Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as the process designed by, or under the supervision of, our Chief Executive Officer and our Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with the authorizations of management and directors; and
(3) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework provided in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2023.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm, as allowed by the SEC.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the fiscal quarter ended December 31, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Item 9B. Other Information
Trading Plans of Our Directors and Officers
During our fiscal quarter ended December 31, 2023, n o n e of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) entered into, modified (as to amount, price or timing of trades) or terminated (i) contracts, instructions or written plans for the purchase or sale of our securities that are intended to satisfy the conditions specified in Rule 10b5-1(c) under the Exchange Act for an affirmative defense against liability for trading in securities on the basis of material nonpublic information or (ii) non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) .
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information regarding our directors, including the audit committee and audit committee financial experts, and executive officers and compliance with Section 16(a) of the Exchange Act will be included in our 2024 Proxy Statement and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics for all of our directors, officers, and employees as required by Nasdaq governance rules and as defined by applicable SEC rules. Stockholders may locate a copy of our Code of Business Conduct and Ethics on our website at www.verastem.com or request a copy without charge from:
Verastem, Inc.
Attention: Investor Relations
117 Kendrick St., Suite 500
Needham, MA 02494
We will post to our website any amendments to the Code of Business Conduct and Ethics and any waivers that are required to be disclosed by the rules of either the SEC or Nasdaq.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 of Form 10-K regarding executive compensation will be included in our 2024 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 of Form 10-K regarding security ownership of certain beneficial owners and management will be included in our 2024 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 of Form 10-K regarding certain relationships and related transactions and director independence will be included in our 2024 Proxy Statement and is incorporated herein by reference.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 of Form 10-K regarding principal accountant fees and services will be included in our 2024 Proxy Statement and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Consolidated Financial Statements
See Part II, Item 8 for the Financial Statements required to be included in this Annual Report on Form 10-K.
(2) Consolidated Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits hereto and such listing is incorporated herein by reference.
Item 16. Form 10-K Summary
None.
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EXHIBIT INDEX
Exhibit
number
Description of exhibit
3.1
Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Registrant on March 12, 2019)
3.2
Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by the Registrant on March 12, 2019)
3.3
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)
3.4
Certificate of Amendment to the Restated Certificate of Incorporation of Verastem, Inc. (incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on May 21, 2020)
3.5
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on November 7, 2022)
3.6
Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 25, 2023)
3.7
Certificate of Amendment to the Restated Certificate of Incorporation of Verastem, Inc. (incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on May 31, 2023)
4.1
Specimen certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)
4.2
D escription of Securities (incorporated by reference to Exhibit 4.5 to the Form 10-K filed by the Registrant with the Securities and Exchange Commission on March 14, 2023)
4.3
Form of Pre-Funded Warrant. (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on June 21, 2023).
10.1#
Form of Incentive Stock Option Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)
10.2#
Form of Incentive Stock Option Agreement under Amended and Restated 2012 Incentive Plan (incorporated by reference to Exhibit 10.4 of the Registrant’s Annual Report on Form 10-K filed by the Registrant on March 13, 2018)
10.3#
Form of Nonstatutory Stock Option Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.4 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)
10.4#
Form of Nonstatutory Stock Option Agreement under Amended and Restated 2012 Incentive Plan (incorporated by reference to Exhibit 10.6 of the Registrant’s Annual Report on Form 10-K filed by the Registrant on March 13, 2018)
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10.5#
Form of Restricted Stock Unit Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.16 to Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-177677) filed by the Registrant on January 13, 2012)
10.6#
Amendment to Form of Restricted Stock Unit Agreement under 2012 Incentive Plan (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K filed by the Registrant on March 26, 2013)
10.9#
Form of Restricted Stock Unit Agreement under Amended and Restated 2012 Incentive Plan (incorporated by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K filed by the Registrant on March 13, 2018)
10.7#
Form of Inducement Award Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8 filed by the Registrant with the Securities and Exchange Commission on December 19, 2014)
10.8#
Form of Inducement Award Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.11 of the Registrant’s Annual Report on Form 10-K filed by the Registrant on March 13, 2018)
10.9#
Form of Inducement Award Restricted Stock Unit Agreement (incorporated by reference to Exhibit 4.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, filed by the Registrant with the Securities and Exchange Commission on November 7, 2018)
10.10#
Form of Indemnification Agreement between the Registrant and each director and executive officer (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Registrant on August 8, 2017)
10.11
Lease Agreement, dated April 15, 2014, between the Registrant and Intercontinental Fund III 117 Kendrick Street LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on April 18, 2014)
10.12
First Amendment of Lease Agreement, dated February 15, 2018, between the Registrant and 117 Kendrick DE, LLC, as successor-in-interest to Intercontinental Fund III 117 Kendrick Street, LLC (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Registrant on May 3, 2018)
10.13#
Employment Agreement, dated August 2, 2023, by and between Verastem, Inc. and Daniel W. Paterson (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on August 4, 2023).
10.14†
License Agreement, dated July 11, 2012, by and between the Registrant and Pfizer Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by the Registrant on August 13, 2012)
10.15†
Letter Agreement, dated December 7, 2012, by and between the Registrant and Pfizer Inc. (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K filed by the Registrant on March 6, 2014)
10.16†
License Agreement for CKI27, dated January 7, 2020, between Verastem, Inc. and Chugai Pharmaceutical Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Registrant on May 7, 2020)
10.17
#
Form of Restricted Stock Unit Agreement under the 2012 Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by the Registrant on May 7, 2020)
10.18
#
Form of Inducement Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by the Registrant on May 7, 2020)
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10.19
#
Form of Incentive Stock Option Agreement under the 2012 Incentive Plan (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by the Registrant on May 7, 2020)
10.20
#
Form of Nonstatutory Stock Option Agreement under the 2012 Incentive Plan (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed by the Registrant on May 7, 2020)
10.21
#
Form of Inducement Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q filed by the Registrant on May 7, 2020)
10.22
#
Form of Incentive Stock Option Agreement under the 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by the Registrant on August 2, 2021)
10.23
#
Form of Nonstatutory Stock Option Agreement (Employees) under the 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by the Registrant on August 2, 2021)
10.24
#
Form of Nonstatutory Stock Option Agreement (Non-Employees) under the 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by the Registrant on August 2, 2021)
10.25
#
Form of Restricted Stock Unit Agreement under the 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed by the Registrant on August 2, 2021)
10.26
#
Form of Inducement Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q filed by the Registrant on August 2, 2021)
10.27
#
Form of Inducement Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q filed by the Registrant on August 2, 2021)
10.28
†
Asset Purchase Agreement by and between Secura Bio, Inc. and Verastem, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Registrant on November 9, 2020)
10.29
Exchange Agreement by and between Verastem, Inc. and Highbridge Tactical Credit Master Fund, L.P., dated November 6, 2020 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by the Registrant on November 9, 2020)
10.30
Loan and Security Agreement, dated as of March 25, 2022, among Verastem, Inc., as borrower, Oxford Finance LLC, as collateral agent and a lender, and Oxford Finance Credit Fund III LP, as a lender (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed by the Registrant with the Securities and Exchange Commission on March 27, 2022)
10.31
Securities Purchase Agreement, dated January 24, 2023, by and among Verastem, Inc. and each purchaser party thereto (incorporated by reference to Exhibit 10.1 to the form 8-K filed by the Registrant with the Securities and Exchange Commission on January 25, 2023)
10.32#
Employment Agreement, dated October 24, 2023 by and between Verastem, Inc. and Daniel Calkins (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on October 27, 2023).
10.33
First Amendment to Loan and Security Agreement, dated as of January 4, 2024, among Verastem, Inc., as borrower, Oxford Finance LLC, as collateral agent and a lender, and the other lenders party thereto. (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 8, 2024)
10.34#
Amended and Restated 2018 Employee Stock Purchase Plan. (incorporated by reference to Exhibit 10.1 to Form 10-Q by the Registrant with the Securities and Exchange Commission on August 8, 2023)
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10.35#
Amended and Restated 2012 Incentive Plan . (incorporated by reference to Exhibit 10.2 to Form 10-Q by the Registrant with the Securities and Exchange Commission on August 8, 2023)
10.36#
Amended and Restated 2021 Equity Incentive Plan. (incorporated by reference to Exhibit 10.3 to Form 10-Q by the Registrant with the Securities and Exchange Commission on August 8, 2023)
10.37
Exchange Agreement, dated November 4, 2022, by and among Verastem, Inc. and B iotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Biotechnology Value Trading Fund OS LP and MSI BVF SPV, LLC (incorporated by reference to Exhibit 10.1 to for the form 8-K filed by the Registrant with the Securities and Exchange Commission on November 7, 2022)
21.1*
Subsidiaries of the Registrant
23.1*
Consent of Ernst & Young LLP
31.1*
Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2*
Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)
32.1*
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
97.1*
Policy for Recoupment of Incentive Compensation
99.1*
Press Release issued by Verastem, Inc. on March 14, 2024 (furnished herewith).
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
Filed herewith.
†
Certain confidential information contained in this exhibit has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed. Confidential materials omitted will be filed separately with the SEC upon request.
#
Management contract or compensatory plan, contract or agreement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th day of March 2024.
VERASTEM, INC.
By:
/s/ Daniel W. Paterson
Daniel W. Paterson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Daniel W. Paterson
Daniel W. Paterson
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 14, 2024
/s/ Daniel Calkins
Daniel Calkins
Chief Financial Officer
(Principal Financial and Accounting officer)
March 14, 2024
/s/ P AUL B UNN, M.D.
Paul Bunn, M.D.
Director
March 14, 2024
/s/ Robert Gagnon
Robert Gagnon
Director
March 14, 2024
/s/ Anil Kapur
Anil Kapur
Director
March 14, 2024
/s/ Michael Kauffman, M.D.,Ph.D.
Michael Kauffman, M.D., P h .D.
Director
March 14, 2024
/s/ J OHN J OHNSON
John Johnson
Director
March 14, 2024
/s/ M ICHELLE R OBERTSON
Michelle Robertson
Director
March 14, 2024
/s/ Eric Rowinsky, M.D.
Eric Rowinsky, M.D.
Director
March 14, 2024
/s/ B RIAN S TUGLIK
Brian Stuglik
Director
March 14, 2024
/s/ Karin Tollefson
Karin Tollefson
Director
March 14, 2024
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Verastem, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Financial Statements
Consolidated Balance Sheets
F-4
Consolidated Statements of Operations and Comprehensive Loss
F-5
Consolidated Statements of Stockholders’ Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-8
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Verastem, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Verastem, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion .
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued and Prepaid Clinical Trial Expense
Description of the Matter
As summarized in Note 4 to the consolidated financial statements, the Company’s accrued clinical expenses were $6.5 million at December 31, 2023, which included the estimated
F-2
Table of Contents
obligation for clinical trial expenses incurred as of December 31, 2023 but not paid as of that date. In addition, the Company’s total prepaid expenses and other current assets were $6.5 million, which included amounts that were paid in advance of services incurred pursuant to clinical trials. As discussed in Note 2 to the consolidated financial statements, the Company records clinical trial expenses as incurred. The Company’s determination of costs incurred for certain devel opment 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 to the Company by its vendor 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.
Auditing the Company’s accrued and prepaid clinical trial expenses was especially challenging due to the volume of information received from vendors that perform services on the Company’s behalf. While the Company’s estimates of accrued and prepaid clinical trial expenses are primarily based on information received from its vendors for each study, the Company is required to make an estimate for additional costs incurred. Additionally, due to the long duration of clinical trials and the timing of vendor invoices, the actual amounts incurred are not typically known at the time the financial statements are issued.
