vstm_Current Folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2019

OR

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

 

For the transition period from              to              

Commission file number: 001‑35403

Verastem, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

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

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

02494
(Zip Code)

(781) 292-4200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

VSTM

The Nasdaq Global Market

 

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

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

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

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non‑accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

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

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

 

As of August 1, 2019, there were 74,140,687 shares of Common Stock outstanding.

 

 

Table of Contents

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

4

Item 2. 

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

28

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4. 

Controls and Procedures

43

PART II—OTHER INFORMATION 

Item 1. 

Legal Proceedings

44

Item 1A. 

Risk Factors

44

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3. 

Defaults Upon Senior Securities

45

Item 4. 

Mine Safety Disclosures

45

Item 5. 

Other Information

45

Item 6. 

Exhibits

45

EXHIBIT INDEX 

46

SIGNATURES 

47

 

 

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FORWARD‑LOOKING STATEMENTS

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

 

Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements we make. Applicable risks and uncertainties include the risks and uncertainties, among other things, regarding: the commercial success of COPIKTRA in the United States; physician and patient adoption of COPIKTRA, including those related to the safety and efficacy of COPIKTRA; the uncertainties inherent in research and development of COPIKTRA, such as negative or unexpected results of clinical trials; whether and when any applications for COPIKTRA may be filed with regulatory authorities in any other jurisdictions; whether and when regulatory authorities in any other jurisdictions may approve any such other applications that may be filed for COPIKTRA, which will depend on the assessment by such regulatory authorities of the benefit-risk profile suggested by the totality of the efficacy and safety information submitted and, if approved, whether COPIKTRA will be commercially successful in such jurisdictions; our ability to obtain, maintain and enforce patent and other intellectual property protection for COPIKTRA and our other product candidates; the scope, timing, and outcome of any legal proceedings; decisions by regulatory authorities regarding labeling and other matters that could affect the availability or commercial potential of COPIKTRA; the fact that regulatory authorities in the U.S. or other jurisdictions, if approved, could withdraw approval; whether preclinical testing of our product candidates and preliminary or interim data from clinical trials will be predictive of the results or success of ongoing or later clinical trials; that the timing, scope and rate of reimbursement for our product candidates is uncertain; that third-party payors (including government agencies) may not reimburse for COPIKTRA; that there may be competitive developments affecting our product candidates; that data may not be available when expected; that enrollment of clinical trials may take longer than expected; that COPIKTRA or our other product candidates will cause unexpected safety events, experience manufacturing or supply interruptions or failures, or result in unmanageable safety profiles as compared to their levels of efficacy; that COPIKTRA will be ineffective at treating patients with lymphoid malignancies; that we will be unable to successfully initiate or complete the clinical development and eventual commercialization of our product candidates; that the development and commercialization of our product candidates will take longer or cost more than planned; that we may not have sufficient cash to fund our contemplated operations; that we, CSPC Pharmaceutical Group, Yakult Honsha Co., Ltd., Sanofi or Infinity Pharmaceuticals, Inc. will fail to fully perform under the duvelisib license agreements; that we may be unable to make additional draws under our debt facility or obtain adequate financing in the future through product licensing, co-promotional arrangements, public or private equity, debt financing or otherwise; that we will not pursue or submit regulatory filings for our product candidates, including for duvelisib in patients with chronic lymphocytic leukemia/small lymphocytic lymphoma (CLL/SLL) or indolent non-Hodgkin lymphoma (iNHL) in other jurisdictions; and that our product candidates will not receive regulatory approval, become commercially successful products, or result in new treatment options being offered to patients. Other risks and uncertainties include those identified in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (SEC) on March 12, 2019, and in any subsequent filings with the SEC.

 

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

 

3

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PART I—FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements (unaudited).

