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.”
O VERVIEW
We are a late-stage development biopharmaceutical company, with an ongoing registration directed trial, committed to advancing new medicines for patients battling cancer. Our pipeline is focused on novel anticancer agents 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, avutometinib and defactinib, are being investigated in both preclinical and clinical studies for the treatment of various solid tumors, including, but not limited to LGSOC, NSCLC, pancreatic cancer, CRC, and melanoma. We believe that avutometinib may be beneficial as a therapeutic as a single agent or when used together in combination with defactinib, 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 signed the Secura APA and on September 30, 2020, the transaction closed. Pursuant to the Secura APA, we sold to Secura our exclusive worldwide license for the research, development, commercialization, and manufacture in oncology indications of products containing duvelisib. Refer to Note 13. License, collaboration and commercial agreements in our consolidated financial statements located in this Annual Report on Form 10-K 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, avutometinib 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 through our ownership period ending in September 2020. We have financed our operations to date primarily through public offerings of our common stock and pre-funded warrants, offerings of convertible notes, 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 and milestone payments under our license and collaboration agreements with Sanofi, CSPC, and Yakult, the upfront payment and milestone payments received under the Secura APA, the proceeds in connection with the private investment in public equity (the “PIPE”), and our loan and security agreement executed with Oxford in March 2022, sales of Series B Convertible Preferred Stock. Additionally, from our 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, 2023, we had an accumulated deficit of $824.9 million. Our net loss was $87.4 million, $73.8 million, and $71.2 million, for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, we had cash, cash equivalents, and investments of $137.1 million. In accordance with applicable accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within 12 months after the date of the issuance of the consolidated financial statements. We anticipate operating losses may continue for the foreseeable future since we do not yet have regulatory approval to sell any of our product candidates, and we continue to incur operating costs to execute our strategic plan, including costs related to research and development of our product candidates and commercial readiness activities. These conditions raise substantial doubt about our ability to continue as a going concern for 12 months after the date the consolidated financial statements are issued.
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We expect to finance our operations with our existing cash, cash equivalents and investments, through potential future milestones and royalties received pursuant to the Secura APA, through the loan and security agreement with Oxford, or through other strategic financing opportunities that could include, but are not limited to collaboration agreements, future offerings of our equity, or the incurrence of debt. However, given the risk associated with these potential strategic or financing opportunities, they are not deemed probable for purposes of the going concern assessment. 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. Therefore, there is substantial doubt about our ability to continue as a going concern.
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FINANCIAL OPERATIONS OVERVIEW
Revenue
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.
Research and development expenses
Research and development expenses consist of costs associated with our research activities, including the development of our product candidates. Research and development expenses include product/ product candidate and/or project-specific costs, as well as unallocated costs. We allocate the expenses related to external research and development services, such as contract research organizations (“CROs”), clinical sites, manufacturing organizations and consultants, by project and/or product candidate. We use our employee and infrastructure resources in a cross-functional manner across multiple research and development projects. Our project costing methodology does not allocate personnel, infrastructure and other indirect costs to specific clinical programs or projects.
Product/ product candidate/ project specific costs include:
● direct third-party costs, which include expenses incurred under agreements with CROs, the cost of consultants who assist with the development of our product candidates on a program-specific basis, clinical site costs, and any other third-party expenses directly attributable to the development of the product candidates;
● costs related to contract manufacturing operations including manufacturing costs in connection with producing product candidates for use in conducting preclinical and clinical studies. Costs associated with manufacturing avutometinib are included in “Avutometinib manufacturing and non-clinical trial specific” category below as these costs relate to both the “Avutometinib + defactinib” and “Avutometinib + other combinations” categories and are not specifically allocated to any particular project. Costs to produce defactinib are included in “Avutometinib + defactinib” below; and
● license fees.
Unallocated costs include:
● research and development employee-related expenses, including salaries, benefits, travel, and stock-based compensation expense;
● cost of consultants, including our scientific advisory board, who assist with our research and development but are not allocated to a specific program; and
● facilities, depreciation, and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, and laboratory supplies.
