Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and as set forth under “Risk Factors.” Please also refer to the section under the heading “Forward-Looking Statements.”
OVERVIEW
We are a development-stage biopharmaceutical company committed to the development and commercialization of new medicines to improve the lives of patients diagnosed with cancer. Our pipeline is focused on novel small molecule drugs that inhibit critical signaling pathways in cancer that promote cancer cell survival and tumor growth, particularly RAF/MEK inhibition and FAK inhibition.
Our most advanced product candidates, VS-6766 and defactinib, are being investigated in both preclinical and clinical studies for treatment of various solid tumors, including, low-grade serous ovarian cancer, non-small cell lung cancer, colorectal cancer, pancreatic cancer, uveal melanoma, and endometrial cancer. We believe that these compounds may be beneficial as therapeutics either as single agents or when used together in combination with other agents, other pathway inhibitors or other current and emerging standard of care treatments in cancers that do not adequately respond to currently available therapies.
On August 10, 2020, we and Secura Bio, Inc. (Secura) signed an Asset Purchase Agreement (Secura APA) and on September 30, 2020, the transaction closed. Pursuant to the Secura APA, we sold our exclusive worldwide license for the research, development, commercialization, and manufacture in oncology indications of products containing duvelisib. Refer to Note 16 License, collaboration and commercial agreements for a detailed description of the terms and conditions of the Secura APA. With the transition of the duvelisib program to Secura, we are focusing our efforts on our lead product candidates, VS-6766 and defactinib.
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 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, the upfront payment under the Secura APA, the issuance of the 2018 Notes in October 2018 and the proceeds in connection with the PIPE. After the U.S. commercial launch of COPIKTRA on September 24, 2018 through our ownership period ending in September 2020, we financed a portion of our operations through product revenue.
As of December 31, 2020, we had an accumulated deficit of $592.5 million. Our net loss was $67.7 million, $149.2 million, and $72.4 million, for the years ended December 31, 2020, 2019 and 2018, respectively. We expect to incur significant expenses and operating losses for the foreseeable future as a result of the continued research and development of VS-6766 and defactinib. As of December 31, 2020, we had cash, cash equivalents, restricted cash, and investments of $147.5 million. We expect our existing cash resources 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, through future milestones and royalties received through the Secura APA 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.
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FINANCIAL OPERATIONS OVERVIEW
Revenue
From our U.S. commercial launch of COPIKTRA on September 24, 2018 through our ownership period ending in September 2020 product revenue, net represented the gross sales of COPIKTRA in the United States less provisions for product sales allowances and accruals. These provisions included trade allowances, rebates, chargebacks and discounts, product returns and other incentives. We sold COPIKTRA to a limited number of specialty pharmacies and specialty distributors. The provisions for product sales and allowances fluctuated 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.
Sale of licenses and related assets revenue to date have been generated through our sale of our duvelisib license and related assets to Secura. The sale included intellectual property related to duvelisib in oncology indications, certain existing duvelisib inventory, certain manufacturing equipment and, claims and rights under certain contracts pertaining to duvelisib including net contract prepaid balances.
Costs of sales - product
Cost of sales - product consisted of costs of COPIKTRA on which product revenue was recognized, royalties owed to Healthcare Royalty Partners (HCR) and Infinity we incurred 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 2020, 2019 and 2018 were expensed prior to the September 2018 FDA marketing approval and, therefore, are not included in cost of sales during this period.
Costs of sales - sale of COPIKTRA license and related assets
Cost of sales - sale of COPIKTRA license and related assets represent assets delivered to Secura as part of the sale pursuant to the Secura APA. This includes our intangible asset, certain duvelisib inventory, net duvelisib contract prepaid balances and manufacturing equipment.
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;
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● facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of equipment, and laboratory supplies; and
● costs associated with COPIKTRA prior to us concluding that regulatory approval is probable and that its net realizable value is recoverable.
Costs for certain development activities, such as clinical trial expenses, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided us by our vendors on their actual costs incurred or level of effort expended. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the consolidated balance sheets as prepaid expenses and other current assets or accrued expenses.