How We Addressed the Matter in Our Audit
To evaluate the accrued and prepaid clinical trial expenses, our audit procedures included, among others, testing the accuracy and completeness of the underlying data used in the estimates and evaluating the significant assumptions used by management to estimate the recorded accruals and prepayments. We obtained third party confirmation from the Company’s primary contract research organization to validate the underlying data used in management’s estimate. We corroborated the progress of research and development activities associated with clinical trials through discussion with the Company’s research and development personnel that oversee the clinical activities. In addition, we performed analytics over fluctuations in accruals and prepaids by vendor throughout the period subject to audit and compared subsequent invoices received from third parties to amounts accrued.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
Boston, Massachusetts
March 14, 2024
F-3
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Verastem, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31,
2023
2022
Assets
Current assets:
Cash and cash equivalents
$
77,909
$
74,933
Short-term investments
59,220
12,961
Accounts receivable, net
—
31
Prepaid expenses and other current assets
6,553
4,945
Total current assets
143,682
92,870
Property and equipment, net
37
92
Right-of-use asset, net
1,171
1,789
Restricted cash
241
241
Other assets
4,587
58
Total assets
$
149,718
$
95,050
Liabilities, convertible preferred stock and stockholders’ equity
Current liabilities:
Accounts payable
$
7,184
$
4,901
Accrued expenses
17,928
14,983
Deferred liabilities
327
710
Lease liability, short-term
941
794
Convertible senior notes
—
275
Total current liabilities
26,380
21,663
Non-current liabilities:
Long-term debt
40,086
24,526
Lease liability, long-term
530
1,470
Preferred stock tranche liability
4,189
—
Total liabilities
71,185
47,659
Convertible preferred stock:
Series B Convertible Preferred Stock, $ 0.0001 par value; 2,144 and 0 shares designated at December 31, 2023 and December 31, 2022, respectively; 1,200 and 0 shares issued and outstanding at December 31, 2023 and 2022, respectively
21,159
—
Stockholders’ equity:
Preferred Stock, $ 0.0001 par value; 5,000 shares authorized:
Series A Convertible Preferred Stock, $ 0.0001 par value; 1,000 shares designated, 1,000 shares issued and outstanding at December 31, 2023 and December 31, 2022
—
—
Common stock, $ 0.0001 par value; 300,000 shares authorized, 25,281 and 16,712 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively
3
2
Additional paid-in capital
882,248
784,912
Accumulated other comprehensive income
13
—
Accumulated deficit
( 824,890 )
( 737,523 )
Total stockholders’ equity
57,374
47,391
Total liabilities, convertible preferred stock and stockholders’ equity
$
149,718
$
95,050
See accompanying notes to the consolidated financial statements.
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Verastem, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
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 )
Net loss per share—basic and diluted
( 3.96 )
( 4.57 )
( 4.90 )
Weighted average common shares outstanding used in computing net loss per share—basic and diluted
22,054
16,138
14,535
Net loss
$
( 87,367 )
$
( 73,812 )
$
( 71,200 )
Unrealized gain (loss) on available-for-sale securities
13
( 34 )
( 19 )
Comprehensive loss
$
( 87,354 )
$
( 73,846 )
$
( 71,219 )
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
Verastem, Inc.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Accumulated
other
Additional
comprehensive
Total
Series B Convertible Preferred Stock
Series A Convertible Preferred Stock
Common stock
paid-in
(loss)
Accumulated
stockholders'
Shares
Amount
Shares
Amount
Shares
Amount
capital
income
deficit
equity
Balance at December 31, 2020
—
$
—
—
$
—
14,205,004
$
1
$
707,731
$
53
$
( 592,511 )
$
115,274
Net loss
—
—
—
—
—
—
—
—
( 71,200 )
( 71,200 )
Unrealized loss on available-for-sale marketable securities
—
—
—
—
—
—
—
( 19 )
—
( 19 )
Conversion of Notes into common stock
—
—
—
—
717,949
1
27,999
—
—
28,000
Issuance of common stock under Employee Stock Purchase Plan
—
—
—
—
9,172
—
182
—
—
182
Issuance of common stock resulting from vesting of restricted stock units
—
—
—
—
215,409
—
( 90 )
—
—
( 90 )
Issuance of common stock resulting from exercise of stock options
—
—
—
—
49,087
—
905
—
—
905
Issuance of common stock resulting from at-the-market transactions, net
—
—
—
—
244,209
—
6,796
—
—
6,796
Stock-based compensation expense
—
—
—
—
—
—
7,711
—
—
7,711
Balance at December 31, 2021
—
$
—
—
$
—
15,440,830
$
2
$
751,234
$
34
$
( 663,711 )
$
87,559
Net loss
—
—
—
—
—
—
—
—
( 73,812 )
( 73,812 )
Unrealized loss on available-for-sale marketable securities
—
—
—
—
—
—
—
( 34 )
—
( 34 )
Issuance of Series A Convertible Preferred Stock in exchange for common stock
—
—
1,000,000
—
( 833,333 )
—
—
—
—
—
Issuance of common stock under Employee Stock Purchase Plan
—
—
—
—
10,194
—
164
—
—
164
Issuance of common stock resulting from vesting of restricted stock units
—
—
—
—
121,441
—
—
—
—
—
Issuance of common stock resulting from exercise of stock options
—
—
—
—
8,181
—
118
—
—
118
Issuance of common stock resulting from at-the-market transactions, net
—
—
—
—
1,964,448
—
27,349
—
—
27,349
Stock-based compensation expense
—
—
—
—
—
—
6,047
—
—
6,047
Balance at December 31, 2022
—
$
—
1,000,000
$
—
16,711,761
$
2
$
784,912
$
—
$
( 737,523 )
$
47,391
Net loss
—
—
—
—
—
—
—
—
( 87,367 )
( 87,367 )
Unrealized gain on available-for-sale marketable securities
—
—
—
—
—
—
—
13
—
13
Issuance of Series B Convertible Preferred Stock, net of issuance costs of $ 1,901 and preferred stock tranche liability of $ 6,940
1,200,000
21,159
—
—
—
—
—
—
—
—
Issuance of common stock, and pre-funded warrants, net of issuance cost of $ 6,351
—
—
—
—
8,489,409
1
91,419
—
—
91,420
Issuance of common stock under Employee Stock Purchase Plan
—
—
—
—
14,270
—
57
—
—
57
Issuance of common stock resulting from vesting of restricted stock units
—
—
—
—
65,710
—
—
—
—
—
Stock-based compensation expense
—
—
—
—
5,860
—
—
5,860
Balance at December 31, 2023
1,200,000
$
21,159
1,000,000
$
—
25,281,150
$
3
$
882,248
$
13
$
( 824,890 )
$
57,374
See accompanying notes to the consolidated financial statements.
F-6
Table of Contents
Verastem, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2023
2022
2021
Operating activities
Net loss
$
( 87,367 )
$
( 73,812 )
$
( 71,200 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
62
118
206
Amortization of right-of-use asset and lease liability
( 175 )
( 154 )
( 134 )
Stock-based compensation expense
5,860
6,047
7,711
Amortization of deferred financing costs, debt discounts and premiums and discounts on available-for-sale marketable securities
( 1,132 )
228
9,331
Change in fair value of preferred stock tranche liability
( 2,751 )
—
—
Changes in operating assets and liabilities:
Accounts receivable, net
31
485
( 277 )
Prepaid expenses, other current assets and other assets
( 5,826 )
744
( 1,558 )
Accounts payable
2,283
2,599
623
Accrued expenses and other liabilities
2,938
( 638 )
1,796
Deferred liabilities
( 383 )
710
—
Net cash used in operating activities
( 86,460 )
( 63,673 )
( 53,502 )
Investing activities
Purchases of property and equipment
—
—
( 196 )
Purchases of investments
( 96,447 )
( 17,815 )
( 86,442 )
Maturities of investments
52,000
84,000
86,725
Net cash provided by (used in) investing activities
( 44,447 )
66,185
87
Financing activities
Proceeds from issuance of Series B Convertible Preferred Stock, net
28,099
—
—
Proceeds from long-term debt, net
14,918
24,148
—
Repayment of 2018 Notes
( 300 )
—
—
Proceeds from insurance premium financing
1,430
—
—
Payments on insurance premium financing
( 1,430 )
—
—
Proceeds from the exercise of stock options and employee stock purchase program
57
282
1,087
Settlement of restricted stock for tax withholdings
—
—
( 925 )
Proceeds from the issuance of common stock and pre-funded warrants, net
91,420
27,354
6,723
Net cash provided by financing activities
134,194
51,784
6,885
Increase (decrease) in cash, cash equivalents and restricted cash
3,287
54,296
( 46,530 )
Cash, cash equivalents and restricted cash at beginning of period
75,789
21,493
68,023
Cash, cash equivalents and restricted cash at end of period
$
79,076
$
75,789
$
21,493
Supplemental disclosure
Cash paid for interest
$
3,361
$
1,536
$
1,007
Supplemental disclosure of non-cash investing and financing activities
Issuance of preferred stock tranche liability
$
6,940
$
—
$
—
Conversion of 2020 Notes into common stock
$
—
$
—
$
28,000
Purchases of property and equipment included in accounts payable and accrued expenses
$
7
$
—
$
—
See accompanying notes to the consolidated financial statements.
F-7
Table of Contents
1. Nature of business
Verastem, Inc. (the “Company”) is a late-stage development biopharmaceutical company, with an ongoing registration directed trial, committed to advancing new medicines for patients battling cancer. The Company’s 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.
The Company’s 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 low-grade serous ovarian cancer (“LGSOC”), non-small cell lung cancer (“NSCLC”), pancreatic cancer, colorectal cancer (“CRC”), and melanoma. The Company believes 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 September 24, 2018, the Company’s first commercial product, COPIKTRA® (duvelisib), was approved by the U.S. Food and Drug Administration (the “FDA”) for the treatment of adult patients with certain hematologic cancers including relapsed or refractory chronic lymphocytic leukemia/ small lymphocytic lymphoma after at least two prior therapies and relapsed or refractory follicular lymphoma after at least two prior systemic therapies. On August 10, 2020, the Company and Secura Bio, Inc. (“Secura”) entered into an asset purchase agreement (“Secura APA”). Pursuant to the Secura APA, the Company sold to Secura its exclusive worldwide license, including certain related assets for the research, development, commercialization, and manufacture in oncology indications of products containing COPIKTRA (duvelisib). The transaction closed on September 30, 2020. Refer to Note 13. License, collaboration and commercial agreements for a detailed discussion of the Secura APA.
The consolidated financial statements include the accounts of Verastem Securities Company and Verastem Europe GmbH, wholly-owned subsidiaries of the Company. All financial information presented has been consolidated and includes the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Company is subject to the risks associated with other life science companies, including, but not limited to, possible failure of preclinical testing or clinical trials, competitors developing new technological innovations, inability to obtain marketing approval of the Company’s product candidates, avutometinib and defactinib, market acceptance and commercial success of the Company’s product candidates, avutometinib and defactinib, following receipt of regulatory approval, and, protection of proprietary technology and the continued ability to obtain adequate financing to fund the Company’s future operations. If the Company does not obtain marketing approval and successfully commercialize its product candidates, avutometinib and defactinib, following regulatory approval, it will be unable to generate product revenue or achieve profitability and may need to raise additional capital.
As of December 31, 2023, the Company had cash, cash equivalents, and investments of $137.1 million. In accordance with applicable accounting standards, the Company evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within 12 months after the date of the issuance of these consolidated financial statements. The Company anticipates operating losses may continue for the foreseeable future since the Company does not yet have regulatory approval to sell any of its product candidates, and the Company continues to incur operating costs to execute its strategic plan, including costs related to research and development of its product candidates and commercial readiness activities. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for 12 months after the date the consolidated financial statements are issued.
The Company expects to finance its operations with its 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 Finance LLC (“Oxford”), or through other strategic financing opportunities that could include, but are not limited to collaboration agreements, future offerings of its 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 the Company fails to obtain additional future capital, it may be unable to complete its planned preclinical studies and clinical trials and obtain approval of certain
F-8
Table of Contents
investigational product candidates from the FDA or foreign regulatory authorities. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern.
Reverse Stock Split
On May 30, 2023, the Company filed a Certificate of Amendment to the Company’s Restated Certificate of Incorporation, as amended to date, with the Secretary of State of the State of Delaware to effect a reverse stock split of the Company’s issued and outstanding common stock, par value $ 0.0001 at a ratio of 1-for-12 (the “Reverse Stock Split”), as authorized at the Company’s 2023 annual meeting of stockholders held on May 15, 2023. The Company effected the Reverse Stock Split on May 31, 2023. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise were entitled to a fractional share of common stock were entitled to receive a price equal to the closing price of the common stock on the Nasdaq Capital Market on the date immediately preceding the Reverse Stock Split, as adjusted by the ratio of one share of common stock for every 12 shares of common stock, multiplied by the applicable fraction of a share. The number of shares of common stock that the Company is authorized to issue remains at 300,000,000 shares and the par value of its common stock remains unchanged at $ 0.0001 per share.