 

Verastem, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,  

 

December 31,

 

 

    

2019

    

2018

 

Assets

 

(unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

113,080

 

$

129,867

 

Short-term investments

 

 

74,173

 

 

119,786

 

Accounts receivable, net

 

 

1,389

 

 

306

 

Inventory

 

 

294

 

 

327

 

Prepaid expenses and other current assets

 

 

3,410

 

 

2,973

 

Total current assets

 

 

192,346

 

 

253,259

 

Property and equipment, net

 

 

1,149

 

 

1,369

 

Right-of-use asset, net

 

 

3,225

 

 

 —

 

Intangible assets, net

 

 

20,793

 

 

21,577

 

Other assets

 

 

1,028

 

 

1,031

 

Total assets

 

$

218,541

 

$

277,236

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

11,538

 

$

10,253

 

Accrued expenses

 

 

19,372

 

 

21,108

 

Lease liability, short-term

 

 

294

 

 

 —

 

Current portion of long-term debt

 

 

 —

 

 

5,716

 

Total current liabilities

 

 

31,204

 

 

37,077

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

34,673

 

 

19,506

 

Convertible senior notes

 

 

99,163

 

 

95,231

 

Lease liability, long-term

 

 

3,694

 

 

 —

 

Other non-current liabilities

 

 

500

 

 

1,123

 

Total liabilities

 

 

169,234

 

 

152,937

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 5,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 200,000 shares authorized, 73,877 and 73,806 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

 7

 

 

 7

 

Additional paid-in capital

 

 

505,086

 

 

499,741

 

Accumulated other comprehensive income

 

 

86

 

 

127

 

Accumulated deficit

 

 

(455,872)

 

 

(375,576)

 

Total stockholders’ equity

 

 

49,307

 

 

124,299

 

Total liabilities and stockholders’ equity

 

$

218,541

 

$

277,236

 

 

See accompanying notes to the condensed consolidated financial statements.

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Verastem, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

3,019

 

$

 —

 

$

4,690

 

$

 —

 

License and collaboration revenue

 

 

117

 

 

10,000

 

 

117

 

 

10,000

 

Total revenue

 

 

3,136

 

 

10,000

 

 

4,807

 

 

10,000

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - product

 

 

377

 

 

 —

 

 

534

 

 

 —

 

Cost of sales - intangible amortization

 

 

392

 

 

 —

 

 

785

 

 

 —

 

Research and development

 

 

11,346

 

 

12,381

 

 

21,103

 

 

23,315

 

Selling, general and administrative

 

 

29,298

 

 

15,813

 

 

55,331

 

 

25,640

 

Total operating expenses

 

 

41,413

 

 

28,194

 

 

77,753

 

 

48,955

 

Loss from operations

 

 

(38,277)

 

 

(18,194)

 

 

(72,946)

 

 

(38,955)

 

Interest income

 

 

1,268

 

 

343

 

 

2,765

 

 

534

 

Interest expense

 

 

(5,185)

 

 

(516)

 

 

(10,115)

 

 

(996)

 

Net loss

 

$

(42,194)

 

$

(18,367)

 

$

(80,296)

 

$

(39,417)

 

Net loss per share—basic and diluted

 

$

(0.57)

 

$

(0.30)

 

$

(1.09)

 

$

(0.70)

 

Weighted average common shares outstanding used in computing net loss per share—basic and diluted

 

 

73,877

 

 

61,256

 

 

73,865

 

 

56,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(42,194)

 

$

(18,367)

 

$

(80,296)

 

$

(39,417)

 

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

 

 

(24)

 

 

 4

 

 

(41)

 

 

 6

 

Comprehensive loss

 

$

(42,218)

 

$

(18,363)

 

$

(80,337)

 

$

(39,411)

 

 

See accompanying notes to the condensed consolidated financial statements.