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 duvelisib 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 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, 2020, 2019 and 2018. 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 $8.9 million, $11.3 million and $9.2 million of personnel costs for the years ended December 31, 2020, 2019 and 2018, respectively.
Year ended December 31,
2020
2019
2018
(in thousands)
(in thousands)
(in thousands)
COPIKTRA
$
13,454
$
25,518
$
24,771
Defactinib/VS-6766
12,073
1,823
2,230
Unallocated and other research and development expense
13,914
16,936
14,604
Unallocated stock-based compensation expense
1,935
1,501
2,043
Total research and development expense
$
41,376
$
45,778
$
43,648
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;
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● 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; and
● 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 for the year ended December 31, 2020 and December 31, 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.
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Revenue recognition
We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services in accordance with Accounting Standards Codification (ASC) Topic 606 Revenue from Contracts with Customers (ASC 606). To determine revenue recognition for contracts with our customers, we perform the following five step assessment: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine which goods and 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
Product Revenue, Net – We sold COPIKTRA to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resold 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 entered 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 recognized 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 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 it is entitled with respect to sales made.
The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period. Our analyses contemplate the application of the constraint in accordance with ASC 606. For the years ended December 31, 2020, 2019, and 2018, we determined a material reversal of revenue would not occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances: We generally provided 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 compensated our specialty distributor customers for sales order management, data, and distribution services. We 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 for the years ended December 31, 2020, 2019, and 2018.
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Third-Party Payer Chargebacks, Discounts and Fees: We executed contracts with Third-Party Payers which allowed 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 charged us for the difference between what they paid 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 compensated 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 for the years ended December 31, 2020, 2019, and 2018.
Government Rebates: We were subject to discount obligations under state Medicaid programs and Medicare. These reserves were 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 offered 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; and
● Product that we, at our sole discretion, has specified can be returned for credit.
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.
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Licenses and sales of intellectual property
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 or sale of our license, (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 on license arrangements, 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 as of progress of each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, is subject to estimates us 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.
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Milestone Payments: At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control 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, adjusts our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties: For license 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 yet recognized any royalty revenue resulting from any of our licensing arrangements.
For sales of license and intellectual property, that include sale-based royalties, including milestone payments based on a level of sales, we evaluate whether the royalties and sales based milestones are considered probable of being achieved and estimate the amount of royalties to include over the contractual term using the expected value method and estimate the sales-based milestones using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated royalty and milestone value is included in the transaction price. Royalties and sales-based milestones for territories for which there is not regulatory approval are not considered probable until such regulatory approval is achieved. We evaluate factors such as whether consideration is outside of our control, timeline for when the uncertainty will be resolved and historical sales of COPIKTRA if applicable. 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 amount of royalty revenue to be received 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.
Collaborative Arrangements: Contracts are considered to be collaborative arrangements when they satisfy the following criteria defined in ASC Topic 808, Collaborative Arrangements (ASC 808): (i) the parties to the contract must actively participate in the joint operating activity and (ii) the joint operating activity must expose the parties to the possibility of significant risk and rewards, based on whether or not the activity is successful. Payments received from or made to a partner that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction or increase to research and development expense, respectively.
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
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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 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 historical exercise data 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, The computation of expected volatility is based 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. We account for forfeitures as they occur.
We issue shares under our 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.
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As of December 31, 2020, there was approximately $7.1 million of unrecognized stock-based compensation related to stock options, which are expected to be recognized over a weighted-average period of 2.6 years. As of December 31, 2020, there was approximately $3.8 million of unrecognized stock-based compensation related to RSUs, which are expected to be recognized over a weighted-average period of 1.5 years. See Note 2 . Significant accounting policies and Note 11. Stock-based compensation to our consolidated financial statements located in this Annual Report on Form 10-K for further discussion of stock-based compensation.
Intangible Assets
We record finite-lived intangible assets related to certain capitalized milestone payments at their fair value. These assets are amortized on a straight-line basis over their remaining useful lives, which are estimated based on the shorter of the remaining underlying patent life or the estimated useful life of the underlying product.