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The table below summarizes our direct research and development expenses for our product/ product candidates/ projects and our unallocated research and development costs for the years ended December 31, 2023, 2022, and 2021:
Year ended December 31,
2023
2022
2021
(in thousands)
(in thousands)
(in thousands)
Product/ product candidate / project specific costs
Avutometinib + defactinib
$
28,683
$
22,374
$
17,025
Avutometinib + other combinations
5,323
2,373
416
Avutometinib manufacturing and non-clinical trial specific
5,528
8,204
5,441
GenFleet
2,177
—
—
COPIKTRA
93
183
1,194
Unallocated costs
Personnel costs, excluding stock-based compensation
12,299
10,848
9,953
Stock-based compensation expense
1,987
1,766
2,099
Other unallocated expenses
5,266
4,810
3,219
Total research and development expense
$
61,356
$
50,558
$
39,347
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.
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 any of our 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.
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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 income, other expense, interest income and interest expense
Other expense for the year ended December 31, 2023 was comprised of transaction losses due to changes in foreign currency exchange rates. Other income for the year ended December 31, 2022 was comprised of a gain on the sale of fixed assets and transaction gains due to changes in foreign currency exchange rates. There was no other income or other expense for the year ended December 31, 2021.
Interest income reflects interest earned on our cash, cash equivalents and available-for-sale securities.
Interest expense reflects interest expense due on our Loan Agreement with Oxford and our convertible notes, as well as non-cash interest related to the amortization of debt discount and issuance costs.
Change in fair value of preferred stock tranche liability
The change in fair value of preferred stock tranche liability for the year ended December 31, 2023, was comprised of the mark-to-market adjustment related to the second tranche right issued as part of the Securities Purchase Agreement (the “Series B Preferred Stock Securities Purchase Agreement”), dated January 24, 2023 with certain purchasers pursuant to which the Company agreed to sell and issue to the purchasers in a private placement up to 2,144,160 shares of its Series B Convertible Preferred Stock in two tranches. There was no preferred stock tranche liability outstanding during the years ended December 31, 2022 and December 31, 2021.
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 and prepaid research and development expenses, stock-based compensation, revenue recognition, and collaborative agreements, 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
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.
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Sales of intellectual property
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. At December 31, 2023, we determined less than $0.1 million of future potential royalties, we expect to receive pursuant to the Secura APA, were not constrained and have been recorded in the transaction price. As the consideration for future royalties is conditional, we recorded a corresponding contract asset for the expected future royalties. Portions of the contract asset are reclassified to accounts receivable when the right to consideration becomes unconditional.
Refer to Note 2. Significant Accounting Policies and Note 13. License, collaboration and commercial agreements t o our consolidated financial statements located in this Annual Report on Form 10-K for further discussion of revenue.
Collaborative Arrangements
Collaborative Arrangements: Contracts are considered to be collaborative arrangements pursuant to GAAP when they satisfy the following criteria defined in ASC Topic 808, Collaborative Arrangements: (i) the parties to the contract must actively participate in the joint operating activity and (ii) the joint operating activity must expose the parties to the possibility of significant risk and rewards, based on whether or not the activity is successful. Payments received from or made to a partner that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction or increase to research and development expense, respectively.
Accrued and prepaid 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
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period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Refer to Note 2. Significant Accounting Policies , and Note 4. Accrued expenses t o our consolidated financial statements located in this Annual Report on Form 10-K for further discussion of accrued research and development expenses.
Stock-based compensation
For service-based awards, we recognize stock-based compensation expense for stock options, and restricted stock units (“RSUs”) issued to employees, directors and consultants based on the grant date fair value of the awards on a straight-line basis over the requisite service period. In addition, we issue shares under our employee stock purchase plan (“ESPP”) to employees. The fair value of our stock options and ESPP grants is estimated at the date of grant using the Black-Scholes option pricing model.