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Verastem, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

comprehensive

 

 

 

Total

 

 

 

Common stock

 

paid-in

 

(loss)

 

Accumulated

 

stockholders'

 

 

    

Shares

    

Amount

    

capital

    

income

    

deficit

    

equity

 

Balance at December 31, 2018

 

73,806,344

 

$

 7

 

$

499,741

 

$

127

 

$

(375,576)

 

$

124,299

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(38,102)

 

 

(38,102)

 

Unrealized loss on available-for-sale marketable securities

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

 —

 

 

(17)

 

Issuance of common stock resulting from exercise of stock options

 

46,803

 

 

 —

 

 

75

 

 

 —

 

 

 —

 

 

75

 

Issuance of common stock resulting from vesting of restricted stock units and payment of tax withholdings

 

23,792

 

 

 —

 

 

(43)

 

 

 —

 

 

 —

 

 

(43)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,248

 

 

 —

 

 

 —

 

 

2,248

 

Balance at March 31, 2019

 

73,876,939

 

$

 7

 

$

502,021

 

$

110

 

$

(413,678)

 

$

88,460

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(42,194)

 

 

(42,194)

 

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

 

 —

 

 

 —

 

 

 —

 

 

(24)

 

 

 —

 

 

(24)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

3,065

 

 

 —

 

 

 —

 

 

3,065

 

Balance at June 30, 2019

 

73,876,939

 

$

 7

 

$

505,086

 

$

86

 

$

(455,872)

 

$

49,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

50,800,908

 

$

 5

 

$

360,823

 

$

(2)

 

$

(303,142)

 

$

57,684

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(21,050)

 

 

(21,050)

 

Unrealized gain on available-for-sale marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 2

 

 

 —

 

 

 2

 

Issuance of common stock resulting from at-the-market transactions, net of issuance costs of $0

 

167,065

 

 

 —

 

 

588

 

 

 —

 

 

 —

 

 

588

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,328

 

 

 —

 

 

 —

 

 

1,328

 

Balance at March 31, 2018

 

50,967,973

 

$

 5

 

$

362,739

 

$

 —

 

$

(324,192)

 

$

38,552

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(18,367)

 

 

(18,367)

 

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

 

 —

 

 

 —

 

 

 —

 

 

 4

 

 

 —

 

 

 4

 

Issuance of common stock resulting from at-the-market transactions, net of issuance costs of $0

 

6,314,410

 

 

 1

 

 

23,687

 

 

 —

 

 

 —

 

 

23,688

 

Issuance of common stock resulting from follow-on offering, net of issuance costs of $361

 

16,111,110

 

 

 1

 

 

81,188

 

 

 —

 

 

 —

 

 

81,189

 

Issuance of common stock resulting from exercise of stock options

 

186,206

 

 

 —

 

 

261

 

 

 —

 

 

 —

 

 

261

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,540

 

 

 —

 

 

 —

 

 

1,540

 

Balance at June 30, 2018

 

73,579,699

 

$

 7

 

$

469,415

 

$

 4

 

$

(342,559)

 

$

126,867

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

 

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Verastem, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

    

2019

    

2018

Operating activities

 

 

 

 

 

 

Net loss

 

$

(80,296)

 

$

(39,417)

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

 

 

 

 

 

 

Depreciation

 

 

227

 

 

792

Amortization of acquired intangible asset

 

 

785

 

 

 —

Amortization of right-of-use asset and lease liability

 

 

112

 

 

 —

Stock-based compensation expense

 

 

5,313

 

 

2,867

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

 

 

2,815

 

 

178

Gain on sale of fixed assets

 

 

 —

 

 

(79)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,083)

 

 

 —

Inventory

 

 

33

 

 

 —

Prepaid expenses, other current assets and other assets

 

 

(434)

 

 

(457)

Accounts payable

 

 

1,278

 

 

(1,436)

Accrued expenses and other liabilities

 

 

(2,199)

 

 

4,785

Net cash used in operating activities

 

 

(73,449)

 

 

(32,767)

Investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

 —

 

 

(677)

Sales of property and equipment

 

 

 —

 

 

82

Purchases of investments

 

 

(37,637)

 

 

 —

Maturities of investments

 

 

84,530

 

 

4,500

Net cash provided by investing activities

 

 

46,893

 

 

3,905

Financing activities

 

 

 

 

 

 

Proceeds from long-term debt, net of issuance costs

 

 

9,694

 

 