We assess our finite-lived intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment include the receipt of additional clinical or nonclinical data regarding one of our drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, we perform a recoverability test by comparing the sum of the estimated undiscounted cash flows of each finite-lived intangible asset or asset group to its carrying value on the consolidated balance sheets. If the undiscounted cash flows used in the recoverability test are less than the carrying value, we would determine the fair value of the finite-lived intangible asset and recognize an impairment loss if the carrying value of the finite-lived intangible asset exceeds its fair value.
Leases
Effective January 1, 2019, we adopted ASC Topic 842, Leases (ASC 842). This standard requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.
At the inception of an arrangement, 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.
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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,
2020
2019
2018
Revenue:
Product revenue, net
15,232
12,339
1,718
License and collaboration revenue
2,912
5,117
25,000
Sale of COPIKTRA license and related assets
70,000
—
—
Transition services revenue
372
—
—
Total revenue
88,516
17,456
26,718
Operating expenses:
Cost of sales - product
$
1,765
$
1,238
$
165
Cost of sales - intangible amortization
793
1,569
423
Cost of sales - sale of COPIKTRA license and related assets
31,187
—
—
Research and development
41,376
45,778
43,648
Selling, general and administrative
62,755
101,212
77,265
Total operating expenses
137,876
149,797
121,501
Loss from operations
(49,360)
(132,341)
(94,783)
Other (expense)/ income
(1,313)
(641)
25,556
Interest income
515
4,381
2,603
Interest expense
(15,794)
(20,608)
(5,810)
Loss on debt extinguishment
(1,580)
—
—
Net loss before income taxes
(67,532)
(149,209)
(72,434)
Income tax expense
(194)
—
—
Net loss
$
(67,726)
$
(149,209)
$
(72,434)
Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019
Product revenue, net. Product revenue net for the year ended December 31, 2020 (2020 Period) was $15.2 million compared to $12.3 million for the year ended December 31, 2019 (2019 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 $2.9 million increase was primarily driven by an increase in product shipments for COPIKTRA as a result of greater market penetration. Pursuant to the Secura APA discussed in greater detail above within section Item 1. Business within heading Licenses and commercial agreements , we have sold our license to sell COPIKTRA to treat patients in oncology indications and therefore will not recognize COPIKTRA product revenue in future periods.
License and collaboration revenue. License and collaboration revenue for the 2020 Period of $2.9 million comprised of Sanofi achieving two development milestones during the 2020 Period totaling $2.5 million and $0.4 million of duvelisib shipments to Sanofi, Yakult Honsha Co., Ltd. (Yakult), and CSPC Pharmaceutical Group Limited (CSPC). License and collaboration revenue for the 2019 Period was $5.1 million, comprised of a $5.0 million upfront payment received in connection to our collaboration agreement with Sanofi and $0.1 million related to the shipment of clinical supply of duvelisib to Yakult and CSPC during the 2019 Period.
Sale of COPIKTRA license and related assets revenue. Sale of COPIKTRA license and related assets revenue for the 2020 Period was comprised of a $70.0 million upfront payment recognized under the Secura APA discussed in greater detail above within section Item 1. Business within heading Licenses and Commercial Agreements . We had no sale of COPIKTRA license and related assets revenue for the 2019 Period.
Transition services revenue. Transition services revenue for the 2020 Period of $0.4 million consisted of us providing certain support functions pursuant to the Secura transition service agreement, which was entered into in
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connection with the Secura APA. The services were provided at a mutually agreed upon rate. We have no transition services revenue for the 2019 Period.
Costs of sales – product. Costs of sales – product for the 2020 Period was $1.8 million compared to $1.2 million for the 2019 Period. The $0.6 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 2020 Period as compared to the 2019 Period. Cost of sales - product consisted of costs associated with the manufacturing of COPIKTRA, royalties owed to HCR and Infinity on such sales, and certain period costs. We expensed the manufacturing costs of COPIKTRA as operating expenses in the periods prior to July 1, 2018. In the third quarter of 2018, we began capitalizing inventory costs for COPIKTRA manufactured in preparation for our launch in the United States based on our evaluation of, among other factors, the status of the COPIKTRA NDA in the United States and the ability of our third-party suppliers to successfully manufacture commercial quantities of COPIKTRA. Certain of the costs of COPIKTRA units recognized as revenue during the 2020 Period and 2019 Period were expensed prior to the September 2018 FDA marketing approval and, therefore, are not included in cost of sales - product during this period.