We have also granted performance-based 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.
During the year ended December 31, 2023, we recorded $5.9 million of stock-based compensation expense. As of December 31, 2023, there was approximately $9.2 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, 2023, there was approximately $3.1 million of unrecognized stock-based compensation related to RSUs, which are expected to be recognized over a weighted-average period of 2.1 years. See Note 2 . Significant accounting policies and Note 8. Stock-based compensation to our consolidated financial statements located in this Annual Report on Form 10-K for further discussion of stock-based compensation.
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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,
2023
2022
2021
Revenue:
Sale of COPIKTRA license and related assets
—
2,596
1,447
Transition services revenue
—
—
606
Total revenue
—
2,596
2,053
Operating expenses:
Research and development
61,356
50,558
39,347
Selling, general and administrative
30,728
24,975
24,115
Total operating expenses
92,084
75,533
63,462
Loss from operations
(92,084)
(72,937)
(61,409)
Other income (expense)
(109)
47
—
Interest income
6,214
1,215
181
Interest expense
(4,139)
(2,137)
(9,972)
Change in fair value of preferred stock tranche liability
2,751
—
—
Net loss
(87,367)
(73,812)
(71,200)
Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022
Sale of COPIKTRA license and related assets revenue. Sale of COPIKTRA license and related assets revenue for the year ended December 31, 2023 (the “2023 Period”) was $0.0 million compared to $2.6 million for the year ended December 31, 2022 (the “2022 Period”). Sale of COPIKTRA license and related assets revenue for the 2022 Period was comprised of one regulatory milestone for $2.5 million achieved by Secura’s sublicensee, CSPC, and $0.1 million related to royalties on COPIKTRA sales in the 2022 Period and future royalties expected to be received pursuant to the Secura APA that are not constrained.
Research and development expense. Research and development expense for the 2023 Period was $61.4 million compared to $50.6 million for the 2022 Period. The $10.8 million increase from the 2022 Period to the 2023 Period was primarily related to an increase of $6.1 million in CRO costs, a $2.0 million upfront payment made in September 2023 pursuant to the GenFleet Agreement, an increase of $1.8 million in personnel related costs, including non-cash stock-based compensation, an increase of $1.5 million in IST costs, an increase of $0.9 million in consulting costs, and an increase of $0.7 million in investigator fees. The increase is partially offset by a decrease of $2.2 million in drug substance and drug manufacturing costs.
Selling, general and administrative expense. Selling, general and administrative expense for the 2023 Period was $30.7 million compared to $25.0 million for the 2022 Period. The increase of $5.7 million from the 2022 Period to the 2023 Period primarily resulted from an increase of $1.7 million in personnel related costs, including non-cash stock-based compensation, an increase of $1.4 million of costs in anticipation of the potential launch of avutometinib and defactinib in LGSOC, an increase of $1.2 million in consulting and professional fees, an increase of $0.6 million in costs associated with financing activities, and an increase of $0.8 million in travel and other costs.
Other Income (expense). Other expense of $0.1 million for the 2023 Period was comprised of transaction losses due to changes in foreign currency exchange rates compared to other income of less than $0.1 million for the 2022 Period comprised of a gain on the sale of fixed assets and transaction gains due to changes in foreign currency exchange rates.
Interest income. Interest income for the 2023 Period was $6.2 million compared to $1.2 million for the 2022 Period. The increase of $5.0 million in interest income was primarily driven by an increase in interest rates and investment balances on short-term investments and cash equivalents.
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Interest expense. Interest expense for the 2023 Period was $4.1 million compared to $2.1 million for the 2022 Period. The increase of $2.0 million from the 2022 Period to the 2023 Period was primarily driven by increased expense on the Loan Agreement as a result of the additional $15.0 million debt drawdown on March 22, 2023.
