

Such impairment charges, should they occur, are recorded within costs of sales-product.

The determination of whether inventory costs will be realizable requires estimates by management.

If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required which would be recorded as a cost of sales - product in the consolidated statements of operations and comprehensive loss.

Shipping and handling costs for product shipments are recorded as incurred in costs of sales - product along with costs associated with manufacturing the product, and any inventory write-downs.

Intangible Assets

We record finite-lived intangible assets related to certain capitalized milestone payments at their fair value.

These assets are amortized on a straight-line basis over their remaining useful lives, which are estimated based on the shorter of the remaining underlying patent life or the estimated useful life of the underlying product.

We assess our finite-lived intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist.

Events that could result in an impairment include the receipt of additional clinical or nonclinical data regarding one of our drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug.

If impairment indicators are present or changes in circumstance suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each finite-lived intangible asset or asset group to its carrying value on the consolidated balance sheets.

If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the finite-lived intangible asset and recognize an impairment loss if the carrying value of the finite-lived intangible asset exceeds its fair value.

Effective January 1, 2019, we adopted ASC 842.

This standard requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances within the arrangement.

A lease is identified where an arrangement conveys the right to control the use of identified property, plant, and equipment for a period of time in exchange for consideration.

Leases which are identified within the scope of ASC 842 and which have a term greater than one year are recognized on our consolidated balance sheets as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities.

We have elected not to recognize leases with terms of one year or less on our consolidated balance sheets.

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term.

However, certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The interest rate implicit in lease contracts is typically not readily determinable.

As a result, we utilize our incremental borrowing rates to calculate the present value of lease payments.

Incremental borrowing rates are the rates we incur to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

In accordance with ASC 842, components of a lease are split into three categories:

lease components (e.g.

land, building, etc.), non-lease components (e.g.

common area maintenance, maintenance, consumables, etc.), and non-components (e.g.

property taxes, insurance, etc.).

The fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components.

Although separation of lease and non-lease components is required, certain practical expedients are available.

Entities may elect the practical expedient to not separate lease and non-lease components.

Rather, they would account for each lease component and the related non-lease component together as a single component.

We have elected to account for the lease and non-lease components of each of our operating leases as a single lease component and allocate all of the contract consideration to the lease component only.

The lease component results in an operating right-of-use asset being recorded on the consolidated balance sheets and amortized on a straight-line basis as lease expense.

RESULTS OF OPERATIONS

All financial information presented has been consolidated and includes the accounts of our wholly-owned subsidiaries, Verastem Securities Company and Verastem Europe GmbH.

All intercompany balances and transactions have been eliminated in consolidation.

Year Ended December 31,

Product revenue, net

License and collaboration revenue

Total revenue

Operating expenses:

Cost of sales - product

Cost of sales - intangible amortization

Research and development

Selling, general and administrative

Total operating expenses

Loss from operations

Other (expense)/ income

Interest income

Interest expense

Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018

Product revenue, net.

Product revenue net for the year ended December 31, 2019 (2019 Period) was $12.3 million compared to $1.7 million for the year ended December 31, 2018 (2018 Period).

Product revenue, net consisted of net product sales of COPIKTRA in the United States.

We began commercial sales of COPIKTRA within the United States in September 2018 following receipt of FDA marketing approval.

The $10.6 million increase was driven primarily by an increase in product shipments for COPIKTRA as a result of greater market penetration.

License and collaboration revenue.

License and collaboration revenue for the 2019 Period was $5.1 million compared to $25.0 million for the 2018 Period.

The $19.9 million decrease was related to a $10.0 million upfront payment received in connection to our license and collaboration agreement with Yakult and a $15.0 million upfront payment received in connection to our license and collaboration agreement with CSPC in the 2018 period, partially offset by a $5.0 million upfront payment received in connection to our collaboration agreement with Sanofi and collaboration revenue of $0.1 million related to the shipment of clinical supply of COPIKTRA to Yakult and CSPC during the 2019 Period.