Cost of Sales – intangible amortization. Cost of sales – intangible amortization for the 2020 Period was approximately $0.8 million compared to $1.6 million for the 2019 Period. In July 2020, our intangible asset met the Held for Sale criteria and we ceased amortization. Cost of sales – intangible amortization was related to the COPIKTRA finite-lived intangible asset which we recognized and began amortizing in September 2018.
Cost of sales – sale of COPIKTRA license and related assets. Cost of sales – sale of COPIKTRA license and related assets for the 2020 Period was $31.2 million consisting of certain assets delivered to Secura under the Secura APA. For the 2020 Period, we recognized approximately $19.2 million, $6.0 million, $5.8 million and $0.2 million for the intangible asset, certain duvelisib inventory, net duvelisib contract prepaid balances and manufacturing equipment, respectively which were delivered to Secura as part of the sale. There was no cost of sales – sale of COPIKTRA license and related assets for the 2019 Period.
Research and development expense. Research and development expense for the 2020 Period was $41.4 million compared to $45.8 million for the 2019 Period. The $4.4 million decrease from the 2019 Period to the 2020 Period was primarily related to a decrease of $7.7 million in CRO costs, $2.0 million in personnel related costs, including non-cash stock-based compensation as a result of reduced headcount, partially offset by an increase of $3.0 million of license fees due to a non-refundable payment of $3.0 million to Chugai in the 2020 Period for the VS-6766 license described further above within section Item 1. Business within heading Licenses and commercial agreements, increase of $1.7 million in drug substance and drug product costs, and $0.6 million in other costs. In future periods, we expect expenses for VS-6766 and defactinib to increase as we have commenced our registration directed trials and we expect our COPIKTRA expenses to significantly decrease.
Selling, general and administrative expense. Selling, general and administrative expense for the 2020 Period was $62.8 million compared to $101.2 million for the 2019 Period. The decrease of $38.4 million from the 2019 Period to the 2020 Period primarily resulted from a decrease of $17.7 million in personnel related costs, including non-cash stock-based compensation, as a result of reduced headcount, $15.9 million in consulting and professional fees, primarily related to the support of commercial launch activities in the 2019 Period, $3.8 million in reduced travel costs, and $1.0 million in other costs. We expect selling, general and administrative expense to decrease in future periods.
Other (expense)/ income. Other expense for the 2020 Period and 2019 Period of approximately $1.3 million and $0.6 million, respectively, was for the mark-to-market adjustments related to the bifurcated make-whole interest provision derivative liability related to the 2019 Notes. All 2019 Notes have converted to common stock and the derivative liability will no longer be remeasured.
Interest income. Interest income for the 2020 Period was $0.5 million compared to $4.4 million for the 2019 Period. The decrease of $3.9 million from the 2019 Period to the 2020 period was primarily due to lower investment cost basis and lower interest rates on investments.
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Interest expense. Interest expense for the 2020 Period was $15.8 million compared to $20.6 million for the 2019 Period. The decrease of $4.8 million was primarily due to reduced interest expense as a result of the reduction in aggregate Notes principal balance. There was aggregate principal amount outstanding of Notes of $28.3 million, $85.7 million, and $150.0 million at December 31, 2020, December 31, 2019, and December 31, 2018, respectively. The decrease is partially offset by non-cash interest expense of $8.1 million recorded upon conversion of the 2019 Notes to common stock recognized during the first three months of the 2020 Period.
Loss on debt extinguishment. Loss on debt extinguishment for the 2020 Period of $1.6 million represents the loss recognized on early extinguishment of our Hercules term loan facility. On November 9, 2020, we repaid in full all principal, accrued and unpaid interest, fees, and expenses under the Amended Loan Agreement with Hercules in an aggregate amount of $37.4 million (the Payoff Amount). The Payoff Amount, excluding accrued interest, exceeded the carrying amount of the Hercules debt on November 9, 2020 by $1.6 million which was recorded as a loss on debt extinguishment. There was no loss on debt extinguishment in the 2019 Period.