9,900

Proceeds from the exercise of stock options

 

 

75

 

 

262

Proceeds from the issuance of common stock, net

 

 

 —

 

 

105,457

Net cash provided by financing activities

 

 

9,769

 

 

115,619

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

 

 

(16,787)

 

 

86,757

Cash, cash equivalents and restricted cash at beginning of period

 

 

130,608

 

 

82,338

Cash, cash equivalents and restricted cash at end of period

 

$

113,821

 

$

169,095

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

 7

 

$

527

Common stock issuance costs included in accounts payable and accrued expenses

 

$

15

 

$

316

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Verastem, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

1. Nature of business

Verastem, Inc. (the Company) is a biopharmaceutical company focused on developing and commercializing medicines to improve the survival and quality of life of cancer patients. On September 24, 2018, the Company’s first commercial product, COPIKTRA™ (duvelisib), was approved by the U.S. Food and Drug Administration (the FDA) for the treatment of patients with certain hematologic cancers including chronic lymphocytic leukemia (CLL), small lymphocytic lymphoma (SLL) and follicular lymphoma (FL). Both its marketed product, COPIKTRA, and most advanced product candidate, defactinib, utilize a multi-faceted approach designed to treat cancers originating either in the blood or major organ systems. The Company is currently developing its product candidates in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, lung cancer, ovarian cancer, colorectal cancer, head and neck cancer, mesothelioma, and pancreatic cancer. The Company believes that these compounds may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents or other current and emerging standard of care treatments in aggressive cancers that do not adequately respond to currently available therapies.

The consolidated financial statements include the accounts of Verastem Securities Company, a wholly-owned subsidiary of the Company. All financial information presented has been consolidated and includes the accounts of the Company and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. On July 11, 2019 the Company completed the registration of Verastem Europe GmbH, wholly owned subsidiary.

As of June 30, 2019, the Company had cash, cash equivalents and short-term investments of $187.3 million and accumulated deficit of $455.9 million. 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, market acceptance and the commercial success of COPIKTRA, or any of the Company’s investigational product candidates following receipt of regulatory approval, protection of proprietary technology and the continued ability to obtain adequate financing to fund the Company’s future operations. If the Company does not successfully commercialize COPIKTRA or any of its other product candidates, it will be unable to generate product revenue or achieve profitability and may need to raise additional capital.

The Company has historical losses from operations and anticipates that it will continue to incur losses as it continues the commercialization of COPIKTRA and the research and development of its product candidates. The Company believes that it may have sufficient funds to meet its obligations within the next twelve months from the date of issuance of these condensed consolidated financial statements. However, COPIKTRA is the Company’s only approved product and the Company’s business currently depends heavily on its successful commercialization. Successful commercialization of an approved product is an expensive and uncertain process. These uncertainties and risk factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued. Certain elements of the Company’s operating plan to alleviate the conditions that raise substantial doubt are outside of the Company’s control and cannot be included in management’s evaluation under the requirements of Accounting Standards Codification (ASC) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Accordingly, the Company has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for a period of at least twelve months from the date of the issuance of these condensed consolidated financial statements.

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2. Summary of significant accounting policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01 under the assumption that the Company will continue as a going concern for the next twelve months. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, or any adjustments that might result from the uncertainty related to the Company’s ability to continue as a going concern. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2019. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (SEC) on March 12, 2019.

Significant Accounting Policies

 

The significant accounting policies identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 that require the Company to make estimates and assumptions include accrued research and development expenses, stock-based compensation, revenue recognition, collaborative arrangements, accounts receivable, inventory and intangible assets. During the six months ended June 30, 2019, there were no material changes to the significant accounting policies, except for the adoption of Accounting Standards Codification (ASC) 842, Leases, issued by the Financial Accounting Standards Board (the FASB), which is detailed below.

Leases

Effective January 1, 2019, the Company adopted ASC 842.  This standard requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. 

At the inception of an arrangement, 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 condensed 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 condensed consolidated balance sheets. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, 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

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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 condensed 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 606 Revenue from Contracts with Customers. 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.