The Company has retroactively restated the share and per share amounts in the consolidated financial statements as of December 31, 2022 and the 12 months ended December 31, 2023, 2022 and 2021, to give retroactive effect to the Reverse Stock Split. Proportionate adjustments were made to the per share exercise price and number of shares of common stock issuable under all outstanding stock options, convertible notes and preferred stock. In addition, proportionate adjustments have been made to the number of shares of common stock issuable upon vesting of the restricted stock units and the number of shares of common stock reserved for the Company’s equity incentive compensation plans. The consolidated statements of convertible preferred stock and stockholders’ equity and balance sheets reflect the impact of the Reverse Stock Split by reclassifying from “common stock” to “additional paid-in capital” in an amount equal to the par value of the decreased shares resulting from the Reverse Stock Split.
2. Significant accounting policies
Basis of presentation
The accompanying financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) under the assumption that the Company will continue as a going concern for the next 12 months. Accordingly, they do not include any adjustments that might result from the uncertainty related to the Company’s ability to continue as a going concern.
Use of estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including but not limited to estimates related to revenue recognition, accrued and prepaid clinical trial expense and other general accruals, stock-based compensation expense and its preferred stock tranche liability. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable. Actual results could differ from such estimates.
Segment and geographic information
Operating segments are defined as components of an enterprise about which separate discrete information is available and regularly reviewed by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing drugs for the treatment of cancer. All material long-lived assets of the Company reside in the United States.
F-9
Table of Contents
Proceeds from grants
In May 2022 the Company was awarded the “Therapeutic Accelerator Award” grant from Pancreatic Cancer Network (“PanCAN”) for up to $ 3.8 million (the “PanCAN Grant”). In August 2022, PanCAN agreed to provide the Company with an additional $ 0.5 million for the collection and analysis of patient samples. The grant is supporting a Phase 1b/2 clinical trial of GEMZAR (gemcitabine) and ABRAXANE (Nab-paclitaxel) in combination with avutometinib and defactinib entitled RAMP 205. The RAMP 205 study is evaluating whether combining avutometinib (to target mutant KRAS which is found in more than 90% of pancreatic adenocarcinomas) and defactinib (to reduce stromal density and adaptive resistance to avutometinib) to the standard GEMZAR/ABRAXANE regimen improves outcomes for patients with such pancreatic cancers. Through December 31, 2023, the Company has received $ 2.7 million of cash proceeds which was initially recorded as deferred liabilities on the balance sheet. The Company recognizes grants as contra research and development expense in the consolidated statement of operations and comprehensive loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. The Company recorded $ 2.0 million and $ 0.3 million of the proceeds as a reduction of research and development expense during the years ended December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023 and December 31, 2022, the Company recorded $ 0.3 million and $ 0.7 million, respectively, as deferred liabilities in the consolidated balance sheet related to the PanCAN Grant.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of a U.S. Government money market funds and corporate bonds and commercial paper of publicly traded companies. Cash equivalents are reported at fair value.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
December 31, 2023
December 31, 2022
Cash and cash equivalents
$
77,909
$
74,933
Restricted cash
1,167
856
Total cash, cash equivalents and restricted cash
$
79,076
$
75,789
Amounts included in restricted cash as of December 31, 2023 and December 31, 2022 represent (i) cash received pursuant to the PanCAN Grant restricted for future expenditures for specific research and development activities in the amounts of $ 0.9 million and $ 0.6 million, respectively, and (ii) cash held to collateralize outstanding letters of credit provided as a security deposit for the Company’s office space located in Needham, Massachusetts in the amount of $ 0.2 million. Cash held pursuant to the PanCAN Grant is included in prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2023, and December 31, 2022. The letters of credit are included in non-current restricted cash on the consolidated balance sheets as of December 31, 2023 and December 31, 2022.
F-10
Table of Contents
Fair value of financial instruments
The Company determines the fair value of its financial instruments based upon the fair value hierarchy, which prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:
Level 1 inputs
Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.
Level 2 inputs
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs
Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
Items Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis (in thousands)
December 31, 2023
Description
Total
Level 1
Level 2
Level 3
Financial assets
Cash equivalents
$
46,093
$
46,093
$
—
$
—
Short-term investments
59,220
5,992
53,228
—
Total financial assets
$
105,313
$
52,085
$
53,228
$
—
Preferred stock tranche liability
$
4,189
$
—
$
—
$
4,189
December 31, 2022
Description
Total
Level 1
Level 2
Level 3
Financial assets
Cash equivalents
$
73,613
$
72,617
$
996
$
—
Short-term investments
12,961
—
12,961
—
Total financial assets
$
86,574
$
72,617
$
13,957
$
—
The investments and cash equivalents have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices provided by third party pricing services by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by the pricing services as of December 31, 2023 and 2022.
A preferred stock tranche liability was recorded as a result of the entry into the Series B Convertible Preferred Stock Securities Purchase Agreement (defined herein) (see Note 7. Capital Stock) . The fair value measurement of the preferred stock tranche liability is classified as Level 3 under the fair value hierarchy. The fair value of the preferred stock tranche liability was determined using a Monte-Carlo simulation. The inputs to the Monte-Carlo include the risk-free rate, stock price volatility, expected dividends and remaining term. Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement.
F-11
Table of Contents
Below are the inputs used to value the preferred stock tranche liability at December 31, 2023 and January 24, 2023:
December 31, 2023
January 24, 2023
Risk-free interest rate
5.13 - 5.52
%
4.41 - 4.84
%
Volatility
75
%
90
%
Dividend yield
—
—
Remaining term (years)
0.6
1.5
The following table represents a rollforward for the year ended December 31, 2023 of the preferred stock right liability recorded in connection with the entry into the Series B Convertible Preferred Stock Securities Purchase Agreement (in thousands):
January 1, 2023
$
—
Fair value recognized upon entering into Securities Purchase Agreement
6,940
Fair value adjustment
( 2,751 )
December 31, 2023
$
4,189
Fair Value of Financial Instruments
The fair value of the Company’s 2018 issued 5.00 % Convertible Senior Notes due 2048 (the “2018 Notes”) was approximately $ 0.3 million as of December 31, 2022, which equals the carrying value of the 2018 Notes as of December 31, 2022. During the year ended December 31, 2023, the Company repaid the 2018 Notes and no 2018 Notes remain outstanding. See Note 9. Convertible Senior Notes for additional discussion on the 2018 Notes. The fair value of the 2018 Notes is influenced by the Company’s stock price, stock price volatility, and current market yields and was determined using Level 3 inputs.
The fair value of the Company’s long-term debt is determined using a discounted cash flow analysis with current applicable rates for similar instruments as of the consolidated balance sheet date. The carrying value of the Company’s long-term debt as of December 31, 2023 and December 31, 2022, was approximately $ 40.1 million and $ 24.5 million, respectively. The Company estimates that the fair value of its long-term debt as of December 31, 2023 and December 31, 2022, was approximately $ 39.6 million and $ 24.9 million, respectively. The fair value of the Company’s long-term debt was determined using Level 3 inputs.
Investments
Investments and cash equivalents consist of investments in a U.S. Government money market funds, overnight repurchase agreements collateralized by government agency securities or U.S. Treasury securities, corporate bonds and commercial paper of publicly traded companies that are classified as available-for-sale pursuant to ASC Topic 320, Investments—Debt and Equity Securities . The Company classifies investments available to fund current operations as current assets on its consolidated balance sheets. Debt securities are carried at fair value with unrealized gains and losses included as a component of accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity, until such gains and losses are realized. The fair value of these securities is based on quoted prices for identical or similar assets.
The Company reviews investments for impairment whenever the fair value of a investment is less than the amortized cost and evidence indicates that a investment’s carrying amount is not recoverable. Unrealized losses are evaluated for impairment under ASC 326, Financial Instruments - Credit Losses (“ASC 326”), to determine if the impairment is credit-related or noncredit-related. Credit-related impairment is recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, and noncredit-related impairment is recognized in other comprehensive income (loss). Evidence considered in this assessment includes reasons for the impairment, compliance with our investment policy, the severity of the impairment, collectability of the security, and any adverse conditions specifically related to the security, an industry, or geographic area. Realized gains and losses are
F-12
Table of Contents
determined using the specific identification method and are included in interest income in the consolidated statements of operations and comprehensive loss.
There were no realized gains or losses on investments for the years ended December 31, 2023, 2022 or 2021. Accrued interest receivable is excluded from the amortized cost and estimated fair value of the Company’s investments. Accrued interest receivable of $0.1 million is presented within prepaid expenses and other current assets on the consolidated balance sheets as of December 31, 2023 and December 31, 2022. There were two debt securities in an unrealized loss position at each of December 31, 2023, and December 31, 2022. None of these investments had been in an unrealized loss position for more than 12 months as of December 31, 2023 and December 31, 2022. The Company considered the decline in the market value for these securities to be primarily attributable to current economic conditions and not credit related. At both December 31, 2023 and December 31, 2022, the Company had the intent and ability to hold such securities until recovery. As a result, the Company did not record any charges for credit-related impairments for its investments as of December 31, 2023 and December 31, 2022.
The following is a summary of available-for-sale securities with unrealized losses for less than 12 months as of December 31, 2023 and 2022 (in thousands):
December 31, 2023
December 31, 2022
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Corporate bonds, agency bonds and commercial paper (due within 1 year)
$
8,896
$
( 1 )
$
5,964
$
( 2 )
Total available-for-sale securities in an unrealized loss position
$
8,896
$
( 1 )
$
5,964
$
( 2 )
Cash, cash equivalents, restricted cash and investments consist of the following (in thousands):
December 31, 2023
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Cash, cash equivalents & restricted cash:
Cash and money market accounts
$
79,076
$
—
$
—
$
79,076
Total cash, cash equivalents & restricted cash:
$
79,076
$
—
$
—
$
79,076
Investments:
Corporate bonds, agency bonds and commercial paper (due within 1 year )
59,208
13
( 1 )
59,220
Total investments
$
59,208
$
13
$
( 1 )
$
59,220
Total cash, cash equivalents, restricted cash and investments
$
138,284
$
13
$
( 1 )
$
138,296
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Cash, cash equivalents & restricted cash:
Cash and money market accounts
$
74,794
$
—
$
—
$
74,794
Corporate bonds, agency bonds and commercial paper (due within 90 days )
995
—
$
—
995
Total cash, cash equivalents & restricted cash:
$
75,789
$
—
$
—
$
75,789
Investments:
Corporate bonds, agency bonds and commercial paper (due within 1 year )
$
12,961
$
2
$
( 2 )
$
12,961
Total investments
$
12,961
$
2
$
( 2 )
$
12,961
Total cash, cash equivalents, restricted cash and investments
$
88,750
$
2
$
( 2 )
$
88,750
F-13
Table of Contents
Concentrations of credit risk and off-balance sheet risk
Cash and cash equivalents, investments, and trade accounts receivable are financial instruments that potentially subject the Company to concentrations of credit risk. The Company mitigates this risk by maintaining its cash and cash equivalents and investments with high quality, accredited financial institutions. The management of the Company’s investments is not discretionary on the part of these financial institutions. As of December 31, 2023, the Company’s cash, cash equivalents and investments were deposited at four financial institutions and it has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
There was no accounts receivable balance as of December 31, 2023. As of December 31, 2022, there was one customer, Secura, that made up more than 60 % of the Company’s trade accounts receivable balance. The Company assesses the creditworthiness of all its customers and sets and reassesses customer credit limits to ensure collectability of any trade accounts receivable balances are assured.
For the year ended December 31, 2023, the Company did not record any revenue. For the year ended December 31, 2022 one customer, Secura, individually accounted for all of the Company’s total revenue. Refer to Note 13. License, collaboration, and commercial agreements for a detailed discussion of the Secura APA.
Property and equipment
Property and equipment consist of laboratory equipment, office furniture, computer equipment and leasehold improvements. Expenditures for repairs and maintenance are recorded to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives of the assets:
Laboratory equipment
5 years
Furniture
5 years
Computer equipment
3 years
Leasehold improvements
Lesser of useful life or life of lease
Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.
The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of assets may not be recoverable. Recoverability is measured by comparison of the asset’s book value to future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. No impairment losses have been recorded through December 31, 2023.