Costs of sales –

product for the 2019 Period was $1.2 million compared to $0.2 million for the 2018 period.

The $1.0 million increase was primarily driven by an increase in the volume of COPIKTRA sold and corresponding increases in royalties, manufacturing and other costs during the 2019 Period as compared to the 2018 Period.

Cost of sales - product consisted of costs associated with the manufacturing of COPIKTRA, royalties owed to HCR and Infinity on such sales, and certain period costs.

We expensed the manufacturing costs of COPIKTRA as operating expenses in the periods prior to July 1, 2018.

Certain of the costs of COPIKTRA units recognized as revenue during the 2019 Period were expensed prior to the September 2018 FDA marketing approval and, therefore, are not included in cost of sales during this period.

We expect cost of sales - product to increase in relation to product revenues as we deplete these inventories.

Our inventory balance as of December 31, 2019 has increased compared to December 31, 2018 due to manufacturing of COPIKTRA in 2019.

Research and development expense.

Research and development expense for the 2019 Period was $45.8 million compared to $43.6 million for the 2018 Period.

The $2.2 million increase from the 2018 Period to the 2019 Period was primarily related to an increase of $3.7 million of contract research organization (CRO) costs for our Phase 2 Intermittent Dosing study entitled TEMPO, increase of $1.3 million for CRO costs related to our Phase 2 study for the treatment of PTCL –

entitled PRIMO, an increase of $1.6 million in personnel related costs, including non-cash stock-based compensation and $0.5 million of other costs.

This increase is partially offset by a decrease of $2.4 million in consulting fees as a result of activities to file an NDA in the 2018 Period and a decrease of $2.5 million in CRO costs as a result of site closures in our Phase 3 DUO and Phase 2 DYNAMO studies throughout 2018 and 2019 as patients continue to complete treatment.

Selling, general and administrative expense.

Selling, general and administrative expense for the 2019 Period was $101.2 million compared to $77.3 million for the 2018 Period.

The increase of $23.9 million from the 2018 Period to the 2019 Period primarily resulted from an increase in personnel related costs, including non-cash stock-based compensation, of $14.2 million, primarily related to the hiring and staffing of our sales and commercial teams, an increase in consulting and professional fees of $6.7 million, primarily related to the support of the commercial launch activities, and an increase in travel and other costs of $3.0 million.

Cost of Sales –

intangible amortization.

Cost of sales –

intangible amortization for the 2019 Period was approximately $1.6 million compared to $0.4 million for the 2018 Period.

Cost of sales –

intangible amortization was related to the COPIKTRA finite-lived intangible asset which we recognized and began amortizing in September 2018.

Other (expense)/ income.

Other expense for the 2019 Period of approximately $0.6 million was for the mark-to-market adjustment related to the bifurcated make-whole interest provision derivative liability related to the 2019 Notes.

Other income for the 2018 Period of approximately $25.6 million was related to the mark-to-market adjustment of the bifurcated conversion option derivative liability related to the 2018 Notes.

Interest income.

Interest income for the 2019 Period was $4.4 million compared to $2.6 million for the 2018 Period.

The increase of $1.8 million from the 2018 Period to the 2019 period is primarily due to higher investment cost basis and higher interest rates on investments.

Interest expense.

Interest expense for the 2019 Period was $20.6 million compared to $5.8 million for the 2018 Period.

The increase of $14.8 million was due to the issuance of the 2018 Notes in October 2018, a higher principal balance and higher interest rates on our loan and security agreement with Hercules and the acceleration of an end of term fee related to the Hercules loan and security agreement refinancing recorded as interest expense.

Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017

Product revenue, net.

We began commercial sales of COPIKTRA within the United States in September 2018, following receipt of FDA marketing approval on September 24, 2018.

For the 2018 Period we recorded approximately $1.7 million of net product revenue.

We had no product revenue during the year ended December 31, 2017 (2017 Period).

License and collaboration revenue.

License and collaboration revenue for the 2018 Period was $25.0 million and was related to upfront payments pursuant to the license and collaboration agreements with Yakult and CSPC.