Product Revenue, Net – The Company sells COPIKTRA to a limited number of specialty pharmacies and specialty distributors in the United States. These customers subsequently resell COPIKTRA either directly to patients or to community hospitals or oncology clinics with in-office dispensaries who in turn distribute COPIKTRA to patients. In addition to distribution agreements with customers, the Company also enters into arrangements with (1) certain government agencies and various private organizations (Third-Party Payers), which may provide for chargebacks or discounts with respect to the purchase of COPIKTRA, and (2) Medicare and Medicaid, which may provide for certain rebates with respect to the purchase of COPIKTRA.

The Company recognizes revenue on sales of COPIKTRA when a customer obtains control of the product, which occurs at a point in time (typically upon delivery). Product revenues are recorded at the wholesale acquisition costs, net of applicable reserves for variable consideration.  Components of variable consideration include trade discounts and allowances, Third-Party Payer chargebacks and discounts, government rebates, other incentives, such as voluntary co-pay assistance, product returns, and other allowances that are offered within contracts between the Company and customers, payors, and other indirect customers relating to the Company’s sale of COPIKTRA. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes based upon relevant factors such as customer contract terms, information received from third parties regarding the anticipated payor mix for COPIKTRA, known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled with respect to sales made.

The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under contracts will not occur in a future period. The Company’s analyses contemplate the application of the constraint in accordance with ASC 606.  For the three and six months ended June 30, 2019, the Company determined a material reversal of revenue would not occur in a future period for the estimates detailed below and, therefore, the transaction price was not reduced further. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Trade Discounts and Allowances: The Company generally provides customers with invoice discounts on sales of COPIKTRA for prompt payment, which are explicitly stated in the Company’s contracts and are recorded as a

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reduction of revenue in the period the related product revenue is recognized. In addition, the Company compensates its specialty distributor customers for sales order management, data, and distribution services. The Company has determined such services are not distinct from the Company’s sale of COPIKTRA to the specialty distributor customers and, therefore, these payments have also been recorded as a reduction of revenue within the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019.

Third-Party Payer Chargebacks, Discounts and Fees: The Company executes contracts with Third-Party Payers which allow for eligible purchases of COPIKTRA at prices lower than the wholesale acquisition cost charged to customers who directly purchase the product from the Company. In some cases, customers charge the Company for the difference between what they pay for COPIKTRA and the ultimate selling price to the Third-Party Payers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable, net. Chargeback amounts are generally determined at the time of resale to the qualified Third-Party Payer by customers, and the Company generally issues credits for such amounts within a few weeks of the customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at the end of each reporting period that the Company expects will be sold to Third-Party Payers, and chargebacks that customers have claimed, but for which the Company has not yet issued a credit. In addition, the Company compensates certain Third-Party Payers for administrative services, such as account management and data reporting.  These administrative service fees have also been recorded as a reduction of product revenue within the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019.

Government Rebates: The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Other Incentives: Other incentives which the Company offers include voluntary co-pay assistance programs, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive for product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses on the condensed consolidated balance sheets.

Product Returns: Consistent with industry practice, the Company generally offers customers a limited right of return for product that has been purchased from the Company. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.

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

·

Receipt of damaged product;

·

Shipment errors that were a result of an error by the Company;

·

Expired product that is returned during the period beginning three months prior to the product’s expiration and ending six months after the expiration date;

·

Product subject to a recall; and

·

Product that the Company, at its sole discretion, has specified can be returned for credit.

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The Company has not received any returns to date.

If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from product revenue. The Company expenses incremental costs of obtaining a contract when incurred, if the expected amortization period of the asset that the Company would have recognized is one year or less. However, no such costs were incurred during the three and six months ended June 30, 2019.