Research and development costs
The Company expenses research and development costs to operations as incurred. Research and development expenses consist of:
● employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;
● external research and development expenses incurred under arrangements with third parties, such as clinical research organizations (“CROs”), clinical trial sites, manufacturing organizations and consultants, including the scientific advisory board;
● license fees;
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and laboratory supplies; and
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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 to the Company by its vendor 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.
Stock-based compensation
For service-based equity awards, the Company recognizes 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, which typically is the vest period. The Company recognized stock-based compensation for shares issued to employees under the Company’s employee stock purchase plan (“ESPP”) plan.
The Company has 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 the Company’s best estimates of the time to vesting for the achievement of the performance-based milestones. Awards subject to performance-based vesting requirements are expensed utilizing an accelerated attribution model if achievement of the performance criteria is determined to be probable.
The grant date fair value of stock options is estimated using the Black-Scholes option pricing model that takes into account the fair value of its common stock, the exercise price, the expected life of the option, the expected volatility of its common stock, expected dividends on its common stock, and the risk-free interest rate over the expected life of the option. The Company applies the simplified method described in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 14.D.2 to calculate the expected term as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees. The expected term is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its population. The Company has not paid and do not anticipate paying cash dividends on the Company’s shares of common stock; therefore, the expected dividend yield is assumed to be zero. The computation of expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company accounts for forfeitures as they occur.
The Company issues shares under the Company’s 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 .
Leases
Leases are accounted for in accordance with ASC Topic 842, Leases (“ASC 842”). This standard requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances within the arrangement. A lease is identified where an arrangement conveys the right to control the use of identified property, plant, and equipment for a period of time in exchange for consideration. Leases which are identified within the scope of ASC 842 and which have a term greater than one year are recognized on the Company’s consolidated balance sheets as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize leases with terms of one year or less on its consolidated balance sheets. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain
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adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates to calculate the present value of lease payments. Incremental borrowing rates are the rates the Company incurs to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
In accordance with ASC 842, components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). The fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the consolidated balance sheets and amortized on a straight-line basis as lease expense.
Revenue recognition
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services in accordance with ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”). To determine revenue recognition for contracts with its customers, the Company performs the following five step assessment: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
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, the Company evaluates whether the royalties and sales-based milestones are considered probable of being achieved and estimates the amount of royalties to include over the contractual term using the expected value method and estimates 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. The Company evaluates factors such as whether consideration is outside of the Company’s 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, the Company reevaluates the probability of achievement of all milestones subject to constraint and amount of royalty revenue to be received and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Collaborative arrangements
Collaborative Arrangements: Contracts are considered to be collaborative arrangements 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
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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.
Accounts receivable, net
Accounts receivable, net consists of amounts due from customers, net of applicable revenue reserves. Accounts receivable have standard payments that generally require payment within 30 to 90 days . The Company analyzes accounts that are past due for collectability and provides an allowance for receivables when collection becomes doubtful.
Income taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized.
The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not that it will be sustained based solely on its technical merits as of the reporting date and only in an amount more likely than not that it will be sustained upon review by the tax authorities. The Company evaluates uncertain tax positions on a quarterly basis and adjust the liability for changes in facts and circumstances, such as new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, significant amendment to an existing tax law, or resolution of an examination. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determination is made. The resolution of its uncertain income tax positions is dependent on uncontrollable factors such as law changes, new case law, and the willingness of the income tax authorities to settle, including the timing thereof and other factors. Although the Company does not anticipate significant changes to its uncertain income tax positions in the next 12 months, items outside of its control could cause its uncertain income tax positions to change in the future, which would be recorded in its statements of operations. Interest and/or penalties related to income tax matters are recognized as a component of income tax expense.
Net operating loss (“NOL”) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years.
The Company experienced a greater than 50% change in ownership as defined under Section 382 and 383 of the Internal Revenue Code as well as similar state provisions during the year ended December 31, 2020. For more details please refer to Note 11. Income Taxes.
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Net loss per share
Basic net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Weighted-average number of common shares outstanding includes the weighted average effect of the pre-funded warrants issued in June 2023, as the exercise of which requires little or no consideration for the delivery of shares of common stock. Diluted net loss per common share is calculated by increasing the denominator by the weighted-average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options, restricted stock units, and ESPP (using the “treasury stock” method), the Notes (defined herein) , Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock (using the “if-converted” method), unless their effect on net loss per share is antidilutive. Under the “if-converted” method, convertible instruments that are-in-the-money, are assumed to have been converted as of the beginning of the period or when issued, if later. Additionally, the effects of any interest expense and changes in fair value of any bifurcated derivatives shall be added back to the numerator of the diluted net loss per share calculation. Refer to Note 10. Net Loss per share for further details related to the calculation of net loss per share.
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Recently Adopted Accounting Standards Updates
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Effective January 1, 2023, the Company adopted the provisions of ASU 2016-13. The adoption did not have a material impact on the Company's consolidated financial statements or related financial statement disclosures.
In August 2020, the FASB issued No. ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40) (“ASU 2020-06”). ASU 2020-06 simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. The ASU also simplifies the diluted earnings per share calculation in certain areas. The Company elected to adopt this standard on January 1, 2023 under the modified retrospective transition method. The adoption did not have a material impact on the Company's consolidated financial statements or related financial statement disclosures.
In September 2022, the FASB issued ASU 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). ASU 2022-04 requires the buyer in a supplier finance program to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. This guidance is effective for fiscal years beginning after December 15, 2022. We adopted this guidance as of January 1, 2023, on a prospective basis. The adoption of the standard only resulted in new disclosures and did not affect the Company’s recognition, measurement, or financial statement presentation of supplier finance program obligations on the consolidated financial statements. For additional information on the new disclosures, see Note 14. Notes Payable .
Recently issued accounting standards updates
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and by extending the disclosure requirements to entities with a single reportable segment. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 is to be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The guidance in ASU 2023-09 improves the transparency of income tax disclosures by greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The standard is effective for public companies for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-09 may have on its consolidated financial statements.
Other recent accounting pronouncements issued, but not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated financial statements upon future adoption.
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3. Property and equipment, net
Property and equipment and related accumulated depreciation are as follows (in thousands):
December 31,
December 31,
2023
2022
Leasehold improvements
$
146
$
146
Furniture and fixtures
811
811
Computer equipment
665
665
Assets not yet placed in service
7
—
1,629
1,622
Less: accumulated depreciation
( 1,592 )
( 1,530 )
Total property and equipment, net
$
37
$
92
The Company recorded approximately $ 0.1 million, $ 0.1 million, and $ 0.2 million in depreciation expense for the years ended December 31, 2023, 2022, and 2021, respectively .
4. Accrued expenses
Accrued expenses consist of the following (in thousands):
December 31, 2023
December 31, 2022
Accrued clinical trial expenses
$
6,518
$
4,281
Accrued contract manufacturing expenses
2,010
3,258
Accrued other research and development expenses
1,043
996
Accrued compensation and related benefits
4,796
3,844
Accrued professional fees
637
469
Accrued consulting fees
1,078
902
Accrued interest
316
192
Accrued commercialization costs
453
148
Accrued other
1,077
893
Total accrued expenses
$
17,928
$
14,983
5. Long-term debt
Oxford
On March 25, 2022 (the “Closing Date”), the Company entered into a loan and security agreement (the “Loan Agreement”) with Oxford, as collateral agent and a lender, and Oxford Finance Credit Fund III LP, as a lender (“OFCF III” and together with Oxford, the “Lenders”), pursuant to which the Lenders have agreed to lend the Company up to an aggregate principal amount of $ 150.0 million in a series of term loans (the “Term Loans”). On January 4, 2024, the Company amended the Loan Agreement to extend the date by which it may draw down the Term C Loan from March 31, 2024 to March 31, 2025.
Pursuant to the Loan Agreement, as amended, the Company received an initial Term Loan of $ 25.0 million on the Closing Date, and drew down the second term loan of $ 15.0 million (the “Term B Loan”) on March 22, 2023 and may borrow an additional $ 110.0 million of Term Loans at its option upon the satisfaction of certain conditions as follows:
i. $ 25.0 million (the “Term C Loan”), when the Company has received accelerated or full approval from the FDA of avutometinib for the treatment of LGSOC (the “Term C Milestone”). The Company may
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draw the Term C Loan within 60 days after the occurrence the Term C Milestone, but no later than March 31, 2025.
ii. $ 35.0 million (the “Term D Loan”), when the Company has achieved at least $ 50.0 million in gross product revenue calculated on a trailing six-month basis (the “Term D Milestone”). The Company may draw the Term D Loan within 30 days after the occurrence of the Term D Milestone, but no later than March 31, 2025.
iii. $ 50.0 million (the “Term E Loan”), at the sole discretion of the Lenders.
The Term Loans bear interest at a floating rate equal to (a) the greater of (i) the one-month CME Secured Overnight Financing Rate and (ii) 0.13 % plus (b) 7.37 % , which is subject to an overall floor and cap. Interest is payable monthly in arrears on the first calendar day of each calendar month. As a result of the Term B Loan drawdown, beginning (i) April 1, 2025, or (ii) April 1, 2026, if either (A) avutometinib has received FDA approval for the treatment of LGSOC or (B) COPIKTRA has received FDA approval for the treatment of PTCL, the Company shall repay the Term Loans in consecutive equal monthly payments of principal, together with applicable interest, in arrears. All unpaid principal and accrued and unpaid interest with respect to each Term Loan is due and payable in full on March 1, 2027.
The Company is required to make a final payment of 5.0 % of the original principal amount of the Term Loans that are drawn, payable at maturity or upon any earlier acceleration or prepayment of the Term Loans (the “Final Payment Fee”). The Company may prepay all, but not less than all, of the Term Loans, subject to a prepayment fee equal to (i) 3.0 % of the principal amount of the applicable Term Loan if prepaid on or before the first anniversary date of the funding date of such Term Loan, (ii) 2.0 % of the principal amount of the applicable Term Loan if prepaid after the first anniversary and on or before the second anniversary of the funding date of such Term Loan, and (iii) 1.0 % of the principal amount of the applicable Term Loan if prepaid after the second anniversary of the applicable funding date of such Term Loan. All Term Loans are subject to a facility fee of 0.5 % of the principal amount.
The Loan Agreement contains no financial covenants. The Loan Agreement includes customary events of default, including, among others, payment defaults, breach of representations and warrants, covenant defaults, judgment defaults, insolvency and bankruptcy defaults, and a material adverse change. The occurrence of an event of default could result in the acceleration of the obligations under the Loan Agreement, termination of the Term Loan commitments and the right to foreclose on the collateral securing the obligations. During the existence of an event of default, the Term Loans will accrue interest at a rate per annum equal to 5.0 % above the otherwise applicable interest rate.
In connection with the Loan Agreement, the Company granted Oxford a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property (but including the right to payments and proceeds of intellectual property), and a negative pledge on intellectual property.
The Company assessed all terms and features of the Loan Agreement in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the Loan Agreement, including put and call features. The Company determined that all features of the Loan Agreement were clearly and closely associated with a debt host and did not require bifurcation as a derivative liability, or the fair value of the feature was immaterial to the Company's financial statements. The Company reassesses the features on a quarterly basis to determine if they require separate accounting. There have been no changes to the Company ’s assessment through December 31, 2023.
The debt issuance costs and the Final Payment Fee have been recorded as a debt discount which are being accreted to interest expense through the maturity date of the Term Loan using the effective interest method. The components of the carrying value of the debt as of December 31, 2023, and 2022 (in thousands):
December 31, 2023
December 31, 2022
Principal loan balance
$
40,000
$
25,000
Final Payment Fee
661
225
Debt issuance costs, net of accretion
( 575 )
( 699 )
Long-term debt, net of discount
$
40,086
$
24,526
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The following table sets forth total interest expense for the years ended December 31, 2023, 2022, and 2021 (in thousands):
Year ended December 31,
2023
2022
2021
Contractual Interest
$
3,472
$
1,733
$
773
Amortization of debt discount and issuance costs
230
179
9,199
Amortization of Final Payment Fee
437
225
—
Total
$
4,139
$
2,137
$
9,972
As of December 31, 2023, future principal payments due are as follows (in thousands):
2024
—
2025
15,000
2026
20,000
2027
5,000
Total principal payments
$
40,000
6. Leases
On April 15, 2014, the Company entered into a lease agreement for approximately 15,197 square feet of office and laboratory space in Needham, Massachusetts. The lease term commenced on April 15, 2014 and it was scheduled to expire on September 30, 2019. Effective February 15, 2018, the Company amended its lease agreement to relocate within the facility to another location consisting of 27,810 square feet of office space (the Amended Lease Agreement). The Amended Lease Agreement extends the expiration date of the lease from September 2019 through 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.