Income tax expense. Income tax expense for the 2020 Period of $0.2 million primarily related to state income tax as a result of the sale of COPIKTRA license and related assets. There was no income tax expense in the 2019 Period.
Restructuring. On October 28, 2019, we committed to an operational plan to reduce overall operating expenses, including the elimination of approximately 40 positions and other cost-saving measures. We recorded $1.2 million expense in the 2019 Period, for one-time termination benefits to the affected employees, including cash severance payments, healthcare benefits, and outplacement assistance.
On February 27, 2020, we committed to an operational plan to reduce overall operating expenses, including the elimination of approximately 31 positions and other cost-saving measures.
In August 2020, in connection with the duvelisib sale to Secura pursuant to the Secura APA we committed to a strategic restructuring (August 2020 Restructuring). The August 2020 restructuring included a workforce reduction of approximately 41 positions primarily in our commercial operations department.
During the 2020 Period, we recorded an aggregate expense of $4.6 million for restructuring expenses, which is reflected in the consolidated statements of operation and comprehensive loss as selling general, and administrative expense and research and development expense of $4.1 million and $0.5 million, respectively, for one-time termination benefits for employee severance, benefits, and related costs.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
We have financed our operations to date primarily through public and private 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 Yakult, CSPC, and Sanofi, the upfront payment under the Secura APA, the issuance of 2018 Notes in October 2018, and the proceeds in connection with the PIPE. With the commercial launch of COPIKTRA in the United States in September 2018, we had recently begun financing a portion of our operations through product revenue. As of December 31, 2020, in connection with the Secura APA, we no longer sell COPIKTRA in the United States. We expect to finance a portion of our business through future milestones and royalties received pursuant to the Secura APA.
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As of December 31, 2020, we had $147.5 million in cash, cash equivalents, restricted cash and investments. We primarily invest our cash, cash equivalents and investments in U.S. Government money market funds, government bonds, corporate bonds and commercial paper of publicly traded companies.
Risks and uncertainties include those identified under Item 1A. Risk Factors, in this Annual Report on Form 10-K.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):
Year ended December 31,
2020
2019
2018
Net cash (used in) provided by:
Operating activities
$
(33,506)
$
(138,518)
$
(74,515)
Investing activities
(47,363)
89,613
(138,377)
Financing activities
69,630
(2,441)
261,162
(Decrease) increase in cash, cash equivalents and restricted cash
$
(11,239)
$
(51,346)
$
48,270
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 $105.0 million decrease in cash used in operating activities for the 2020 Period compared to the 2019 Period was primarily due to a decrease in net loss primarily driven by increased revenue , and decreased selling, general and administrative expenses, and a net decrease in components of working capital.
Investing activities. The cash used by investing activities for the 2020 Period relates to the net purchases of investments of $47.3 million. The cash provided by investing activities for the 2019 Period relates to the net maturities of investments of $89.6 million.
Financing activities. The cash provided by financing activities for the 2020 Period primarily represents $93.8 million in net proceeds from sales of our common stock under the Purchase Agreement described below, $12.2 million in net proceeds received under our at-the-market equity offering program, and $3.0 million of proceeds received related to exercise of stock options and employee stock purchase plan. This is partially offset by $37.4 million for repayment of our Hercules Capital, Inc. (Hercules) term loan facility, $1.8 million of interest-make whole payments on the 2019 Notes and $0.3 million of payments for settlement of restricted stock for tax withholdings. T he 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 options and employee stock purchase plan.
On February 27, 2020, we entered into a Purchase Agreement with certain institutional investors in which we agreed to sell 46,511,628 shares of common stock at a purchase price of $2.15 per share, which represents 12.6% premium to the last reported sale price of our common stock of $1.91 per share on February 27, 2020. On March 3, 2020, the closing occurred. The aggregate proceeds net of underwriting discounts and offering costs, were approximately $93.8 million.