Exclusive Licenses of Intellectual Property - The Company may enter into collaboration and licensing arrangements for research and development, manufacturing, and commercialization activities with collaboration partners for the development and commercialization of its product candidates, which have components within the scope of ASC 606. The arrangements generally contain multiple elements or deliverables, which may include (i) licenses, or options to obtain licenses, to the Company’s intellectual property, (ii) research and development activities performed for the collaboration partner, (iii) participation on joint steering committees, and (iv) the manufacturing of commercial, clinical or preclinical material. Payments pursuant to these arrangements typically include non-refundable, upfront payments, milestone payments upon the achievement of significant development events, research and development reimbursements, sales milestones, and royalties on product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period. The contracts into which the Company enters generally do not include significant financing components.

 

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its collaboration and license agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract within the scope of ASC 606; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above; and d) the measure of progress in step (v) above. The Company uses judgment to determine whether milestones or other variable consideration, except for royalties, should be included in the transaction price as described further below.

 

If a license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other elements, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of its associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining elements, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress of each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, is subject to estimates by management and may change over the course of the arrangement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

 

Customer Options: If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services such as research and development services or manufacturing services, the goods and services underlying the customer options are not considered to be performance obligations at the inception of the arrangement; rather, such goods and services are contingent on exercise of the option, and the associated option fees are

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not included in the transaction price. The Company evaluates customer options for material rights or options to acquire additional goods or services for free or at a discount. If a customer option is determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the estimated probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.

 

Milestone Payments: At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

 

Royalties: For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

 

Collaborative Arrangements: Contracts are considered to be collaborative arrangements when they satisfy the following criteria defined in ASC 808, Collaborative Arrangements: (i) the parties to the contract must actively participate in the joint operating activity and (ii) the joint operating activity must expose the parties to the possibility of significant risk and rewards, based on whether or not the activity is successful. Payments received from or made to a partner that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development activities, are recorded as a reduction or increase to research and development expense, respectively. 

Concentrations of credit risk and off-balance sheet risk

Cash,  cash equivalents, short-term 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 June 30, 2019, the Company’s cash, cash equivalents and short-term investments were deposited at two 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.

As of June 30, 2019, there were two customers that cumulatively 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 quarter ended June 30, 2019, there were five customers who each individually accounted for greater than 10% of the Company’s total revenues.

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Recently Issued Accounting Standards Updates

 

In November 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which makes targeted improvements for collaborative arrangements to clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, adds unit of account guidance in Topic 808 to align with guidance in Topic 606, and clarifies presentation of certain revenues with a collaborative arrangement participant which are not directly related to a third party. ASU 2018-18 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its condensed consolidated financial statements and related disclosures.

 

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its condensed consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. ASU 2018-13 is effective for all entities for annual and interim periods beginning after December 15, 2019. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its condensed consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 will replace 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. The standard will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has not elected to early adopt this standard and is currently evaluating the impact the adoption of the standard will have on its condensed consolidated financial statements and related disclosures.

Recently Adopted Accounting Standards Updates

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions accounted for under ASC 606. ASU 2018-07 was effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted, but no earlier than the date on which ASC 606 is adopted. The Company adopted this standard prospectively effective January 1, 2019.  The adoption of this ASU did not have an effect on the Company’s condensed consolidated financial statements or related disclosures.

 

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the guidance under FASB Accounting Standards Codification (ASC) Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases (ASC 842). ASU 2016-02 requires lessees to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. The guidance also eliminates the current real estate-specific provisions for all entities.  In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02. Under the amendments in ASU 2018-11, entities may elect not to restate the comparative periods presented when transitioning to ASC 842 (optional transition method) and lessors may elect not to separate lease and non-lease components when certain conditions are met (lessor relief practical expedient). The optional transition method applies to entities that have not yet adopted ASU 2016-02, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted.

 

The Company adopted this standard using the optional transition method effective January 1, 2019.  Upon adoption of this standard, the Company recognized a lease liability and a corresponding right-of use asset of $4.0 million and $3.4 million, respectively, and derecognized a deferred rent liability and a corresponding lease incentive obligation of $0.4 million and $0.2 million, respectively.  The Company did not record any cumulative effect adjustment to accumulated deficit as a result of adopting this standard.  The Company also elected to adopt the practical expedients upon transition, which permit companies to not reassess lease identification, classification, and initial direct costs under ASU 2016-02 for leases that commenced prior to the effective date.