Change in fair value of preferred stock tranche liability. The change in fair value of the preferred stock tranche liability of $2.8 million for the 2023 Period was comprised of the mark-to-market adjustment related to the second tranche right issued as part of the Series B Convertible Preferred Stock Securities Purchase Agreement. There was no preferred stock tranche liability outstanding during the 2022 Period.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity
We have financed our operations to date primarily through public and private offerings of our common stock and pre-funded warrants, offerings of convertible notes, 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, the upfront payment under the Secura APA, the proceeds in connection with the PIPE, the Loan Agreement with Oxford, and the issuance of Series B Convertible Preferred Stock. With the commercial launch of COPIKTRA in the United States in September 2018 through our ownership period ending in September 2020, we financed a portion of our operations through product revenue. As of September 30, 2020, we have sold our COPIKTRA license and no longer sell COPIKTRA in the United States. We expect to finance a portion of our business through future potential milestones and royalties received pursuant to the Secura APA.
As of December 31, 2023, we had $137.1 million in cash, cash equivalents, 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,
2023
2022
2021
Net cash (used in) provided by:
Operating activities
$
(86,460)
$
(63,673)
$
(53,502)
Investing activities
(44,447)
66,185
87
Financing activities
134,194
51,784
6,885
Increase (decrease) in cash, cash equivalents and restricted cash
$
3,287
$
54,296
(46,530)
Operating activities. The use of cash in operating activities in the 2023 Period and 2022 Period resulted primarily from our net losses adjusted for non-cash adjustments and changes in the components of working capital. Our cash outflow from net losses adjusted for non-cash adjustments was $85.5 million and $67.6 million for the 2023 Period and 2022 Period, respectively. Non-cash adjustments were primarily related to stock-based compensation expense, non-cash interest, net, and change in fair value on preferred stock tranche liability in the 2023 Period and stock-based compensation expense in the 2022 Period. Our cash outflow for the 2023 Period from operating activities due to changes in operating assets and liabilities was $1.0 million for the 2023 Period primarily driven by an increase of $5.8 million in prepaid expenses, other current assets and other assets, and a decrease of $0.4 million in deferred liabilities, partially offset by an increase of $2.9 million in accrued expenses and other liabilities, and an increase of $2.3 million in accounts payable. Our cash inflow for the 2022 Period from operating activities due to changes in operating assets and liabilities was $3.9 million primarily driven by an increase of $2.6
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million in accounts payable, an increase of $0.7 million in deferred liabilities, a decrease of $0.7 million of prepaid expenses, other current assets and other assets, and a decrease of $0.5 million in accounts receivable, partially offset by a $0.6 million decrease in accrued expenses and other liabilities. The changes in prepaid expenses, other current assets, and other assets in both periods are exclusive of cash received from PanCAN and used in the RAMP 205 study. Cash used in operating activities was $86.5 million and $63.7 million for the 2023 Period and the 2022 Period, respectively.
Investing activities. The cash used in investing activities for the 2023 Period primarily relates to the net purchases of investments of $44.4 million. The cash provided by investing activities for the 2022 Period primarily relates to the net maturities of investments of $66.2 million.
Financing activities. The cash provided by financing activities for the 2023 Period primarily represents $91.4 million of proceeds from our previously disclosed public offering in June 2023 of common stock and pre-funded warrants to purchase shares of our common stock, net of issuance costs, $28.1 million of proceeds received from issuance of Series B Convertible Preferred Stock, net of issuance costs, $14.9 million of proceeds received pursuant to the loan and security agreement with Oxford, $1.4 million of proceeds received from insurance premium financing and $0.1 million of proceeds received related to our employee stock purchase plan, partially offset by $1.4 million of payments on insurance premium financing, and $0.3 million of repayment of our 5.00% Convertible Senior Notes due 2048 (the “2018 Notes”). The cash provided by financing activities for the 2022 Period primarily represents $27.4 million of net proceeds received under our at-the market equity offering program, $24.1 million of net proceeds received from the loan and security agreement with Oxford, and $0.3 million of proceeds received related to exercise of stock options and our employee stock purchase plan.