In March 2017, we established an at-the-market equity offering program pursuant to which we 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. In August 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 at-the-market equity offering program to $75.0 million.
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During the year ended December 31, 2020, we sold 6,769,559 shares under the at-the market equity offering program for net proceeds of approximately $12.2 million (after deducting commissions and other offering expenses). Through December 31, 2020, we have sold a total of 18,287,913 shares under this program for net proceeds of approximately $59.6 million (after deducting commissions and other offering expenses). As of December 31, 2020, we can issue an aggregate amount of $14.1 million of common stock under this program.
On March 21, 2017, we entered into a term loan facility of up to $25.0 million with Hercules. The term loan facility is governed by a loan and security agreement, dated March 21, 2017 (the Original Loan Agreement). The Original Loan Agreement was amended on January 4, 2018, March 6, 2018, October 11, 2018, April 23, 2019, and November 14, 2019 (the Amended Loan Agreement) to increase the total borrowing limit under the Original Loan Agreement from up to $25.0 million to up to $75.0 million, pursuant to certain conditions of funding.
On November 9, 2020, we repaid in full all principal, accrued and unpaid interest, fees, and expenses under the Amended Loan Agreement with Hercules in an aggregate amount of $37.4 million (the Payoff Amount). The Payoff Amount includes the principal balance of $35.0 million, final payment fee of $1.8 million, prepayment penalty fee of $0.5 million, and accrued and unpaid interest of $0.1 million. On November 9, 2020 the Amended Loan Agreement was terminated along with Hercules’ commitment to provide funding under any future term loans. All liens on substantially all of our assets to secure the loans under the Amended Loan Agreement have been terminated and released.
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.
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.
On November 6, 2020, we entered into a privately negotiated agreement with an investor who is a holder of our 2018 Notes to exchange approximately $28.0 million aggregate principal amount of 2018 Notes for approximately $28.0 million aggregate principal amount of newly issued 5.00% Convertible Senior Notes due 2048 (the 2020 Notes). The issuance of the 2020 Notes closed on November 13, 2020. The 2020 Notes are governed pursuant to the Base Indenture between us and Wilmington dated as of October 17, 2018 as supplemented by the second supplemental indenture thereto dated as of November 13, 2020 (the Supplement Indenture and together with the Base Indenture, the 2020 Indenture).
We will have the right, exercisable at our option, to cause all 2020 Notes then outstanding to be converted automatically if the “Daily VWAP” (as defined in the 2020 Indenture) per share of our common stock equals or exceeds 123.08% of the conversion price on each of at least 20 “VWAP Trading Days” (as defined in the 2020
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Indenture), whether or not consecutive, during any 30 consecutive VWAP Trading Day period commencing on or after the date we first issued the 2020 Notes.
The initial conversion rate for the 2020 Notes is 307.6923 shares of our common stock per $1,000 principal amount of the 2020 Notes, which is equivalent to an initial conversion price of approximately $3.25 per share, representing an approximately 153.9% premium to the sale price of $1.28 per share of our common stock on November 5, 2020, as reported on the Nasdaq Global Market. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends, but will not be adjusted for any accrued and unpaid interest.
Prior to November 1, 2023, we will not have the right to redeem the 2020 Notes. On or after November 1, 2023, we may elect to redeem the 2020 Notes, in whole or in part, at a cash redemption price equal to the principal amount of the 2020 Notes to be redeemed, plus accrued and unpaid interest, if any.
Unless we have previously called all outstanding 2020 Notes for redemption, the 2020 Notes will be subject to repurchase by us at the holders’ option on each of November 1, 2023, November 1, 2028, November 1, 2033, November 1, 2038 and November 1, 2043 (or, if any such date is not a business day, on the next business day) at a cash repurchase price equal to the principal amount of the 2020 Notes to be repurchased, plus accrued and unpaid interest, if any.
Upon conversion of the 2020 Notes, holders will receive a cash payment equal to the accrued and unpaid interest on the converted 2020 Notes.