 

3. Cash, cash equivalents and restricted cash

 

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

 

 

 

 

 

 

 

 

    

June 30, 2019

    

December 31, 2018

Cash and cash equivalents

 

$

113,080

 

$

129,867

Restricted cash

 

 

741

 

 

741

Total cash, cash equivalents and restricted cash

 

$

113,821

 

$

130,608

 

Amounts included in restricted cash as of June 30, 2019 and December 31, 2018 represent cash received pursuant to a Research Funding Agreement with Leukemia & Lymphoma Society, Inc. (LLS), which cash is restricted for future expenditures for specific R&D studies in the amount of approximately $0.5 million, respectively.  Restricted cash also includes 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 approximately $0.2 million, respectively. Restricted cash related to the LLS Research Funding Agreement is included in prepaid and other current assets, while restricted cash for letters of credit are included in other assets on the consolidated balance sheets.

4. Fair value of financial instruments

 

The Company determines the fair value of its financial instruments based upon the fair value hierarchy, which prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

 

Level 1 inputs

Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 inputs

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs

Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

 

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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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

Description

    

Total

    

Level 1

    

Level 2

    

Level 3

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

111,174

 

$

111,174

 

$

 —

 

$

 —

 

Short-term investments

 

 

74,173

 

 

 —

 

 

74,173

 

 

 —

 

Total financial assets

 

$

185,347

 

$

111,174

 

$

74,173

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

Description

 

Total

    

Level 1

    

Level 2

    

Level 3

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

127,689

 

$

60,092

 

$

67,597

 

$

 —

 

Short-term investments

 

 

119,786

 

 

 —

 

 

119,786

 

 

 —

 

Total financial assets

 

$

247,475

 

$

60,092

 

$

187,383

 

$

 —

 

 

The Company’s cash equivalents and short-term investments consist of U.S. Government money market funds, corporate bonds and commercial paper of publicly traded companies. 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 June 30, 2019 and December 31, 2018.

 

Fair Value of Financial Instruments

 

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 condensed consolidated balance sheet dates. The carrying value of the Company’s long-term debt, including the current portion, at June 30, 2019 and December 31, 2018 was approximately $34.7 million and $25.2 million, respectively.  At June 30, 2019, the Company estimates that the fair value of its long-term debt, including the current portion, was approximately $37.1 million. The fair value of the Company’s long-term debt was determined using Level 3 inputs.

 

The fair value of the Company’s  5.00% Convertible Senior Notes due 2048 (the Notes) as of June 30, 2019 was approximately $77.6 million, which differs from the carrying value of the Notes.  The fair value of the Notes was determined using Level 2 inputs.

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5. Investments

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2019

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market accounts

 

$

113,080

 

$

 —

 

$

 —

 

$

113,080

 

Corporate bonds and commercial paper (due within 90 days)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total cash and cash equivalents

 

$

113,080

 

$

 —

 

$

 —

 

$

113,080

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and commercial paper (due within 1 year)

 

$

74,088

 

$

86

 

$

 

 

$

74,173

 

Total investments

 

$

74,088

 

$

86

 

$

 —

 

$

74,173

 

Total cash, cash equivalents and investments

 

$

187,168

 

$

86

 

$

 —

 

$

187,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2018

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

    

Cost

    

Gains

    

Losses

    

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market accounts

 

$

62,270

 

$

 —

 

$

 —

 

$

62,270

 

Corporate bonds and commercial paper (due within 90 days)

 

 

67,590

 

$

 8

 

$

(1)

 

$

67,597

 

Total cash and cash equivalents

 

$

129,860

 

$

 8

 

$

(1)

 

$

129,867

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and commercial paper (due within 1 year)

 

$

119,666

 

$

132

 

$

(12)

 

$

119,786

 

Total investments

 