We had no license and collaboration revenue during the 2017 Period .

Costs of sales –

Costs of sales - product of approximately $0.2 million for the 2018 Period, consisted of costs associated with the manufacturing of COPIKTRA, royalties owed to Infinity on such sales, and certain period costs.

We had no cost of sales - product during the 2017 Period.

Research and development expense.

Research and development expense for the 2018 Period was $43.6 million compared to $46.4 million for the 2017 Period.

The $2.8 million decrease from the 2017 Period to the 2018 Period was primarily related to a decrease of $6.0 million in license fees related to a one-time milestone payment pursuant to the Infinity license agreement that was recognized in the 2017 Period and a decrease of approximately $3.2 million in consulting fees, partially offset by increases of $4.0 million in personnel related costs, including non-cash stock-based compensation, and $1.9 million in CRO expense for outsourced biology, development and clinical services, which includes our clinical trial costs, and approximately $0.5 million of other costs.

Selling, general and administrative expense.

Selling, general and administrative expense for the 2018 Period was $77.3 million compared to $21.4 million for the 2017 Period.

The increase of $55.9 million from the 2017 Period to the 2018 Period primarily resulted from an increase in personnel related costs, including non-cash stock-based compensation, of $26.9 million, primarily related to the hiring and staffing of our sales and commercial teams, an increase in consulting and professional fees of $24.4 million, primarily related to the support of the commercial launch preparation activities, and an increase in travel and other costs of $4.6 million.

Cost of Sales –

intangible amortization.

Cost of sales –

intangible amortization for the 2018 Period of approximately $0.4 million was related to the COPIKTRA finite-lived intangible asset which we recognized and began amortizing in September 2018.

There was no cost of sales –

intangible amortization in the 2017 Period.

Other income/(expense) Other income for the 2018 Period of approximately $25.6 million was related to the mark-to-market adjustment of the bifurcated conversion option derivative liability related to the Notes.

There was no mark-to-market adjustment or any other income in the 2017 Period.

Interest income.

Interest income for the 2018 Period was $2.6 million compared to $0.6 million for the 2017 Period.

The increase of $2.0 million from the 2017 Period to the 2018 period is primarily due to higher investment cost basis and higher interest rates on investments.

Interest expense.

Interest expense for the 2018 Period was $5.8 million compared to $0.6 million for the 2017 Period.

The increase of $5.2 million was due to a higher principal balance and higher interest rates on our loan and security agreement with Hercules, an increase in the number of days the loan with Hercules was outstanding in the 2018 Period compared to the 2017 Period, and the issuance of the Notes in October 2018.

LIQUIDITY AND CAPITAL RESOURCES

Sources of liquidity

We have financed our operations to date primarily through public offerings of our common stock, sales of common stock under our at-the market equity offering programs, our loan and security agreement executed with Hercules in March 2017, as amended, the upfront payments under our license and collaboration agreements with Sanofi, Yakult and CSPC and the issuance in October 2018 of $150.0 million aggregate principal amount of 5.00% Convertible Senior Notes due 2048.

With the commercial launch of COPIKTRA in the United States in September 2018, we have recently begun financing a portion of our operations through product revenue.

As of December 31, 2019, we had $111.3 million in cash, cash equivalents, restricted cash and short-term investments inclusive of $35.7 million in restricted cash.

We primarily invest our cash, cash equivalents and investments in U.S.

Government money market funds and corporate bonds and commercial paper of publicly traded companies.

COPIKTRA is our only approved product and our business currently depends heavily on its successful commercialization.

Successful commercialization of an approved product is an expensive and uncertain process.

Risks and uncertainties include those identified under Item 1A.

Risk Factors, in this Annual Report on Form 10-K.

The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):

Year ended December 31,

Net cash (used in) provided by:

Operating activities

Investing activities

Financing activities

Increase (decrease) in cash, cash equivalents and restricted cash

Operating activities.

The use of cash in operating activities for all periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital.