The 2020 Notes are our senior unsecured obligations and will be senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the 2020 Notes, and equal in right of payment with our existing and future indebtedness that is not so subordinated, and effectively subordinated to our existing and future indebtedness, to the extent of the value of the collateral securing such indebtedness. The 2020 Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
As of December 31, 2020, there was $0.3 million and $28.0 million aggregate principal amount outstanding of 2018 Notes and 2020 Notes, respectively, for a total of $28.3 million aggregate principal amount outstanding compared to $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 as of December 31, 2019.
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:
● continue our ongoing clinical trials, including with VS-6766 and defactinib;
● initiate additional clinical trials for our product candidates;
● maintain, expand and protect our intellectual property portfolio;
● acquire or in-license other products and technologies;
● hire additional clinical, development and scientific personnel;
● add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts; and
● establish and maintain a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval.
We expect our existing cash resources will be sufficient to fund our obligations for at least the next twelve months from the date of filing of this Quarterly Report on Form 10-Q. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to
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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 our 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 product candidates 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 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; and
● Receipt of milestone payments and royalties pursuant to the Secura APA including timing of such receipt.
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 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, 2020:
(in thousands)
Total
2021
2022 - 2023
2024 - 2025
Thereafter
Operating lease obligations
$
4,745
$
1,019
$
2,099
$
1,627
$
—
2018 Notes
300
—
—
—
300
2020 Notes
28,000
—
—
—
28,000
License agreements (1)
—
—
—
—
—
(1) As discussed in N ote 16. License, collaboration and commercial agreements to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we are party to several agreements to license intellectual property. The license agreements may require us to pay upfront license fees, ongoing annual license maintenance fees, milestone payments, minimum royalty payments, as well as reimbursement of certain patent costs incurred by the licensors, as applicable. We have not included these payments in the table above because: there were no upfront license fees payable in future periods; no annual license maintenance fees; we cannot estimate if milestone and/or royalty payments will occur in future periods; and patent cost reimbursement costs are perpetual and the agreements are cancelable by us at any time upon prior written notice to the licensor.
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OFF-BALANCE SHEET ARRANGEMENTS
We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.
TAX LOSS CARRYFORWARDS
As of December 31, 2020, we had federal and state net operating loss carryforwards of $348.5 million and $231.9 million, respectively, which are available to reduce future taxable income. We also had federal and state tax credits of $1.6 million and $0.6 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 2037, except for $154.5 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, 2020, we recorded a 100% valuation allowance against our net operating loss and tax credit carryforwards of $88.7 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.
Based on our analysis under Section 382 of the Internal Revenue Code and similar provisions under state law, we believe that $41.4 million of our federal net operating loss carryforwards and $168.0 million of our state net operating loss carryforwards are limited by Section 382 and similar provisions under state law as of December 31, 2020 and have been written off in the 2020 Period. Due to limitations under Section 382 we believe that our Research & Development (R&D) and Orphan Drug (OD) credits will be limited as of December 31, 2020. The portion of R&D and OD credits that were determined to be limited by Section 382 have been written off as of December 31, 2020. The remaining unused carryforwards remain available for future periods. Due to our full valuation allowance the write off of net operating loss carryforwards and R&D and OD credits did not have any impact to the statements of operation and comprehensive loss for the 2020 Period.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-18, Collaborative Arrangements (ASU 2018-18): Clarifying the Interaction between ASC 808 and ASC 606, which makes targeted improvements for collaborative arrangements to clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, adds unit of account guidance in ASC 808 to align with guidance in ASC 606, and clarifies presentation of certain revenues with a collaborative arrangement participant which are not directly related to a third party. ASU 2018-18 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. This guidance requires entities to adopt on a retrospective basis to the date we adopted ASC 606. We adopted ASU 2018-18 as of January 1, 2020 on a retrospective basis to January 1, 2018, the date at which we adopted ASC 606, and it did not have a material impact on our consolidated financial statements or disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We adopted this standard effective January 1, 2020 on a prospective basis. The adoption of this ASU did not have an effect on our financial statements or disclosures.
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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. ASU 2018-13 is effective for all entities for annual and interim periods beginning after December 15, 2019. We adopted this standard effective January 1, 2020 on a prospective basis. The adoption of this ASU did not have an effect on tour financial statements or disclosures.