The Company has accounted for its Needham, Massachusetts office space as an operating lease. The Company’s lease contains an option to renew and extend the lease terms and an option to terminate the lease prior to the expiration date. The Company has not included the lease extension or the termination options within the right-of-use asset and lease liability on the consolidated balance sheets as neither option is reasonably certain to be exercised. The Company’s lease includes variable non-lease components (e.g., common area maintenance, maintenance, consumables, etc.) that are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred. The Company does not have any other operating or finance leases.
In calculating the present value of future lease payments, the Company has elected to utilize its incremental borrowing rate based on the remaining lease term at the date of adoption of ASC 842. The Company has elected to account for lease components and associated non-lease components as a single lease component and has allocated all of the contract consideration to the lease components only. This will potentially result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied.
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As of December 31, 2023, a right-of-use asset of $ 1.2 million and lease liability of $ 1.5 million are reflected on the consolidated balance sheets. The elements of lease expense were as follows (dollar amounts in thousands):
Year ended December 31,
2023
2022
2021
Lease Expense
Operating lease expense
$
885
$
885
$
885
Total Lease Expense
$
885
$
885
$
885
Other Information - Operating Leases
Operating cash flows paid for amounts included in measurement of lease liabilities
$
1,060
$
1,039
$
1,019
December 31, 2023
Other Balance Sheet Information - Operating Leases
Weighted average remaining lease term (in years)
1.5
Weighted average discount rate
14.6 %
Maturity Analysis
2024
1,081
2025
546
Total
$
1,627
Less: Present value discount
( 156 )
Lease Liability
$
1,471
7. Capital Stock
Under the amended and restated certificate of incorporation, the Company’s board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.
As of December 31, 2023 and 2022, the Company had reserved the following shares of common stock for the issuance of common stock for vested restricted stock units, the exercise of stock options, employee stock purchase plan, 2018 Notes, Series A Convertible Preferred Stock conversions to shares of common stock, the issuance and conversion of Series B Convertible Preferred Stock, and exercise of Pre-Funded Warrants (in thousands):
December 31,
2023
2022
Shares reserved under equity compensation plans
2,845
2,895
Shares reserved for inducement grants
810
327
Shares reserved for 2018 Notes
—
3
Shares reserved for ESPP
75
89
Shares reserved for Series A Convertible Preferred Stock
833
833
Shares reserved for Series B Convertible Preferred Stock
7,570
—
Shares reserved for Pre-Funded Warrants
1,539
—
Total shares reserved
13,672
4,147
Each share of common stock is entitled to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors.
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June 2023 Public Offering
On June 15, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with RBC Capital Markets, LLC and Cantor Fitzgerald & Co. (“Cantor”), as representatives of several underwriters (the “Underwriters”) to offer 7,181,409 shares of the Company’s common stock, at a price to the public of $ 9.75 per share, less the underwriting discounts and commissions, and, in lieu of shares of common stock to certain investors, pre-funded warrants to purchase up to an aggregate of 1,538,591 shares of common stock at a price to the public of $ 9.749 (the “Pre-Funded Warrants”) per Pre-Funded Warrant, which represents the per share public offering price for the shares of common stock less the $ 0.001 per share exercise price for each such Pre-Funded Warrant (the “June 2023 Offering”). In addition, the Company granted the Underwriters an option to purchase, at the public offering price less any underwriting discounts and commissions, an additional 1,308,000 shares of common stock, exercisable for 30 days from the date of the Underwriting Agreement, which the Underwriters exercised in full on June 16, 2023. The June 2023 Offering closed on June 21, 2023.
The Company may not effect the exercise of any Pre-Funded Warrant, and a holder will not be entitled to exercise any portion of any Pre-Funded Warrant if, upon giving effect to such exercise, the aggregate number of shares of common stock beneficially owned by the holder (together with its affiliates) would exceed 9.99 % of the number of shares of common stock outstanding immediately after giving effect to the exercise, which percentage may be increased or decreased at the holder’s election upon 61 days ’ notice to the Company subject to the terms of such Pre-Funded Warrants, provided that such percentage may in no event exceed 19.99 % .
Each Pre-Funded Warrant has an exercise price equal to $ 0.001 per share of common stock. The exercise price and the number of shares of common stock issuable upon exercise of each Pre-Funded Warrant is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock as well as upon any distribution of assets, including cash, stock or other property, to the Company’s stockholders. The Pre-Funded Warrants are exercisable as of June 21, 2023, do not expire and are exercisable in cash or by means of a cashless exercise. In addition, upon the consummation of an acquisition (as described in the Pre-Funded Warrant agreements), each Pre-Funded Warrant will automatically be converted into the right of the holder of such Pre-Funded Warrant to receive the kind and amount of securities, cash or other property that such holders would have received had they exercised such Pre-Funded Warrant immediately prior to such acquisition, without regard to any limitations on exercise contained in the Pre-Funded Warrants
The Pre-Funded Warrants cannot require cash settlement, are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, are immediately exercisable, and do not embody an obligation for the Company to repurchase its common stock shares and permit the holders to receive a fixed number of shares of common stock upon exercise. Additionally, the Pre-Funded Warrants do not provide any guarantee of value or return. Accordingly, the Pre-Funded Warrants are classified as a component of permanent equity. After deducting for commissions and other offering expenses, the Company received net proceeds of approximately $ 91.4 million from the sale of 8,489,409 shares of common stock and 1,538,591 Pre-Funded Warrants.
Series B Convertible Preferred Stock
On January 24, 2023, the Company entered into a Securities Purchase Agreement (the “Series B Convertible Preferred Stock Securities Purchase Agreement”) with certain purchasers pursuant to which the Company agreed to sell and issue to the purchasers in a private placement (the “Private Placement”) up to 2,144,160 shares of its Series B convertible preferred stock, par value $ 0.0001 per share (the “Series B Convertible Preferred Stock”), in two tranches. On January 24, 2023, the Company filed the Certificate of Designation of the Preferences, Rights and Limitations of the Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock Certificate of Designation”) setting forth the preferences, rights and limitations of the Series B Convertible Preferred Stock with the Secretary of State of the State of Delaware. The Series B Convertible Preferred Stock Certificate of Designation became effective upon filing.
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Each share of the Series B Convertible Preferred Shares is convertible into 3.5305 shares of the Company’s common stock, such conversion rate reflects an adjustment to account for the Reverse Stock Split, at the option of the holders at any time, subject to certain limitations, including that the holder will be prohibited from converting Series B Convertible Preferred Stock into common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own a number of shares of common stock above a conversion blocker, which is initially set at 9.99 % (the “Conversion Blocker”) of the total common stock then issued and outstanding immediately following the conversion of such shares of Series B Convertible Preferred Stock. Holders of the Series B Convertible Preferred Stock are permitted to increase the Conversion Blocker to an amount not to exceed 19.99 % upon 60 days ’ notice.
The Company agreed to sell and issue in the first tranche of the Private Placement 1,200,000 shares of Series B Convertible Preferred Stock at a purchase price of $ 25.00 per share of Series B Convertible Preferred Stock (equivalent to $ 7.0812 per share of common stock on a post-Reverse Stock Split basis). The first tranche of the Private Placement closed on January 27, 2023. The Company received gross proceeds from the first tranche of the Private Placement of approximately $ 30.0 million, before deducting fees to the placement agent and other offering expenses payable by the Company (“Series B Convertible Preferred Stock Proceeds”).
In addition, the Company agreed to sell and issue in the second tranche of the Private Placement 944,160 shares of Series B Convertible Preferred Stock at a purchase price of $ 31.77 per share of Series B Convertible Preferred Stock (equivalent to $ 9.00 per share of common stock on a post-Reverse Stock Split basis) if at any time within 18 months following the closing of the first tranche the 10-day volume weighted average price of the Company’s common stock (as quoted on Nasdaq and as calculated by Bloomberg) should reach at least $ 13.50 per share, such threshold reflects an adjustment to account for the Reverse Stock Split (which may be further adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as needed) with aggregate trading volume during the same 10-day period of at least $ 25 million (the “Second Tranche Right”). The second tranche of the Private Placement is expected to close within seven trading days of meeting the second tranche conditions and will be subject to additional, customary closing conditions. If the Second Tranche Right conditions are satisfied, the Company anticipates receiving gross proceeds from the second tranche of the Private Placement of approximately $ 30.0 million, before deducting fees to the placement agent and other offering expenses payable by the Company.
The Series B Convertible Preferred Stock ranks (i) senior to the common stock; (ii) senior to all other classes and series of equity securities of the Company that by their terms do not rank senior to the Series B Convertible Preferred Stock; (iii) senior to all shares of the Company’s Series A Convertible Preferred Stock the equity securities described in (i)-(iii), the “Junior Stock”); (iv) on parity with any class or series of capital stock of the Company hereafter created specifically ranking by its terms on parity with the Series B Convertible Preferred Stock (the “Parity Stock”); (v) junior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms senior to any Series B Convertible Preferred Stock (“Senior Stock”); and (vi) junior to all of the Company’s existing and future debt obligations, including convertible or exchangeable debt securities, in each case, as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily and as to the right to receive dividends.
In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Company, and subject to the prior and superior rights of any Senior Stock, each holder of shares of Series B Convertible Preferred Stock will be entitled to receive, in preference to any distributions of any of the assets or surplus funds of the Company to the holders of the common stock and any of the Company’s securities that are Junior Stock and pari passu with any distribution to the holders of any Parity Stock, an amount equal to $ 1.00 per share of Series B Convertible Preferred Stock, plus an additional amount equal to any dividends declared but unpaid on such shares, before any payments shall be made or any assets distributed to holders of the common stock or any of our securities that Junior Stock.
So long as any shares of the Series B Convertible Preferred Stock remain outstanding, the Company cannot without the affirmative vote or consent of the holders of majority of the shares of the Series B Convertible Preferred Stock then-outstanding, in which the holders of the Series B Convertible Preferred Stock vote separately as a class: (a) amend, alter, modify or repeal (whether by merger, consolidation or otherwise) the Series B Convertible Preferred Stock Certificate of Designation, the Company’s certificate of incorporation, or the Company’s bylaws in
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any manner that adversely affects the rights, preferences, privileges or the restrictions provided for the benefit of, the Series B Convertible Preferred Stock; (b) issue further shares of Series B Convertible Preferred Stock or increase or decrease (other than by conversion) the number of authorized shares of Series B Convertible Preferred Stock; (c) authorize or issue any Senior Stock; or (d) enter into any agreement to do any of the foregoing that is not expressly made conditional on obtaining the affirmative vote or written consent of the majority of then-outstanding Series B Convertible Preferred Stock. Holders of Series B Convertible Preferred Stock are entitled to receive when, as and if dividends are declared and paid on the common stock, an equivalent dividend, calculated on an as-converted basis. Shares of Series B Convertible Preferred Stock are otherwise not entitled to dividends.
The Company classified the first tranche of the Series B Convertible Preferred Stock as temporary equity in the consolidated balance sheets as the Company could be required to redeem the Series B Convertible Preferred Stock if the Company cannot convert the Series B Convertible Preferred Stock into shares of common stock for any reason including due to any applicable laws or by the rules or regulations of any stock exchange, interdealer quotation system, or other self-regulatory organization with jurisdiction over the Company which is not solely in the control of the Company. If the Company were required to redeem the Series B Convertible Preferred Stock, it would be based upon the volume-weighted-average price of common stock on an as converted basis on the date the holders provided a conversion notice to the Company. As of December 31, 2023, the Company did not adjust the carrying value of the Series B Convertible Preferred Stock since it was not probable the holders would be unable to convert the Series B Convertible Preferred Stock into shares of common stock due to any reason including due to any applicable laws or by the rules or regulations of any stock exchange, interdealer quotation system, or other self-regulatory organization with jurisdiction over the Company.