The $64.0 million increase in cash used in operating activities for the 2019 Period compared to the 2018 Period was primarily due to an increase in selling, general, and administrative expenses related to the post-launch commercial operations supporting COPIKTRA, and due to a $10.0 million license payment from Yakult and $15.0 million license payment received from CSPC during the 2018 Period, partially offset by a $5.0 million license payment received from Sanofi during the 2019 Period.

The $17.2 million increase in cash used in operating activities for the 2018 Period compared to the 2017 Period primarily due to an increase in selling, general, and administrative expenses related to the hiring and staffing of our sales and commercial teams as well as an increase in consulting and professional fees primarily related to the support of the commercial launch preparation activities.

Investing activities.

The cash provided by investing activities for the 2019 Period relates to the net maturities of investments of $89.6 million.

The cash used in investing activities for the 2018 Period relates to the net purchases of investments of $115.0 million, the acquisition of the COPIKTRA finite-lived intangible asset of $22.0 million and net purchases of property and equipment of approximately $1.4 million.

Financing activities.

The cash used by financing activities for the 2019 Period represents $12.2 million principal payments on the 2018 Notes, $0.4 million of interest-make whole payments on the 2019 Notes and $0.1 million of payments for settlement of restricted stock for tax withholdings.

This is partially offset by $9.7 million of net proceeds as a result of the Amendment to the loan and security agreement with Hercules and $0.6 million of proceeds received related to exercise of stock option and employee stock purchase plan.

The cash provided by financing activities for the 2018 Period primarily represents $145.3 million in net proceeds received from the issuance of 2018 Notes, $81.2 million in net proceeds from the sales of our common stock under the Underwriting Agreement and Purchase Agreement described below, $24.3 million in net proceeds received under our at-the-market equity offering program (ATM), $9.9 million in net proceeds received from our loan and security agreement executed with Hercules, and approximately $0.8 million related to stock option exercises, offset by the payment of approximately $0.3 million of issuance costs related to a sale of our common stock during December 2017.

On March 21, 2017 (Closing Date), we entered into a term loan facility of up to $25.0 million with Hercules, a Maryland corporation.

The term loan facility is governed by a loan and security agreement, dated March 21, 2017 (the Original Loan Agreement), which originally provided for up to four separate advances, of which an aggregate of $15.0 million were drawn down during the year ended December 31, 2017.

The Original Loan Agreement was amended on January 4, 2018, March 6, 2018, and October 11, 2018 (the Amended Loan Agreement) to increase the total borrowing limit under the Original Loan Agreement from $25.0 million up to $50.0 million (the Amended Term Loan), pursuant to certain conditions of funding.

On April 23, 2019 (the Fourth Amendment Date) and November 14, 2019 (the Fifth Amendment Date), we entered into the Fourth Amendment and Fifth Amendment (together the Amendments) to the Original Loan Agreement with Hercules.

The Amendments further amend the Amended Loan Agreement (together, with the Amendments, the 2019 Term Loan Agreement).

Per the terms of the 2019 Term Loan Agreement, we may borrow up to an aggregate of $75.0 million, of which $35.0 million was outstanding immediately as of the Fourth Amendment Date (2019 Term A Loan) as a result of the existing outstanding principal of term loans of $25.0 million under the Amended Loan Agreement being converted into the 2019 Term A Loan, and an additional $10.0 million being drawn on the Fourth Amendment Date.

The remaining $40.0 million of borrowing capacity may be drawn in multiple tranches comprised of (i) a term loan in an amount of up to $15.0 million upon us generating cumulative net product revenues (as defined in the 2019 Term Loan Agreement) of either (a) $37.5 million on or before April 30, 2020 or (b) $50.0 million on or before June 30, 2020 (2019 Term B Loan), and (ii) a term loan in an amount of up to $25.0 million available through December 31, 2021, subject to Hercules’

approval and certain other conditions specified in the 2019 Term Loan Agreement (the 2019 Term C Loan, and together with the 2019 Term A Loan and 2019 Term B Loan, the 2019 Term Loan).