Refer to Note 11. Capital Stock to our consolidated financial statements located in this Annual Report on Form 10-K for additional details on the January 2023 offering of our Series B Convertible Preferred Stock, the June 2023 offering of our common stock and pre-funded warrants to purchase shares of our common stock, and our at-the-market equity offering program; Note 5. Debt to our consolidated financial statements located in this Annual Report on Form 10-K for additional details on the Loan Agreement; Note 16. Notes Payable to our consolidated financial statements located in this Annual Report on Form 10-K for additional details on the finance agreement with AFCO Premium Credit LLC related to insurance premium financing and the monthly payments of principal and interest related thereto; and Note 10. Convertible Senior Notes to our consolidated financial statements located in this Annual Report on Form 10-K for details on the 2018 Notes.
Funding requirements
We expect to continue to incur significant expenses and may continue to incur operating losses. Refer to risk factor titled We have incurred significant losses since our inception. We may incur losses for the foreseeable future and may never achieve or maintain profitability within section Item 1A. Risk Factors for detailed activities which may drive our continued operating losses and expenses in future periods.
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 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 receive marketing approval;
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● the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending intellectual property related claims;
● 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, licensing arrangements, and through future potential milestones and royalties received pursuant to the Secura APA. 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.
Without additional funding we do not believe that we have sufficient funds to meet our obligations within the next 12 months from the date of issuance of these consolidated financial statements. While we believe that we may have sufficient funds to meet our obligations within the next 12 months from the date of the issuance of the consolidated financial statements for the year ended December 31, 2023, in performing this analysis under the applicable accounting standards management excluded certain elements of our operating plan that cannot be considered probable of occurring. Accordingly, management has concluded that substantial doubt exists about our ability to continue as a going concern for 12 months from the date the consolidated financial statements are issued.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
On April 15, 2014, we entered into a lease agreement for approximately 15,197 square feet of office and laboratory space in Needham, Massachusetts. The lease term commenced on April 15, 2014, and it was scheduled to expire on September 30, 2019. Effective February 15, 2018, we amended the lease agreement to relocate within the facility to another location consisting of 27,810 square feet of office space (the “Amended Lease Agreement”). The Amended Lease Agreement extends the expiration date of the lease from September 2019 through June 2025. Pursuant to the Amended Lease Agreement, the initial annual base rent amount is approximately $0.7 million, which increases during the lease term to $1.1 million for the last 12-month period. As of December 31, 2023, the total future minimum lease payments under the agreement are $1.6 million through June 2025.
As discussed in Note 13. License, collaboration and commercial agreements to the consolidated financial statements located 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. As of December 31, 2023, we do not have any minimum contractual obligations in relation to these agreements 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.
TAX LOSS CARRYFORWARDS
As of December 31, 2023, we had federal and state net operating loss (“NOL”) carryforwards of $473.6 million and $189.0 million, respectively, which are available to reduce future taxable income. We also had federal and state tax credits of $9.5 million and $2.2 million, respectively, which may be used to offset future tax liabilities.
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The net operating loss and tax credit carryforwards will expire at various dates through 2043, except for $277.9 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, 2023, we recorded a 100% valuation allowance against our NOL and tax credit carryforwards, 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 our federal net operating loss carryforwards, our state net operating loss carryforwards, our research and development (“R&D”) credits and our Orphan Drug (“OD”) credits will be limited as of December 31, 2023. The portion of federal NOL, state NOL, R&D credits and OD credits that were determined to be limited by Section 382 have been written off as of December 31, 2023. The remaining unused carryforwards remain available for future periods. Due to our full valuation allowance the write off of NOLs, R&D credits, and OD credits did not have any impact to the statements of operation and comprehensive loss for the 2023 Period and 2022 Period.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Refer to Note 2. Significant Accounting Policies to our consolidated financial statements located in this Annual Report on Form 10-K for recently adopted accounting standards.