The Company evaluated the Second Tranche Right under ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and determined that it met the requirements for separate accounting from the initial issuance of Series B Convertible Preferred Stock as a freestanding financial instrument. The Company then determined the Second Tranche Right should be liability classified pursuant to ASC 480. As a result, the Company classified the Second Tranche Right as a non-current liability within the consolidated balance sheets and the Second Tranche Right was initially recorded at fair value and is subsequently re-measured at fair value at the end of each reporting period. The fair value of the Second Tranche Right on the date of issuance was determined to be $6.9 million based on a Monte-Carlo valuation and the Company allocated $ 6.9 million of the Series B Convertible Preferred Stock Proceeds to this liability and recorded this amount as preferred stock tranche liability. On December 31, 2023, the fair value of the Second Tranche Right was determined to be $ 4.2 million, and the Company recorded this amount as preferred stock tranche liability on the consolidated balance sheets. The Company recorded the mark-to-market adjustment of $ 2.8 million for the year ended December 31, 2023, under change in fair value of preferred stock tranche liability within the consolidated statements of operations and loss.
The Company determined that all other features of the securities offered pursuant to the Series B Convertible Preferred Stock Securities Purchase Agreement were clearly and closely associated with the equity host and did not require bifurcation or the fair value of the feature was immaterial to the Company's consolidated financial statements. The Company reassesses the features on a quarterly basis to determine if they require separate accounting. There have been no changes to the Company’s original assessment through December 31, 2023.
Series A Convertible Preferred Stock
On November 4, 2022, the Company e ntered into an exchange agreement (the “Exchange Agreement”) with Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Biotechnology Value Trading Fund OS LP and MSI BVF SPV, LLC (collectively referred to as “BVF”), pursuant to which BVF exchanged 833,333 shares of the Company’s common stock (as adjusted to account for the Reverse Stock Split) for 1,000,000 shares of newly designated Series A convertible preferred stock, par value $ 0.0001 per share (the “Series A Convertible Preferred Stock”) (the “Exchange”).
Each share of the Series A Convertible Preferred Stock is convertible into 0.833 shares of the Company’s common stock (as adjusted to account for the Reverse Stock Split) at the option of the holder at any time, subject to certain limitations, including that the holder will be prohibited from converting Preferred Stock into common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own a number of shares of
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common stock above the Conversion Blocker, initially set at 9.99 % , of the total common stock then issued and outstanding immediately following the conversion of such shares of Preferred Stock. Holders of the Series A Convertible Preferred Stock are permitted to increase the Conversion Blocker to an amount not to exceed 19.99 % upon 60 days ’ notice.
Shares of Series A Convertible Preferred Stock generally have no voting rights, except as required by law and except that the consent of a majority of the holders of the outstanding Series A Convertible Preferred Stock will be required to amend the terms of the Series A Convertible Preferred Stock. In the event of the Company’s liquidation, dissolution or winding up, holders of Series A Convertible Preferred Stock will participate pari passu with any distribution of proceeds to holders of common stock. Holders of Series A Convertible Preferred Stock are entitled to receive when, as and if dividends are declared and paid on the common stock, an equivalent dividend, calculated on an as-converted basis. Shares of Series A Convertible Preferred Stock are otherwise not entitled to dividends.
The Series A Convertible Preferred Stock (i) senior to any class or series of capital stock of the Company hereafter created specifically ranking by its terms junior to the Series A Convertible Preferred Stock; (ii) on parity with the common stock and any class or series of capital stock of the Company created specifically ranking by its terms on parity with the Series A Convertible Preferred Stock; and (iii) junior to the Series B Convertible Preferred Stock and to any class or series of capital stock of the Company created specifically ranking by its terms senior to any Series A Convertible Preferred Stock, in each case, as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntarily or involuntarily.
The Company evaluated the Series A Preferred Stock for liability or equity classification under ASC 480, Distinguishing Liabilities from Equity , and determined that equity treatment was appropriate because the Series A Preferred Stock did not meet the definition of the liability under ASC 480. Additionally, the Series A Preferred Stock is not redeemable for cash or other assets (i) on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within control of the Company. As such, the Company recorded the Series A Preferred Stock as permanent equity.
At-the-market equity offering programs
In August 2021, the Company entered into a sales agreement with Cantor pursuant to which the Company can offer and sell up to $ 100.0 million of its common stock at the current market prices from time to time through Cantor as sales agent (the “August 2021 ATM”). During the years ended December 31, 2023, 2022, and 2021, the Company sold 0 shares, 1,964,448 shares and 244,209 shares, respectively, under the August 2021 ATM for net proceeds of approximately $ 0.0 million, $ 27.4 million and $ 6.8 million, respectively, (after deducting commissions and other offering expenses) .
8. Stock-based compensation
Stock-based compensation expense as reflected in the Company’s consolidated statements of operations and comprehensive loss was as follows (in thousands):
Year ended December 31,
2023
2022
2021
Research and development
$
1,987
$
1,766
$
2,099
Selling, general and administrative
3,873
4,281
5,612
Total stock-based compensation expense
$
5,860
$
6,047
$
7,711
All of the $ 5.9 million, $ 6.0 million, and $ 7.7 million of stock-based compensation expense recorded during the years ended December 31, 2023, 2022, and 2021, respectively, was recorded to additional paid-in capital.
The Company has awards outstanding under two equity compensation plans, the 2021 Equity Incentive Plan (the “2021 Plan”), and the Amended and Restated 2012 Incentive Plan (the “2012 Plan”), as well as the inducement award program. Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the individual plans.
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2021 Plan
During 2021, the Company’s stockholders approved the 2021 Plan. Upon effectiveness of the 2021 Plan, the Company ceased making awards under the 2012 Plan. The 2021 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSUs and other stock-based awards. The number of shares of common stock initially reserved for issuance under the 2021 Plan was (i) 1,991,666 which is the sum of 1,104,177 shares plus the number of shares available for issuance under the 2012 Plan as of the date the Company’s Board of Directors approved the 2021 Plan ( 887,489 shares) plus (ii) the number of shares of the Company’s common stock underlying awards under the 2012 Plan and the 2010 Equity Incentive Plan (the “ 2010 Plan”) that expire, terminate or are surrendered without delivery of shares, are forfeited to or repurchased by the Company, or otherwise become available again for grant under the terms of the 2012 Plan or the 2010 Plan, as applicable.
As of December 31, 2023, under the 2021 Plan, the Company has granted stock options for 1,398,762 shares of common stock, of which 52,013 have been forfeited and 0 have been exercised, and granted RSUs for 269,349 shares of common stock, of which 18,594 have been forfeited and 80,367 have vested. As of December 31, 2023, 693,645 shares remain available for future issuance. The exercise price of each option has been equal to the closing price of a share of the Company’s common stock on the grant date.
2012 Plan
The 2012 Plan became effective immediately upon the closing of the Company’s initial public offering in February 2012. Upon effectiveness of the 2012 Plan, the Company ceased making awards under the 2010 Plan. The 2012 Plan initially allowed the Company to grant awards for up to 285,714 shares of common stock, plus the number of shares of common stock available for grant under the 2010 Plan as of the effectiveness of the 2012 Plan (which was an additional 2,508 shares), plus that number of shares of common stock related to awards outstanding under the 2010 Plan which terminate by expiration, forfeiture, cancellation or otherwise. The 2012 Plan included an “evergreen provision” that allowed for an annual increase in the number of shares of common stock available for issuance under the 2012 Plan. The annual increase was added on the first day of each year from 2013 through 2018 and was equal to the lesser of 107,412 shares of common stock and 4.0 % of the number of shares of common stock outstanding, or a lesser amount as determined by the board of directors. On each of January 1, 2018, January 1, 2017 and January 1, 2016, the number of shares available for issuance under the 2012 Plan increased by 107,412 under this provision. On December 18, 2018, the shareholders of the Company approved the Amended and Restated 2012 Incentive Plan which increased the maximum number of shares available for issuance under the 2012 Plan to 1,385,702 and eliminated the evergreen provision. On May 19, 2020, the shareholders of the Company approved the Amended and Restated 2012 Incentive Plan which increased the maximum number of shares available for issuance by 1,083,333 shares.
Awards under the 2012 Plan may include the following award types: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, RSUs, other stock-based or cash-based awards and any combination of the foregoing. As of December 31, 2023, under the 2012 Plan, the Company has granted stock options for 1,841,188 shares of common stock, of which 814,357 have been forfeited, 213,901 have expired, and 191,342 have been exercised, and granted RSUs for 556,432 shares of common stock, of which 87,458 have been forfeited and 455,878 have vested. The exercise price of each stock option has been equal to the closing price of a share of the Company’s common stock on the grant date. Upon adoption of the 2021 Plan, the Company ceased issuing awards from the 2012 Plan.
Inducement Award Program
In December 2014, the Company established an inducement award program (in accordance with Nasdaq Listing Rule 5635(c)(4)) under which it may grant non-statutory stock options to purchase, and RSUs in respect of up to an aggregate of 62,500 shares of common stock to new or prospective employees as inducement to enter into employment with the Company. In December 2016, the Board of Directors authorized and reserved 48,333 additional shares of common stock under this program. In December 2017, the Board of Directors authorized and reserved 208,333 additional shares of common stock under this program. In June and December 2018, the Board of Directors authorized and reserved 141,666 and 104,166 additional shares of common stock under this program,
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respectively. In February 2020, the Board of Directors authorized the reduction of 169,447 shares available for issuance under this program. In September 2023, the Board of Directors authorized and reserved 500,000 additional shares of common stock under this program. The program is governed by the terms of the 2021 Plan, but shares issued pursuant to the program are not issued under the 2021 Plan. As of December 31, 2023, the Company had granted options for 825,562 shares of common stock under the program, of which 472,880 have been forfeited, 1,997 have expired and 48,663 have been exercised, and granted RSUs for 80,804 shares, of which 24,871 have been forfeited and 30,128 have vested. As of December 31, 2023, 482,667 shares remain available for future issuance.
Stock Options
Most options granted by the Company vest twenty-five percent ( 25 %) one year from vesting start date and six and a quarter percent ( 6.25 %) for each successive three-month period, thereafter (subject to acceleration of vesting in the event of certain change of control transactions) subject to the employee’s continued employment with, or service to, the Company on such vesting date and are exercisable for a period of ten years from the date of grant.
A summary of the Company’s stock option activity and related information for the year ended December 31, 2023, is as follows:
Shares
Weighted-average exercise price per share
Weighted-average remaining contractual term (years)
Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2022
1,168,105
$
33.63
7.1
$
18
Granted
1,177,750
7.98
Forfeited/cancelled
( 62,831 )
35.38
Expired
( 12,665 )
117.12
Outstanding at December 31, 2023
2,270,359
$
19.81
7.8
$
559
Vested at December 31, 2023
876,016
$
33.39
5.8
$
138
The fair value of each stock option was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:
Year ended December 31,
2023
2022
2021
Risk-free interest rate
3.77
%
3.13
%
1.15
%
Volatility
92
%
88
%
89
%
Dividend yield
—
—
—
Expected term (years)
6.1
5.8
6.0
The Company recorded stock-based compensation expense associated with employee and non-employee stock options of $ 4.2 million, $ 4.2 million, and $ 4.1 million, for the years ended December 31, 2023, 2022, and 2021, respectively. The weighted-average grant date fair value of stock options granted in the years ended December 31, 2023, 2022, and 2021 was $ 6.16 , $ 8.28 , and $ 21.84 per stock option, respectively. The fair value of stock options that vested during the years ended December 31, 2023, 2022, and 2021 was $ 3.1 million, $ 4.4 million, and $ 3.8 million, respectively. The aggregate intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by employees to exercise the option) during the years ended December 31, 2023, 2022, and 2021 was $ 0.0 million, less than $ 0.1 million, and $ 0.8 million, respectively.
At December 31, 2023 there was $ 9.2 million of total unrecognized compensation cost related to unvested stock options and the Company expects to recognize this cost over a remaining weighted-average period of 2.6 years.
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Restricted Stock Units (“RSUs”)
Each RSU entitles the holder to receive one share of the Company’s common stock when the RSU vests. The RSUs generally vest (i) twenty-five percent ( 25 %) one year from vesting start date and six and a quarter percent ( 6.25 %) for each successive three-month period, thereafter, (ii) two tranches for 50 % of the award with the second and final vesting date on the one year anniversary of the vesting commencement date and (iii) 100 percent within two years of the vesting commencement date. The RSUs are subject to acceleration of vesting in the event of certain change of control transactions and subject to the employee’s continued employment with, or service to, the Company on such vesting date. Compensation expense is recognized on a straight-line basis.