As of December 31, 2019, we have borrowed a total of $35.0 million in term loans.

The 2019 Term Loan will mature on December 1, 2022 (2019 Term Loan Maturity Date).

Each advance accrues interest at a floating per annum rate equal to the greater of (a) 9.75% or (b) the lesser of (i) 12.00% and (ii) the sum of (x) 9.75% plus (y) (A) the prime rate minus (B) 5.50%.

The 2019 Term Loan provides for interest-only payments until April 1, 2021, which may be extended to December 1, 2021 pursuant to us generating $40.0 million in net product revenue on a trailing six-month basis on or prior to December 31, 2020 provided that no event of default has occurred.

Thereafter, amortization payments will be payable monthly in equal installments of principal and interest (subject to recalculation upon a change in prime rates).

The 2019 Term Loan is secured by a lien on substantially all of our assets, other than intellectual property and contains customary covenants and representations, including a liquidity covenant, minimum net revenue covenant, financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.

On the Fourth Amendment Date, we were required to pay any outstanding accrued interest as well as the final payment fee equal to 4.5% on the outstanding principal balance of the Amended Term Loan, or $1.1 million.

No prepayment charges were due as a result of executing the Amendment or conversion of the existing term loans into 2019 Term A Loans.

The events of default under the 2019 Term Loan Agreement include, without limitation, and subject to customary grace periods, (i) any failure by us to make any payments of principal or interest under the 2019 Term Loan Agreement, promissory notes or other loan documents, (ii) any breach or default in the performance of any covenant under the 2019 Term Loan Agreement, (iii) any making of false or misleading representations or warranties in any material respect, (iv) our insolvency or bankruptcy, (v) certain attachments or judgments on the assets of Verastem, Inc., or (vi) the occurrence of any material default under certain agreements or obligations of ours involving indebtedness, or (vii) the occurrence of a material adverse effect.

If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the 2019 Term Loan Agreement.

The 2019 Term Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality.

Hercules has indemnification rights and the right to assign the 2019 Term Loan.

On March 30, 2017, we established an at-the-market equity offering program (ATM) pursuant to which were able to offer and sell up to $35.0 million of our common stock at then-current market prices from time to time through Cantor Fitzgerald & Co.

(Cantor), as sales agent.

On August 28, 2017, we amended our sales agreement with Cantor to increase the maximum aggregate offering price of shares of common stock that can be sold under the ATM to $75.0 million.

Through December 31, 2018, we sold 11,518,354 shares under the ATM for net proceeds of approximately $47.3 million (after deducting commissions and other offering expenses).

During the 2019 Period, there were no sales under the ATM.

As of December 31, 2019, we can issue an addition $26.6 million of gross proceeds under this program.

On May 16, 2018, we entered into an underwriting agreement with Cantor relating to the underwritten offering of 7,777,778 shares of our common stock (the Underwriting Agreement).

Cantor agreed to purchase the shares of our common stock pursuant to the Underwriting Agreement at a price of $4.31 per share.

In addition, we granted Cantor an option to purchase, at the public offering price less any underwriting discounts and commissions, an additional 1,166,666 shares of our common stock, exercisable for 30 days from the date of the prospectus supplement.

The option was exercised by Cantor on May 23, 2018.

The aggregate proceeds from Cantor, net of underwriting discounts and offering costs, were approximately $38.3 million.

On June 14, 2018, we entered into a purchase agreement with Consonance Capital Master Account L.P.

and P Consonance Opportunities Ltd.

(collectively, Consonance) relating to the registered offering of 7,166,666 shares of our common stock at a price of $6.00 per share (the Purchase Agreement).

The aggregate proceeds from Consonance, net of offering costs, were approximately $42.9 million.

On October 17, 2018, we closed a registered direct public offering of $150.0 million aggregate principal amount of our 5.00% Convertible Senior Notes due 2048 (the 2018 Notes) , for net proceeds of approximately $145.3 million.