$

119,666

 

$

132

 

$

(12)

 

$

119,786

 

Total cash, cash equivalents and investments

 

$

249,526

 

$

140

 

$

(13)

 

$

249,653

 

 

There were no realized gains or losses on investments for the three and six months ended June 30, 2019 or 2018, respectively.  There were zero and fourteen investments in an unrealized loss position as of June 30, 2019 and December 31, 2018, respectively. None of these investments had been in an unrealized loss position for more than 12 months as of June 30, 2019 and December 31, 2018, respectively. The fair value of these securities as of June 30, 2019 and December 31, 2018 was $0 and $46.9 million, respectively, and the aggregate unrealized loss was immaterial.  The Company considered the decline in the market value for these securities to be primarily attributable to current economic conditions. As it was not more likely than not that the Company would be required to sell these securities before the recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of June 30, 2019 and December 31, 2018, respectively.

6. Inventory

 

During the third quarter of 2018, the Company began capitalizing inventory costs for COPIKTRA manufactured in preparation for its launch in the United States based on its evaluation of, among other factors, the status of the COPIKTRA New Drug Application (NDA) in the United States and the ability of its third-party suppliers to successfully manufacture commercial quantities of COPIKTRA, which provided the Company with reasonable assurance that the net realizable value of the inventory would be recoverable.

 

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Inventory consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

    

June 30, 2019

    

December 31, 2018

 

Raw materials

 

$

 —

 

$

 —

 

Work in process

 

 

119

 

 

63

 

Finished goods

 

 

175

 

 

264

 

Total inventories

 

$

294

 

$

327

 

 

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

7. Intangible assets

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

 

 

 

 

 

 

 

 

    

 

    

 

 

 

    

June 30, 2019

    

Estimated useful life

 

Acquired and in-licensed rights

 

$

22,000

 

14 years

 

Less: accumulated amortization

 

 

(1,207)

 

 

 

Total intangible assets, net

 

$

20,793

 

 

 

Acquired and in-licensed rights as of June 30, 2019, consist of a $22.0 million milestone payment which became payable upon the FDA marketing approval on September 24, 2018 pursuant to the amended and restated license agreement with Infinity Pharmaceuticals, Inc. (Infinity).  The Company made the milestone payment of $22.0 million to Infinity in November 2018.

The Company recorded approximately $0.4 million and $0.8 million in amortization expense related to finite-lived intangible assets during the three and six months ended June 30, 2019 using the straight-line methodology. Estimated future amortization expense for finite-lived intangible assets as of June 30, 2019 is approximately $0.8 million for the remainder of 2019 and approximately $1.6 million per year thereafter.

8. Accrued expenses

 

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

 

    

 

 

 

    

June 30, 2019

    

December 31, 2018

 

Compensation and related benefits

 

 

6,689

 

 

8,749

 

Contract research organization costs

 

 

6,516

 

 

6,682

 

Commercialization costs

 

 

2,298

 

 

1,979

 

Interest

 

 

1,534

 

 

1,786

 

Consulting fees

 

 

1,267

 

 

494

 

Professional fees

 

 

661

 

 

482

 

Other

 

 

407

 

 

936

 

Total accrued expenses

 

$

19,372

 

$

21,108

 

 

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Table of Contents

9. Product revenue reserves and allowances

As of June 30, 2019, the Company’s sole source of product revenue has been from sales of COPIKTRA in the United States, which it began shipping to customers on September 25, 2018.  The following table summarizes activity in each of the product revenue allowance and reserve categories for the three and six months ended June 30, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-Party

 

 

 

 

 

 

 

 

 

 

 

Trade

 

Payer

 

Government

 

 

 

 

 

 

 

 

discounts

 

chargebacks,

 

rebates and

 

 

 

 

 

 

 

 

and

 

discounts

 

other

 

 

 

 

 

 

 

    

allowances

    

and fees

    

incentives

    

Returns

    

Total

Beginning balance at December 31, 2018

 

$

29

 

$

88

 

$

157

 

$