A summary of RSU activity during the year ended December 31, 2023, is as follows:
Shares
Weighted-average grant date fair value per share
Outstanding at December 31, 2022
172,909
$
25.82
Granted
108,058
$
10.15
Vested
( 66,201 )
$
25.45
Forfeited/cancelled
( 5,477 )
$
17.96
Outstanding at December 31, 2023
209,289
$
18.05
The Company recorded stock-based compensation expense associated with employee and non-employee RSUs of $ 1.6 million, $ 1.8 million, and $ 3.5 million, for the years ended December 31, 2023, 2022, and 2021, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2023, 2022, and 2021 was approximately $ 1.7 million, $ 2.3 million, and $ 3.7 million, respectively.
At December 31, 2023, there was $ 3.1 million of total unrecognized compensation cost related to unvested RSUs and the Company expects to recognize this cost over a remaining weighted-average period of 2.1 years.
Employee stock purchase plan
At the Special Meeting of Stockholders, held on December 18, 2018, the stockholders approved the 2018 Employee Stock Purchase Plan (“2018 ESPP”). On June 21, 2019, the board of directors of the Company amended and restated the 2018 ESPP, to account for certain non-material changes to the plan’s administration (the “Amended and Restated 2018 ESPP”). The Amended and Restated 2018 ESPP provides eligible employees with the opportunity, through regular payroll deductions, to purchase shares of the Company’s common stock at 85 % of the lesser of the fair market value of the common stock (a) on the date the option is granted, which is the first day of the purchase period, and (b) on the exercise date, which is the last business day of the purchase period. The Amended and Restated 2018 ESPP generally allows for two six-month purchase periods per year beginning in January and July, or such other periods as determined by the compensation committee of the Company’s board of directors. The Company has reserved 166,666 shares of common stock for the administration of the Amended and Restated 2018 ESPP. The fair value of shares expected to be purchased under the Amended and Restated 2018 ESPP was calculated using the Black-Scholes model with the following weighted-average assumptions:
Year ended December 31,
2023
2022
2021
Risk-free interest rate
5.16
%
1.56
%
0.07
%
Volatility
126
%
77
%
68
%
Dividend yield
—
—
—
Expected term (years)
0.5
0.5
0.5
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For the years ended December 31, 2023, 2022, and 2021, the Company has recognized less than $ 0.1 million, $ 0.1 million, and $ 0.1 million, respectively, of stock-based compensation expense under the Amended and Restated 2018 ESPP. During the year ended December 31, 2023, 2022, and 2021, the Company issued 14,270 shares, 10,194 shares and 9,172 shares, respectively, of common stock for proceeds of $ 0.1 million, $ 0.2 million and $ 0.2 million, respectively under the Amended and Restated 2018 ESPP.
9. Convertible Senior Notes
2018 Notes
On October 17, 2018, the Company closed a registered direct public offering of $ 150.0 million aggregate principal amount of the Company’s 2018 Notes for net proceeds of approximately $ 145.3 million. The 2018 Notes were governed by the terms of a base indenture for senior debt securities (the “2018 Base Indenture”), as supplemented by the first supplemental indenture thereto (the “Supplemental Indenture” and together with the “2018 Base Indenture”, the “2018 Indenture”), each dated October 17, 2018, by and between the Company and Wilmington Trust, National Association, (“Wilmington”) as trustee. The 2018 Notes were senior unsecured obligations of the Company and bore 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.
Prior to November 1, 2022, the Company did not have the right to redeem the 2018 Notes. On or after November 1, 2022, the Company may elect to redeem the 2018 Notes, in whole or in part, at a cash redemption price equal to the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest, if any.
Unless the Company has previously called all outstanding 2018 Notes for redemption, the 2018 Notes will be subject to repurchase by the Company at the holders’ option on each of November 1, 2023, November 1, 2028, November 1, 2033, November 1, 2038 and November 1, 2043 (or, if any such date is not a business day, on the next business day) at a cash repurchase price equal to the principal amount of the 2018 Notes to be repurchased, plus accrued and unpaid interest, if any.
The Company determined that the expected life of the 2018 Notes was equal to the period through November 1, 2023, as this represents the point at which the 2018 Notes were initially subject to repurchase by the Company at the option of the holders.
In the fourth quarter of 2023, the Company repaid the remaining outstanding balance of 2018 Notes of $ 0.3 million in exchange for principal amount plus accrued and unpaid interest of a total of $ 0.3 million. As a result there are no outstanding 2018 Notes as of December 31, 2023.
The components of the carrying value of the 2018 Notes as of December 31, 2022 are detailed below (in thousands):
December 31, 2022
2018 Notes principal balance
$
300
Debt discount and issuance costs, net of accretion
( 25 )
2018 Notes, net
$
275
2019 Notes
On November 14, 2019 and December 23, 2019, the Company entered into privately negotiated agreements to exchange approximately $ 114.3 million and $ 7.4 million, respectively, aggregate principal amount of the 2018 Notes for (i) approximately $ 62.9 million and $ 4.0 million, respectively, aggregate principal amount of newly issued 5.00 % Convertible Senior Second Lien Notes due 2048 (the “2019 Notes”), (ii) an aggregate of $ 11.4 million and $ 0.7 million, respectively, in 2018 Notes principal repayment and (iii) accrued interest on the 2018 Notes through November 14, 2019 and December 23, 2019, respectively. As of March 31, 2020, all 2019 Notes had converted into shares of common stock and are no longer outstanding.
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2020 Notes
On November 6, 2020, the Company entered into a privately negotiated agreement with an investor who was a holder of the Company’s 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” and together with the 2018 Notes and 2019 Notes referred to as the “Notes”). The issuance of the 2020 Notes closed on November 13, 2020.
On July 16, 2021, the aggregate principal of $ 28.0 million of 2020 Notes was converted into 717,949 shares of common stock. As a result, as of September 30, 2021, all 2020 Notes have converted into shares of common stock. Upon conversion of the 2020 Notes, holders received a cash payment equal to the accrued and unpaid interest on the converted 2020 Notes. Pursuant to ASC 815-15-40-1, upon conversion, the Company recorded the remaining discount on the 2020 Notes of $ 7.8 million as interest expense in the statements of operations and comprehensive loss during the year ended December 31, 2021.
All Notes
The Company determined that the expected life of the Notes was equal to the period through November 1, 2023, as this represents the point at which the Notes were initially subject to repurchase by the Company at the option of the holders. Accordingly, the total debt discount, inclusive of the fair value of the embedded conversion feature derivative at issuance and change in fair value of conversion options upon exchanges, was amortized using the effective interest method through November 1, 2023. The effective interest utilized to amortize 2018 Notes and 2020 Notes was 15.65 % and 20.31 %, respectively. For the year ended December 31, 2023, the Company recognized less than $ 0.1 million of interest expense related to the 2018 Notes.
10. Net Loss per Share
ASC Topic 260, Earnings Per Share, requires the Company to calculate its net loss per share based on basic and diluted net loss per share, as defined. Basic EPS excludes dilution and is computed by dividing net loss by the weighted average number of shares outstanding for the period. For the years ended December 31, 2023, 2022, and 2021 net loss, basic and diluted EPS are the same as the assumed exercise of stock options, RSUs, ESPP, the 2018 Notes, Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock are anti-dilutive.
The following potentially dilutive securities were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
Year Ended December 31,
2023
2022
2021
Outstanding stock options
2,270,359
1,168,105
1,355,220
Outstanding restricted stock units
209,289
172,909
233,710
2018 Notes
—
3,489
3,489
Employee stock purchase plan
7,475
6,874
4,803
Series A Convertible Preferred Stock
833,333
833,333
—
Series B Convertible Preferred Stock
4,236,570
—
—
Total potentially dilutive securities
7,557,026
2,184,710
1,597,222
11. Income Taxes
As of December 31, 2023, the Company had federal and state NOL carryforwards of approximately $ 473.6 million and $ 189.0 million, respectively, which are available to reduce future taxable income. The Company 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. The NOL and tax credit carryforwards will expire at various dates through 2043, except for $ 277.9 million of federal NOL carryforwards which may be carried forward indefinitely.
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A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:
December 31,
2023
2022
Income tax benefit using U.S. federal statutory rate
21.00
%
21.00
%
State tax benefit, net of federal benefit
2.82
%
2.15
%
Research and development tax credits
4.41
%
2.81
%
Stock-based compensation
( 0.98 )
%
( 2.17 )
%
Permanent items
0.44
%
( 0.08 )
%
Change in the valuation allowance
( 21.17 )
%
( 21.41 )
%
Tax law change
( 4.31 )
%
—
%
NOL and tax credit expiration under Section 382
( 2.07 )
%
( 2.26 )
%
Other
( 0.14 )
%
( 0.04 )
%
—
%
—
%
On October 4, 2023, Massachusetts enacted tax law changes which included the adoption of a single sales apportionment factor effective on January 1, 2025. As required under ASC 740, the Company has accounted for the deferred tax impacts of this tax law change in the period the tax law was enacted, which has the impact of reducing its state deferred tax assets. The impact of the tax law change is offset by a change in valuation allowance.
The principal components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
December 31,
2023
2022
Deferred tax assets:
Net operating loss carryforwards
$
110,152
$
103,243
Capitalized research and development
20,356
11,621
Research and development credits
11,192
7,107
Stock-based compensation
3,340
3,450
Installment sale
6,909
7,768
Lease liability
311
538
Other deferred tax assets
346
587
Total deferred tax assets
152,606
134,314
Deferred tax liabilities:
Right-of-use asset
( 248 )
( 425 )
Debt discount
—
( 4 )
Other deferred tax liability
—
( 29 )
Total deferred tax liabilities
( 248 )
( 458 )
Net deferred tax asset prior to valuation allowance
152,358
133,856
Valuation allowance
( 152,358 )
( 133,856 )
Net deferred tax asset
$
—
$
—
The Tax Cuts and Jobs Act (“TCJA”) requires taxpayers to capitalize and amortize research and development (“R&D”) expenditures under section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during 2022. The Company will amortize these costs for tax purposes over 5 years for R&D performed in the U.S. and over 15 years for R&D performed outside the U.S.
The Company has recorded a valuation allowance against its deferred tax assets at December 31, 2023 and 2022 because the Company’s management believes that it is more likely than not that these assets will not be fully realized. The increase in the valuation allowance of approximately $ 18.5 million in the year ended December 31, 2023, primarily relates to the capitalization of research and development expenses, the generation of NOLs and R&D credits.
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Section 382 of the Internal Revenue Code and similar provisions under state law limit the utilization of U.S. NOL carryforwards, state NOL carryforwards, R&D credits, and Orphan Drug (“OD”) credits following certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%. Based on the Company’s analysis under Section 382, the Company believes that its federal NOL carryforwards, its state NOL carryforwards, R&D credits, and OD credits are limited by Section 382 and similar provisions under state law as of December 31, 2023. The portion of federal NOL carryforwards, state NOL carryforwards, R&D credits, and OD credits that were determined to be limited have been written off as of December 31, 2023. The remaining unused carryforwards and credits remain available for future periods. Due the Company’s full valuation allowance the write off of NOL carryforwards and R&D and OD credits did not have any impact to the statements of operation and comprehensive loss.
The Company’s reserves related to taxes are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. From inception and through December 31, 2023, the Company had no unrecognized tax benefits or related interest and penalties accrued. The Company has not conducted a study of R&D credit carryforwards. This study may result in an adjustment to the Company’s R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s R&D credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required. The Company would recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. The Company’s uncertain tax positions are related to years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.
12. Commitments and contingencies
The Company entered into a lease agreement for approximately 27,810 square feet of office space in Needham, Massachusetts. Please refer to Note 6. Leases for further details regarding the minimum aggregate future lease commitments as of December 31, 2023. In conjunction with the execution of the Amended Lease Agreement, the Company has provided a security deposit in the form of a letter of credit in the amount of $ 0.2 million as of December 31, 2023, and 2022. The amount is included in non-current restricted cash on the consolidated balance sheets as of December 31, 2023, and 2022.
Pursuant to the terms of various agreements, the Company may be required to pay various development, regulatory and commercial milestones. In addition, if any products related to these agreements are approved for sale, the Company may be required to pay significant royalties on future sales. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurring.