The 2018 Notes are governed by the terms of a base indenture for senior debt securities (the Base Indenture), as supplemented by the first supplemental indenture thereto (the Supplemental Indenture and together with the Base Indenture, the 2018 Indenture), each dated October 17, 2018, by and between us and Wilmington Trust, National Association, as trustee.

The 2018 Notes are senior unsecured obligations of us and bear interest at a rate of 5.00% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on May 1, 2019.

The 2018 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with their terms.

The 2018 Notes are convertible into shares of our common stock, par value $0.0001 per share, together, if applicable, with cash in lieu of any fractional share, at an initial conversion rate of 139.5771 shares of common stock per $1,000 principal amount of the 2018 Notes, which corresponds to an initial conversion price of approximately $7.16 per share of common stock and represents a conversion premium of approximately 15.0% above the last reported sale price of our common stock of $6.23 per share on October 11, 2018.

Upon conversion, converting noteholders will be entitled to receive accrued interest on their converted Notes.

To the extent we have insufficient authorized but unissued shares to settle conversions in shares of common stock, we would be required to settle the deficiency in cash.

We will have the right, exercisable at our option, to cause all 2018 Notes then outstanding to be converted automatically if the “Daily VWAP”

(as defined in the 2018 Indenture) per share of our common stock equals or

exceeds 130% of the conversion price, which equates to approximately $9.31 per share, on each of at least 20 VWAP Trading Days, whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date we first issued the 2018 Notes.

The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends, but will not be adjusted for any accrued and unpaid interest.

We assessed all terms and features of the 2018 Notes in order to identify any potential embedded features that would require bifurcation.

As part of this analysis, we assessed the economic characteristics and risks of the 2018 Notes, including the conversion, put and call features.

Per the terms of the 2018 Indenture, upon conversion of the 2018 Notes, a portion of the principal may be settled in cash until the date upon which our stockholders approve an increase in the number of authorized shares of common stock, or the Authorized Share Effective Date.

In consideration of this provision, we concluded the conversion feature required bifurcation as a derivative.

The fair value of the conversion feature derivative was determined based on the difference between the fair value of the 2018 Notes with the conversion option and the fair value of the 2018 Notes without the conversion option.

We determined that the fair value of the derivative upon issuance of the 2018 Notes was $51.5 million and recorded this amount as a derivative liability and the offsetting amount as a debt discount as a reduction to the carrying value of the Notes on the closing date, or October 17, 2018.

On December 18, 2018, the Authorized Share Effective Date was achieved as our stockholders approved an increase in the number of authorized shares of common stock.

Following this approval, no portion of the 2018 Notes are settleable in cash upon conversion.

As such, we determined that the conversion feature no longer met the definition of a derivative following the increase in the number of authorized shares of common stock.

As of December 18, 2018, we determined the fair value of the conversion feature was $25.9 million.

We recorded the change in the fair value of the conversion feature for the period from October 17, 2018 to December 18, 2018 of $25.6 million as other income on the consolidated statements of operations and comprehensive loss.

As of December 18, 2018, the fair value of the conversion option was reclassified to additional paid-in capital on the consolidated balance sheets as it qualified for a scope exception from derivative accounting.

Accordingly, the conversion feature will no longer be measured at fair value on our financial statements.

On November 14, 2019 and December 23, 2019, we entered into privately negotiated agreements to exchange approximately $114.3 million and $7.4 million, respectively, aggregate principal amount of the 2018 Notes for (i) approximately $62.9 million and $4.0 million, respectively, aggregate principal amount of 5.00% Convertible Senior Second Lien Notes due 2048 (the 2019 Notes) (ii) an aggregate of approximately $11.4 million and $0.7 million in 2018 Notes principal repayment and (iii) accrued interest on the 2018 Notes through November 14, 2019 and December 23, 2019, respectively.

The 2019 Notes are governed by the terms of an indenture (the 2019 Indenture).

The 2019 Notes are senior secured obligations of the Company and bear interest at 5.00% per annum, payable semi-annually in arrears on May 1 and November 1 of each year.