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13. License, collaboration and commercial agreements
GenFleet Therapeutics (Shanghai), Inc.
On August 24, 2023, the Company entered into a collaboration and option agreement (“GenFleet Agreement”) with GenFleet Therapeutics (Shanghai), Inc. (“GenFleet”), pursuant to which GenFleet granted the Company the option to obtain exclusive development and commercialization rights worldwide outside of mainland China, Hong Kong, Macau, and Taiwan (the “Territory”) for up to three oncology programs targeting RAS pathway driven cancers (the “GenFleet Options”). The Company may exercise its GenFleet Options on a program-by-program basis.
The Company made an upfront payment of $ 2.0 million to GenFleet in September 2023 and will provide $ 1.5 million of research support (“GenFleet R&D Support Fee”) over the first three years of the GenFleet Agreement. In addition, pursuant to the GenFleet Agreement, upon achievement of certain development and commercial milestones, and upon the Company exercising its GenFleet Options, GenFleet will be entitled to receive payments of up to $ 622.0 million. The Company has also agreed to pay GenFleet royalties on net sales of licensed products in the Territory ranging from the mid to high single digits.
The Company may terminate the GenFleet Agreement in its entirety or on a program-by-program basis by providing 90 days written notice to GenFleet. Either party may terminate the GenFleet Agreement in its entirety or on a program-by-program and country-by-country basis, with 60 days ’ written notice for the other party’s material breach if such party fails to cure the breach. Either party may also terminate the GenFleet Agreement in its entirety upon certain insolvency events involving the other party.
During the year ended December 31, 2023, the Company expensed $ 2.0 million related to the upfront payment and $ 0.2 million related to the GenFleet R&D Support Fee within research and development expense in the consolidated statements of operations and comprehensive loss. The future milestone payments are contingent in nature and will be recognized if and when the respective contingencies are resolved. If the Company elects to exercise its GenFleet Options, the related payment will be recognized if and when each respective GenFleet Option is elected.
Secura Bio, Inc. (“Secura”)
On August 10, 2020, the Company and Secura signed the Secura APA and on September 30, 2020, the transaction closed.
Pursuant to the Secura APA, the Company sold to Secura its exclusive worldwide license, including related assets, for the research, development, commercialization, and manufacture in oncology indications of products containing duvelisib. The sale included certain intellectual property related to duvelisib in oncology indications, certain existing duvelisib inventory, claims and rights under certain contracts pertaining to duvelisib. Pursuant to the Secura APA, Secura assumed all operational and financial responsibility for activities that were part of the Company’s duvelisib oncology program, including all commercialization efforts related to duvelisib in the United States and Europe, as well as the Company’s ongoing duvelisib clinical trials. Further, Secura assumed all obligations with existing collaboration partners developing and commercializing duvelisib, which include Yakult Honsha Co., Ltd. (“Yakult”), CSPC Pharmaceutical Group Limited (“CSPC”), and Sanofi. Additionally, Secura assumed all royalty payment obligations due under the amended and restated license agreement with Infinity Pharmaceuticals, Inc.
Pursuant to the terms of the Secura APA, Secura has paid the Company an up-front payment of $ 70.0 million in September 2020 and has agreed to pay the Company (i) regulatory milestone payments up to $ 45.0 million, consisting of a payment of $ 35.0 million upon receipt of regulatory approval of COPIKTRA in the United States for the treatment of peripheral T-cell lymphoma and a payment of $ 10.0 million upon receipt of the first regulatory approval for the commercial sale of COPIKTRA in the European Union for the treatment of peripheral T-cell lymphoma, (ii) sales milestone payments of up to $ 50.0 million, consisting of $ 10.0 million when total worldwide net sales of COPIKTRA exceed $ 100.0 million, $ 15.0 million when total worldwide net sales of
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COPIKTRA exceed $ 200.0 million and $ 25.0 million when total worldwide net sales of COPIKTRA exceed $ 300.0 million, (iii) low double-digit royalties on the annual aggregate net sales above $ 100.0 million in the United States, European Union, and the United Kingdom of Great Britain and Northern Ireland and (iv) 50 % of all royalty, milestone and sublicense revenue payments payable to Secura under the Company’s existing license agreements with Sanofi, Yakult, and CSPC, and 50 % of all royalty and milestone payments payable to Secura under any license or sublicense agreement entered into by Secura in certain jurisdictions.
In connection with the Secura APA, the Company and Secura entered into a transition services agreement (“Secura TSA”). Under the terms of the Secura TSA, the Company provided certain support functions at Secura’s direction for a term of less than one year from the date of execution (“Secura TSA Services”). Services performed were paid at a mutually agreed upon rate.
The Company evaluated the Secura APA and Secura TSA in accordance with ASC 606 as the Company concluded that the counterparty, Secura, is a customer. The Company identified the following performance obligations under the Secura APA and Secura TSA:
● a bundled performance obligation consisting of delivery of the duvelisib global license and intellectual property, certain existing duvelisib inventory, certain duvelisib contracts and clinical trials, certain regulatory approvals, and certain regulatory documentation and books and records (the “Bundled Secura Performance Obligation”); and
● Secura TSA Services.
The Company concluded that the duvelisib global license and intellectual property were not distinct within the context of the contract (i.e. separately identifiable) because the other assets including certain existing duvelisib inventory, certain duvelisib contracts and clinical trials, certain regulatory approval, and certain regulatory documentation and books and records do not have stand-alone value from other duvelisib global license and intellectual property and Secura could not benefit from them without the duvelisib global license and intellectual property. Consistent with the guidance under ASC 606-10-25-16A, the Company disregarded immaterial promised goods and services when determining performance obligations.
The Company has determined that the upfront payment of $ 70.0 million, future potential milestone payments and royalties including from Secura’s sublicensees should be allocated to the delivery of the Bundled Secura Performance Obligation. The Company has the right to consideration for TSA services in an amount that corresponds directly with the value to Secura of the Company’s performance to date. Consideration allocated to the Secura TSA Services will be recognized as such services are provided over the performance period using an output method based on the amount to which the Company has a right to invoice.
The Company determined less than $ 0.1 million of future potential royalties the Company expects to receive pursuant to the Secura APA were not constrained as of December 31, 2023. When estimating the amount of royalties to be received that were not constrained, the Company used the expected value method as there are a range of possible outcomes. When estimating royalties expected to be received, the Company used a combination of internal projections and forecasts and data from external sources. The Company determined that all other future potential royalties were constrained under the guidance as of December 31, 2023. As part of the Company’s evaluation of the constraint on future royalties, the Company considered a number of factors in determining whether there is significant uncertainty associated with the future events that would result in royalty payments. Those factors include: the likelihood and magnitude of revenue reversals related to future royalties, the amount of variable consideration is highly susceptible to factors outside of the Company’s influence, the amount of time to resolve the uncertainty, and lack of significant history of selling COPIKTRA outside of the United States.
As the consideration for future royalties is conditional, the Company 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. As of December 31, 2023, and 2022, the contract asset has been recorded within prepaid and other current assets on the consolidated balance sheets.
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The following table presents changes in the Company’s contract asset for the year ended December 31, 2023 (in thousands):
Contract Asset:
December 31, 2022
Additions
Reclassification to receivable
December 31, 2023
Contract asset - Secura
$
96
$
—
$
( 54 )
$
42
Total
$
96
$
—
$
( 54 )
$
42
During the year ended December 31, 2023, the Company determined all future potential milestones were excluded from the transaction price, as all other milestone amounts were fully constrained under the guidance as of December 31, 2023. As part of the Company’s evaluation of the constraint, the Company considered a number of factors in determining whether there is significant uncertainty associated with the future events that would result in the milestone payments. Those factors included: the likelihood and magnitude of revenue reversals related to future milestones, the amount of variable consideration that is highly susceptible to factors outside of the Company’s influence and the uncertainty about the consideration is not expected to be resolved for an extended period of time. All future potential milestone payments were fully constrained as the risk of significant revenue reversal related to these amounts has not yet been resolved.
During the year ended December 31, 2022, the Company recognized $ 2.6 million of sale of COPIKTRA license and related assets revenue within the statements of operations and comprehensive loss. The sale of COPIKTRA license and related assets revenue for the year ended December 31, 2022 related to 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 year ended December 31, 2022, and future royalties expected to be received pursuant to the Secura APA that were not constrained. The Company determined all other future potential milestones were excluded from the transaction price, as all other milestone amounts were fully constrained under the guidance as of December 31, 2022.
During the year ended December 31, 2021, the Company recognized $ 1.4 million of sale of COPIKTRA license and related assets revenue within the statements of operations and comprehensive loss. The sale of COPIKTRA license and related assets revenue for the year ended December 31, 2021 primarily related to two regulatory milestone for $ 1.3 million achieved by Secura’s sublicensee and $ 0.2 million related to royalties received and expected to be received pursuant to the Secura APA. During the year ended December 31, 2021, the Company also recognized $ 0.6 million in transition services revenue within the statements of operations and comprehensive loss. The Company determined all other future potential milestones were excluded from the transaction price, as all other milestone amounts were fully constrained under the guidance as of December 31, 2021.
14. Notes Payable
In February 2023, the Company entered into a finance agreement with AFCO Premium Credit LLC (“AFCO”). Pursuant to the terms of the agreement, AFCO loaned the Company the principal amount of $ 1.4 million, which accrues interest at 7.4 % per annum, to fund a portion of the Company’s insurance policies. The Company is required to make monthly payments of $ 0.1 million through October 2023 including principal and interest. The agreement assigns AFCO a security interest in (i) all unearned premiums and dividends which may become payable under the insurance policies financed pursuant to this agreement, (ii) loss payments which reduce the unearned premiums, and (iii) the Company’s interest in any state insurance guarantee fund related to any of the insurance policies financed pursuant to this agreement. The outstanding balance at December 31, 2023 was $ 0.0 million.
15. Employee benefit plan
In June 2011, the Company adopted a 401(k) retirement and savings plan (the 401(k) Plan) covering all employees. The 401(k) Plan allows employees to make pre-tax or post-tax contributions up to the maximum allowable amount set by the Internal Revenue Service. Under the 401(k) Plan, the Company may make discretionary
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contributions as approved by the board of directors. The Company made contributions to the 401(k) Plan of approximately $ 0.8 million in each of the years ended December 31, 2023, 2022, and 2021.
16. Subsequent events
The Company reviews all activity subsequent to year end but prior to the issuance of the consolidated financial statements for events that could require disclosure or that could impact the carrying value of assets or liabilities as of the consolidated balance sheet date. The Company is not aware of any material subsequent events other than the following:
Oxford Loan Agreement
On January 4, 2024, the Company amended its Loan Agreement to extend the outside date for the period during which the Company may draw the Term C Loan from March 31, 2024, to March 31, 2025. Refer to Note 5. Long-term debt for additional details on the Loan Agreement.
Option Exchange
On January 17, 2024, the Company’s stockholders, upon recommendation of the board of directors, approved a one-time stock option exchange program (the “Option Exchange Program”) for certain employees, executive officers and non-employee directors of the Company who held certain underwater options and remained employed or otherwise engaged by the Company through the completion of the Exchange Offer. The Company’s offer to participate in the Option Exchange Program commenced on February 8, 2024, and expired on March 8, 2024 (the “Exchange Offer”). Pursuant to the Exchange Offer, 42 eligible holders elected to exchange, and the Company accepted for cancellation, eligible options to purchase an aggregate of 603,330 shares of the Company’s common stock. On March 11, 2024, promptly following the expiration of the Exchange Offer, the Company granted new options to purchase 603,330 shares of common stock, pursuant to the terms of the Exchange Offer and the 2021 Plan. The exercise price of the new options granted pursuant to the Option Exchange Offer was $ 11.44 per share, which was the closing price of the common stock on the Nasdaq Capital Market on the grant date of the new options.
The stock option exchange is considered a modification of those options exchanged. The incremental compensation expense will be measured as the excess, if any, of the fair value of each new option granted measured as of the date the new options are granted, over the fair value of the eligible options surrendered, measured immediately prior to the grant of the new options. This incremental compensation expense will be recognized ratably over the remaining requisite service period of the new options subject to continued employment or service with the Company. Unrecognized compensation cost associated with stock options surrendered will be recognized in future periods subject to continued employment or service with the Company. The Company is continuing to evaluate the incremental compensation cost associated with the Option Exchange Program.
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