The 2019 Notes will mature on November 1, 2048, unless earlier repurchased, redeemed or converted in accordance with the terms.

The 2019 Notes are convertible into shares of our common stock, par value $0.0001 per share, together, if applicable, with cash in lieu of any fractional share, at an initial conversion rate of 606.0606 shares of common stock per $1,000 principal amount of the 2019 Notes, which corresponds to an initial conversion price of approximately $1.65 per share of common stock and represents a conversion premium of approximately 52.8% above the last reported sale price of our common stock of $1.08 per share on November 11, 2019.

We will have the right, exercisable at our option, to cause all 2019 Notes then outstanding to be converted automatically if the “Daily VWAP”

(as defined in the 2019 Indenture) per share of our common stock equals or exceeds 121% of the conversion price, which equates to approximately $2.00 per share, on each of at least 20 VWAP Trading Days, whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date we first issued the 2019 Notes.

(Company’s Mandatory Conversion Option)

Upon conversion, converting noteholders will be entitled to receive accrued interest on their converted 2019 Notes.

In addition, if the 2019 Notes are converted with a conversion date that is on or prior to November 1, 2020, other than in connection with the Company’s exercise of the Company’s Mandatory Conversion Option then

the consideration due upon any such conversion will also include a cash interest make-whole payment for all future scheduled interest payments on the converted 2019 Notes through November 1, 2020 (2019 Notes Interest Make-Whole Provision).

We assessed all terms and features of the 2019 Notes in order to identify any potential embedded features that would require bifurcation.

As part of this analysis, we assessed the economic characteristics and risks of the 2019 Notes, including the conversion, put and call features.

In consideration of the 2019 Notes Interest Make-Whole Provision, we concluded the provision required bifurcation as a derivative.

The fair value of the 2019 Interest Make-Whole Provision was determined using a Monte Carlo model.

It was determined that the fair value of the derivative upon the November 14, 2019 and December 23, 2019 issuance of the 2019 Notes was an aggregate of $0.2 million, and we recorded this amount as a derivative liability and the offsetting amount as a debt discount as a reduction to the carrying value of the 2019 Notes on the closing dates.

During the period November 14, 2019 to December 31, 2019, we paid out approximately $0.4 million in 2019 Interest Make-Whole payments which was recorded as a reduction of the derivative liability.

As of December 31, 2019, we determined the fair value of the 2019 Interest Make-Whole Provision was $0.5 million.

We recorded the change in the fair value of the 2019 Interest Make-Whole Provision for the period from November 14, 2019 to December 31, 2019 of $0.6 million as other expense on the consolidated statements of operations and comprehensive loss.

As of December 31, 2019, there was $28.3 million and $57.4 million aggregate principal amount outstanding of the 2018 Notes and 2019 Notes, respectively, for a total of $85.7 million aggregate principal amount outstanding compared to $150.0 million aggregate principal amount outstanding of 2018 Notes as of December 31, 2018.

During the 2019 Period, 2019 Note holders converted $9.5 million aggregate principal of 2019 Notes in exchange for 5,767,872 shares of common stock and $0.4 million of cash for 2019 Interest Make-Whole Provision.

Funding requirements

We expect to continue to incur significant expenses and operating losses.

We anticipate that our expenses and operating losses will continue as we:

commercialize COPIKTRA;

continue our ongoing clinical trials, including with COPIKTRA, defactinib and CH5126766;

initiate additional clinical trials for our product candidates;

maintain, expand and protect our intellectual property portfolio;

acquire or in-license other products and technologies;

hire additional clinical, development and scientific personnel;

add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts;

establish and maintain a sales, marketing and distribution infrastructure to commercialize COPIKTRA or any products for which we may obtain marketing approval.

We expect our existing cash resources, including proceeds from the sale of Common Stock in March 2020 along with the revenue we expect to generate from COPIKTRA will be sufficient to fund our obligations for at least the next twelve months from the date of filing of this Annual Report on Form 10-K.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated

with completing the development of our current product candidates.

Our future capital requirements will depend on many factors, including:

the costs and timing of commercialization activities for COPIKTRA and the product candidates for which we expect to receive marketing approval;

the scope, progress and results of our ongoing and potential future clinical trials;

the extent to which we acquire or in-license other products and technologies;

the costs, timing and outcome of regulatory review of our product candidates (including our efforts to seek approval and fund the preparation and filing of regulatory submissions);

revenue received from commercial sales of COPIKTRA and our product candidates, should any of our other product candidates also receive marketing approval;

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

our ability to establish collaborations or partnerships on favorable terms, if at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders.

Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our contractual obligations at December 31, 2019:

(in thousands)

Operating lease obligations

2019 Term Loan Agreement

License agreements (1)

As discussed in Note 16 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we are party to several agreements to license intellectual property.

The license agreements may require us to pay upfront license fees, ongoing annual license maintenance fees, milestone payments, minimum royalty payments, as well as reimbursement of certain patent costs incurred by the licensors, as applicable.

We have not included these payments in the table above because:

there were no upfront license fees payable in future periods;

no annual license maintenance fees;

we cannot estimate if milestone and/or royalty payments will occur in future periods;

and patent cost reimbursement costs are perpetual and the agreements are cancelable by us at any time upon prior written notice to the licensor.

OFF‑BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off‑balance sheet arrangements, as defined under Securities and Exchange Commission rules.

TAX LOSS CARRYFORWARDS

As of December 31, 2019, we had federal and state net operating loss carryforwards of $371.7 million and $392.3 million, respectively, which are available to reduce future taxable income.

We also had federal and state tax credits of $20.6 million and $3.0 million, respectively, which may be used to offset future tax liabilities.

The net operating loss and tax credit carryforwards will expire at various dates through 2039, except for $136.3 million of federal net operating loss carryforwards which may be carried forward indefinitely.

Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three‑year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions.

This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.

The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change.

Subsequent ownership changes may further affect the limitation in future years.

At December 31, 2019, we recorded a 100% valuation allowance against our net operating loss and tax credit carryforwards of $128.4 million, as we believe it is more likely than not that the tax benefits will not be fully realized.

In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period of determination.

RECENTLY ADOPTED ACCOUNTING STANDARDS

In June 2018, the FASB issued ASU 2018-07, Compensation –

Stock Compensation (Topic 718):

ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract and services from nonemployees.

ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions accounted for under ASC 606.

ASU 2018-07 was effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, but no earlier than the date on which ASC 606 is adopted.

The Company adopted this standard prospectively effective January 1, 2019.

The adoption of this ASU did not have an effect on the Company’s consolidated financial statements or related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which supersedes the guidance under FASB Accounting Standards Codification (ASC) Topic 840, Leases , resulting in the creation of FASB ASC Topic 842, Leases (ASC 842).

ASU 2016-02 requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.

The guidance also eliminates the current real estate-specific provisions for all entities.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842):

Targeted Improvements , which provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02.

Under the amendments in ASU 2018-11, entities may elect not to restate the comparative periods presented when transitioning to ASC 842 (optional transition method) and lessors may elect not to separate lease and non-lease components when certain conditions are met (lessor relief practical expedient).

The optional transition method applies to entities that have not yet adopted ASU 2016-02, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted.

The Company adopted this standard using the optional transition method effective January 1, 2019.

Upon adoption of this standard, the Company recognized a lease liability and a corresponding right-of use asset of $4.0 million and $3.4 million, respectively, and derecognized a deferred rent liability and a corresponding lease incentive obligation of $0.4 million and $0.2 million, respectively.

The Company did not record any cumulative effect adjustment to accumulated deficit as a result of adopting this standard.

The Company also elected to adopt the practical expedients upon transition, which permit companies to not reassess lease identification, classification, and initial direct costs under ASU 2016-02 for leases that commenced prior to the effective date.

Total stockholders’ equity

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity