Verastem(VSTM) - 2019 Q1 - Quarterly Report

FORM 10-Q Filing Information Registrant Details and Filing Status This section provides basic filing information for Verastem, Inc.'s Form 10-Q for the quarterly period ended March 31, 2019 Registrant Details | Detail | Value | | :--- | :--- | | Registrant Name | Verastem, Inc. | | State of Incorporation | Delaware | | Commission File Number | 001‑35403 | | Quarterly Period Ended | March 31, 2019 | | SEC Filing Compliance (12 months) | Yes | | Interactive Data File Submission (12 months) | Yes | | Filer Status | Accelerated filer, Smaller reporting company | | Shell Company | No | | Common Stock Trading Symbol | VSTM | | Common Stock Exchange | The Nasdaq Global Market | | Common Stock Outstanding (May 2, 2019) | 73,876,939 shares | Table of Contents Report Structure Overview This section outlines the structure of the Form 10-Q report, detailing items covered within Part I and Part II - The report is structured into two main parts: Part I (Financial Information) and Part II (Other Information)[5][6] Report Structure | Item | Description | Page | | :--- | :--- | :--- | | 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 | 27 | | Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 | | Item 4. | Controls and Procedures | 40 | | PART II—OTHER INFORMATION | | | | Item 1. | Legal Proceedings | 41 | | Item 1A. | Risk Factors | 41 | | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 41 | | Item 3. | Defaults Upon Senior Securities | 41 | | Item 4. | Mine Safety Disclosures | 41 | | Item 5. | Other Information | 41 | | Item 6. | Exhibits | 42 | Forward-Looking Statements Disclaimer and Risk Factors This section provides a cautionary statement regarding forward-looking statements and highlights key risks and uncertainties - The report contains forward-looking statements regarding strategy, future operations, financial position, revenues, costs, prospects, plans, and management objectives[8] - Key risks and uncertainties include the commercial success of COPIKTRA, physician and patient adoption, results of clinical trials, regulatory approvals, intellectual property protection, and the ability to obtain adequate financing[9] - The company explicitly disclaims any obligation to update forward-looking statements, except as required by law[10] PART I—FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Verastem, Inc Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity, driven by a reduction in cash and an increased accumulated deficit Condensed Consolidated Balance Sheets (in thousands) | Item | March 31, 2019 | December 31, 2018 | Change (vs. Dec 31, 2018) | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $91,525 | $129,867 | $(38,342) | | Short-term investments | $120,134 | $119,786 | $348 | | Total current assets | $216,596 | $253,259 | $(36,663) | | Total assets | $243,365 | $277,236 | $(33,871) | | Liabilities | | | | | Total current liabilities | $28,624 | $37,077 | $(8,453) | | Total liabilities | $154,905 | $152,937 | $1,968 | | Stockholders' Equity | | | | | Accumulated deficit | $(413,678) | $(375,576) | $(38,102) | | Total stockholders' equity | $88,460 | $124,299 | $(35,839) | Condensed Consolidated Statements of Operations and Comprehensive Loss The company reported its first product revenue in Q1 2019 but also experienced a significant increase in net loss compared to the prior year Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) | Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Product revenue, net | $1,671 | $— | $1,671 | | Total revenue | $1,671 | $— | $1,671 | | Costs of revenues, excluding amortization of acquired intangible assets | $158 | $— | $158 | | Research and development | $9,758 | $10,934 | $(1,176) | | Selling, general and administrative | $26,033 | $9,827 | $16,206 | | Amortization of acquired intangible assets | $392 | $— | $392 | | Total operating expenses | $36,341 | $20,761 | $15,580 | | Loss from operations | $(34,670) | $(20,761) | $(13,909) | | Interest income | $1,497 | $191 | $1,306 | | Interest expense | $(4,929) | $(480) | $(4,449) | | Net loss | $(38,102) | $(21,050) | $(17,052) | | Net loss per share—basic and diluted | $(0.52) | $(0.41) | $(0.11) | | Weighted average common shares outstanding | 73,854 | 50,835 | 23,019 | Consolidated Statements of Stockholders' Equity The company's total stockholders' equity decreased significantly due to the net loss incurred during the period Consolidated Statements of Stockholders' Equity (in thousands, except share data) | Item | December 31, 2018 | March 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Common stock (shares) | 73,806,344 | 73,876,939 | 70,595 | | Common stock (amount) | $7 | $7 | $0 | | Additional paid-in capital | $499,741 | $502,021 | $2,280 | | Accumulated other comprehensive income | $127 | $110 | $(17) | | Accumulated deficit | $(375,576) | $(413,678) | $(38,102) | | Total stockholders' equity | $124,299 | $88,460 | $(35,839) | | Net loss | — | $(38,102) | $(38,102) | | Stock-based compensation expense | — | $2,248 | $2,248 | | Issuance of common stock from stock options | — | $75 | $75 | Condensed Consolidated Statements of Cash Flows The company experienced a significant increase in cash used in operating activities during Q1 2019 compared to Q1 2018 Condensed Consolidated Statements of Cash Flows (in thousands) | Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(38,780) | $(22,454) | $(16,326) | | Net cash provided by investing activities | $363 | $4,435 | $(4,072) | | Net cash provided by financing activities | $75 | $299 | $(224) | | Decrease in cash, cash equivalents and restricted cash | $(38,342) | $(17,720) | $(20,622) | | Cash, cash equivalents and restricted cash at end of period | $92,266 | $64,618 | $27,648 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements - The financial statements are prepared in accordance with GAAP for interim reporting and Regulation S-X, Rule 10-01[23] - Effective January 1, 2019, the company adopted ASC 842, Leases, requiring recognition of right-of-use assets and lease liabilities on the balance sheet for leases over one year[24][25] - Revenue from COPIKTRA sales is recognized upon customer control, net of variable consideration (discounts, rebates, returns), with estimates based on contract terms, payor mix, and industry data[30][31] 1. Nature of Business Verastem, Inc. is a biopharmaceutical company focused on developing and commercializing cancer medicines - Verastem, Inc. is a biopharmaceutical company focused on developing and commercializing medicines for cancer patients[20] - COPIKTRA™ (duvelisib), the company's first commercial product, was approved by the FDA on September 24, 2018, for chronic lymphocytic leukemia (CLL), small lymphocytic lymphoma (SLL), and follicular lymphoma (FL)[20] Financial Position as of March 31, 2019 (in millions) | Item | Amount | | :--- | :--- | | Cash, cash equivalents and short-term investments | $211.7 | | Accumulated deficit | $(413.7) | 2. Summary of Significant Accounting Policies This note details the significant accounting policies used in preparing the condensed consolidated financial statements - Revenue is recognized when the customer obtains control of promised goods or services, reflecting the expected consideration[28] - Product revenue from COPIKTRA sales is recorded at wholesale acquisition cost, net of reserves for variable consideration (trade discounts, chargebacks, government rebates, co-pay assistance, and returns)[30][31] - Revenue from exclusive intellectual property licenses is recognized from non-refundable, upfront fees when the license is transferred and the customer can use and benefit from it[41][44] Basis of Presentation The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial reporting - Financial statements are unaudited and prepared under GAAP for interim reporting and Regulation S-X, Rule 10-01[23] - Management's estimates and assumptions affect reported amounts, and actual results may differ[23] Significant Accounting Policies Key accounting policies requiring estimates include accrued R&D, stock-based compensation, and revenue recognition - Significant accounting policies include accrued R&D, stock-based compensation, revenue recognition, collaborative arrangements, accounts receivable, inventory, and intangible assets[24] - The company adopted ASC 842, Leases, effective January 1, 2019, as the only material change to significant accounting policies[24] Leases Effective January 1, 2019, the company adopted ASC 842, requiring the recognition of right-of-use assets and lease liabilities - Adopted ASC 842 effective January 1, 2019, requiring recognition of right-of-use assets and lease liabilities for leases over one year[25] - Elected not to recognize leases with terms of one year or less on the balance sheet[26] - Elected to account for lease and non-lease components as a single lease component, allocating all contract consideration to the lease component[27] Revenue Recognition The company recognizes revenue when customers obtain control of goods or services, applying a five-step model Product Revenue, Net Product revenue from COPIKTRA sales is recognized upon delivery, net of variable consideration - COPIKTRA is sold to specialty pharmacies and distributors in the U.S., with revenue recognized upon delivery[30][31] - Product revenues are recorded net of variable consideration, including trade discounts, chargebacks, government rebates, other incentives (co-pay assistance), and product returns[31] - Estimates for variable consideration are based on customer contract terms, anticipated payor mix, market events, industry data, and forecasted buying patterns[31] Trade Discounts and Allowances The company provides invoice discounts and compensates specialty distributors for services, both recorded as a reduction of revenue - Invoice discounts for prompt payment are recorded as a reduction of revenue[33] - Compensation to specialty distributors for sales order management, data, and distribution services is also recorded as a reduction of revenue[33] Third-Party Payer Chargebacks, Discounts and Fees The company contracts with Third-Party Payers for lower COPIKTRA prices, resulting in chargebacks from customers - Contracts with Third-Party Payers allow for COPIKTRA purchases at prices lower than wholesale acquisition cost[34] - Reserves for chargebacks and administrative service fees are established as a reduction of product revenue and accounts receivable, net[34][35] Government Rebates The company is subject to discount obligations under state Medicaid and Medicare programs - Subject to discount obligations under state Medicaid and Medicare programs[36] - Reserves for government rebates are recorded as a reduction of product revenue and a current liability in accrued expenses[36] Other Incentives The company offers voluntary co-pay assistance programs to commercially-insured patients - Offers voluntary co-pay assistance programs for qualified commercially-insured patients[37] - Accruals for co-pay assistance are estimated based on expected claims and costs, reducing product revenue and increasing accrued expenses[37] Product Returns The company offers a limited right of return for product and estimates potential returns as a reduction of revenue - Estimates product return liabilities using industry data and sales information, recorded as a reduction of revenue[38] - Return policy allows for eligible returns due to damaged product, shipment errors, expired product (3 months prior to 6 months after expiration), product recall, or company-specified returns[39] - No product returns have been received to date[39] Exclusive Licenses of Intellectual Property For collaboration and licensing arrangements, the company identifies performance obligations and allocates transaction price - Collaboration and licensing arrangements involve multiple elements like licenses, R&D activities, and manufacturing[41] - Upfront fees for distinct intellectual property licenses are recognized when the license is transferred to the customer[44] - Significant judgment is used to determine performance obligations, transaction price, standalone selling price, and measure of progress[43] Customer Options Customer options to acquire additional goods or services are not considered performance obligations unless they represent a material right - Customer options are not performance obligations at inception unless they represent a material right[45] - If a material right is identified, it's a separate performance obligation, with transaction price allocated based on standalone selling price and probability of exercise[45] Milestone Payments Milestone payments are included in the transaction price only if they are probable of being achieved without a significant revenue reversal - Milestone payments are included in the transaction price if probable of achievement without significant revenue reversal[46] - Milestones dependent on regulatory approvals are not considered probable until approvals are received[46] - Probability of achievement is reevaluated quarterly, with adjustments affecting revenues and earnings in the period of adjustment[48] Royalties For arrangements with sales-based royalties, revenue is recognized when sales occur or the performance obligation is satisfied - Sales-based royalties are recognized when related sales occur or when the performance obligation is satisfied, whichever is later[49] - The company has not recognized any royalty revenue from licensing arrangements to date[49] Collaborative Arrangements Contracts are classified as collaborative arrangements if parties actively participate in joint operating activities - Contracts are collaborative if parties actively participate in joint operating activities and share significant risks and rewards[50] - Payments for co-development activities are recorded as a reduction or increase to R&D expense[50] Concentrations of Credit Risk and Off-Balance Sheet Risk The company manages credit risk by using high-quality financial institutions and has significant customer concentration - Cash, cash equivalents, short-term investments, and trade accounts receivable are subject to credit risk, mitigated by using high-quality financial institutions[51] - As of March 31, 2019, two customers comprised over 60% of trade accounts receivable[52] - Five customers individually accounted for greater than 10% of total revenues for the quarter ended March 31, 2019[52] Recently Issued Accounting Standards Updates The company is evaluating the impact of recently issued ASUs related to collaborative arrangements, software, and fair value measurement - Evaluating ASU 2018-18 (Collaborative Arrangements) to clarify interactions between Topic 808 and Topic 606[54] - Evaluating ASU 2018-15 (Intangibles-Goodwill and Other-Internal Use Software) for capitalizing implementation costs in cloud computing arrangements[55] - Evaluating ASU 2018-13 (Fair Value Measurement) for changes to disclosure requirements[56] Recently Adopted Accounting Standards Updates The company adopted new standards for stock compensation and leases in Q1 2019 - Adopted ASU 2018-07 (Compensation – Stock Compensation) prospectively on January 1, 2019, with no effect on financial statements[57] - Adopted ASU 2016-02 (Leases) using the optional transition method effective January 1, 2019[58][59] Impact of ASU 2016-02 Adoption (in millions) | Item | Amount | | :--- | :--- | | Lease liability recognized | $4.0 | | Right-of-use asset recognized | $3.4 | | Deferred rent liability derecognized | $0.4 | | Lease incentive obligation derecognized | $0.2 | | Cumulative effect adjustment to accumulated deficit | $0 | 3. Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents, and restricted cash amounted to $92.3 million as of March 31, 2019 - Restricted cash includes $0.5 million for LLS Research Funding Agreement R&D studies and $0.2 million for office space security deposit[60] Cash, Cash Equivalents and Restricted Cash (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $91,525 | $129,867 | | Restricted cash | $741 | $741 | | Total cash, cash equivalents and restricted cash | $92,266 | $130,608 | 4. Fair Value of Financial Instruments The company measures financial instruments at fair value using a three-level hierarchy - Fair value hierarchy prioritizes valuation inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[61] Financial Instruments Measured at Fair Value (in thousands) | Description | March 31, 2019 Total | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents | $89,551 | $86,809 | $2,742 | $— | | Short-term investments | $120,134 | $— | $120,134 | $— | | Total financial assets | $209,685 | $86,809 | $122,876 | $— | | Long-term debt (fair value) | $26,900 | — | — | $26,900 | | Convertible senior notes (fair value) | $118,200 | — | $118,200 | — | 5. Investments As of March 31, 2019, total cash, cash equivalents, and investments were $211.7 million - No realized gains or losses on investments for the three months ended March 31, 2019 or 2018[66] - One investment was in an unrealized loss position as of March 31, 2019, compared to fourteen at December 31, 2018, with aggregate unrealized losses being immaterial[66] Cash, Cash Equivalents, and Short-Term Investments (in thousands) | Item | March 31, 2019 Fair Value | December 31, 2018 Fair Value | | :--- | :--- | :--- | | Cash and money market accounts | $88,783 | $62,270 | | Corporate bonds and commercial paper (due within 90 days) | $2,742 | $67,597 | | Total cash and cash equivalents | $91,525 | $129,867 | | Corporate bonds and commercial paper (due within 1 year) | $120,134 | $119,786 | | Total investments | $120,134 | $119,786 | | Total cash, cash equivalents and investments | $211,659 | $249,653 | 6. Inventory The company began capitalizing COPIKTRA inventory costs in Q3 2018 in anticipation of its U.S. launch - Capitalized COPIKTRA inventory costs began in Q3 2018 after FDA approval and commercial launch preparations[67] Inventory Composition (in thousands) | Item | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Raw materials | $— | $— | | Work in process | $46 | $63 | | Finished goods | $260 | $264 | | Total inventories | $306 | $327 | 7. Intangible Assets The company's net intangible assets totaled $21.2 million as of March 31, 2019, primarily from a milestone payment for COPIKTRA - Intangible assets primarily consist of a $22.0 million milestone payment to Infinity Pharmaceuticals, Inc. upon FDA marketing approval of COPIKTRA[69] - Amortization expense for Q1 2019 was approximately $0.4 million, with estimated future amortization of $1.2 million for the rest of 2019 and $1.6 million annually thereafter[70] Intangible Assets (in thousands) | Item | March 31, 2019 | | :--- | :--- | | Acquired and in-licensed rights | $22,000 | | Less: accumulated amortization | $(815) | | Total intangible assets, net | $21,185 | | Estimated useful life | 14 years | 8. Accrued Expenses Accrued expenses decreased to $19.8 million at March 31, 2019, primarily due to a significant decrease in compensation and related benefits Accrued Expenses (in thousands) | Item | March 31, 2019 | December 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Compensation and related benefits | $3,334 | $8,749 | $(5,415) | | Contract research organization costs | $7,652 | $6,682 | $970 | | Commercialization costs | $2,671 | $1,979 | $692 | | Interest | $4,479 | $1,786 | $2,693 | | Consulting fees | $607 | $494 | $113 | | Professional fees | $611 | $482 | $129 | | Other | $474 | $936 | $(462) | | Total accrued expenses | $19,828 | $21,108 | $(1,280) | 9. Product Revenue Reserves and Allowances Product revenue reserves and allowances increased to $0.433 million at March 31, 2019, reflecting provisions related to current year sales - Trade discounts and Third-Party Payer chargebacks are reductions to accounts receivable, net[72] - Trade allowances, Third-Party Payer fees, government rebates, other incentives, and returns are components of accrued expenses[72] Product Revenue Allowance and Reserve Categories (in thousands) | Item | Beginning Balance (Dec 31, 2018) | Provision (Current Year Sales) | Adjustments (Prior Period Sales) | Credits and Payments Made | Ending Balance (Mar 31, 2019) | | :--- | :--- | :--- | :--- | :--- | :--- | | Trade discounts and allowances | $29 | $75 | $— | $(61) | $43 | | Third-Party Payer chargebacks, discounts and fees | $88 | $136 | $— | $(120) | $104 | | Government rebates and other incentives | $157 | $177 | $(32) | $(20) | $282 | | Returns | $2 | $2 | $— | $— | $4 | | Total | $276 | $390 | $(32) | $(201) | $433 | 10. Leases As of March 31, 2019, the company recognized a right-of-use asset of $3.3 million and a lease liability of $4.0 million - Lease agreement for Needham, Massachusetts office space extends through May 2025[73] - The company adopted ASU 2016-02 effective January 1, 2019, using the optional transition method, not restating prior periods[77] Lease Information (as of March 31, 2019, in thousands) | Item | Amount/Value | | :--- | :--- | | Right-of-use asset | $3,300 | | Lease liability | $4,011 | | Operating lease expense (Q1 2019) | $222 | | Operating cash flows paid for lease liabilities (Q1 2019) | $165 | | Weighted average remaining lease term | 6.2 years | | Weighted average discount rate | 14.6% | | Total future lease payments | $6,183 | | Less: Present value discount | $(2,172) | 11. Long-Term Debt The company amended its loan agreement with Hercules Capital, Inc., increasing its total borrowing capacity to $75.0 million - As of March 31, 2019, $25.0 million in term loans were outstanding with Hercules Capital, Inc[79] - On April 23, 2019, the company amended its loan agreement with Hercules, increasing total borrowing capacity to $75.0 million[84] 2019 Term Loan Agreement Details (as of April 23, 2019, in thousands) | Item | Value | | :--- | :--- | | Total borrowing capacity | $75,000 | | Immediately outstanding (2019 Term A Loan) | $35,000 | | Remaining borrowing capacity | $40,000 | | Maturity Date | December 1, 2022 | | Interest Rate (floating) | Greater of 9.75% or lesser of 12.00% and (9.75% + Prime Rate - 5.50%) | | Interest-only payments until | April 1, 2011 (extendable to Dec 1, 2021) | | Future principal payments (as of Mar 31, 2019) | | | 2021 | $14,234 | | 2022 | $20,766 | | Total principal payments | $35,000 | 12. Convertible Senior Notes In October 2018, the company closed a public offering of $150.0 million aggregate principal amount of 5.00% Convertible Senior Notes due 2048 - Issued $150.0 million aggregate principal amount of 5.00% Convertible Senior Notes due 2048 in October 2018[88] - Notes bear 5.00% annual interest, payable semi-annually, and mature on November 1, 2048[89] - Convertible into common stock at an initial rate of 139.5771 shares per $1,000 principal amount, corresponding to an initial conversion price of approximately $7.16 per share[90] 13. Stock-Based Compensation The company's stock-based compensation programs include stock options, RSUs, and an Employee Stock Purchase Plan Stock Options As of March 31, 2019, 14.2 million stock options were outstanding with a weighted-average exercise price of $5.15 - Weighted-average assumptions for Black-Scholes model in Q1 2019: risk-free interest rate 2.56%, volatility 83%, expected term 6.0 years[95] - Unrecognized compensation cost for unvested stock options was $20.9 million, to be recognized over approximately 3.46 years[95] Stock Option Activity (Three months ended March 31, 2019) | Item | Shares | Weighted Average Exercise Price per Share | | :--- | :--- | :--- | | Outstanding at December 31, 2018 | 12,522,867 | $5.42 | | Granted | 2,231,806 | $3.46 | | Exercised | (46,803) | $1.60 | | Forfeited/cancelled | (530,632) | $4.73 | | Outstanding at March 31, 2019 | 14,177,238 | $5.15 | | Vested at March 31, 2019 | 6,484,243 | $5.82 | | Vested and expected to vest at March 31, 2019 | 13,739,238 | $5.17 | Restricted Stock Units (RSUs) As of March 31, 2019, 688,194 RSUs were outstanding with a weighted-average grant date fair value of $4.25 - Unrecognized compensation cost for unvested RSUs was approximately $2.3 million, to be recognized over approximately 2.96 years[97] RSU Activity (Three months ended March 31, 2019) | Item | Shares | Weighted Average Grant Date Fair Value per Share | | :--- | :--- | :--- | | Outstanding at December 31, 2018 | 306,750 | $5.24 | | Granted | 428,904 | $3.43 | | Vested | (36,439) | $3.11 | | Forfeited | (11,021) | $3.35 | | Outstanding at March 31, 2019 | 688,194 | $4.25 | Employee Stock Purchase Plan (ESPP) The 2018 ESPP allows eligible employees to purchase common stock at a discount - 2018 ESPP allows employees to purchase common stock at 85% of the lesser of fair market value on grant or exercise date[98] - The initial purchase plan period commenced in February 2019[99] - Recognized $0.2 million of stock-based compensation under the 2018 ESPP for Q1 2019; no purchases made to date[99] 14. Net Loss Per Share Basic net loss per common share is calculated by dividing net loss by weighted-average common shares outstanding - Basic net loss per share is net loss divided by weighted-average common shares outstanding[100] - Diluted net loss per share includes potentially dilutive securities (stock options, RSUs, convertible senior notes) unless anti-dilutive[100] Potentially Dilutive Securities Excluded from Diluted Net Loss Per Share | Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :--- | :--- | :--- | | Outstanding stock options | 14,177,238 | 10,818,454 | | Outstanding restricted stock units | 688,194 | 166,250 | | Convertible senior notes | 20,936,548 | — | | Total potentially dilutive securities | 35,801,980 | 10,984,704 | 15. License and Collaboration Agreements The company has license and collaboration agreements with Yakult and CSPC for exclusive rights to duvelisib in certain Asian regions Yakult Honsha Co., Ltd. (Yakult) The company granted Yakult exclusive rights to develop and commercialize duvelisib in Japan - Granted exclusive rights to Yakult to develop and commercialize duvelisib in Japan (June 2018)[102] - Entitled to up to $90.0 million in development, regulatory, and commercial milestones, plus double-digit royalties on net sales[103] - Entered a supply agreement with Yakult in February 2019 for drug product supply and a limited manufacturing license for Japan[105] CSPC Pharmaceutical Group Limited (CSPC) The company granted CSPC exclusive rights to develop and commercialize duvelisib in China, Hong Kong, Macau, and Taiwan - Granted exclusive rights to CSPC to develop and commercialize duvelisib in China, Hong Kong, Macau, and Taiwan (September 2018)[107] - Entitled to up to $160.0 million in development, regulatory, and commercial milestones, plus double-digit royalties on net sales[109] - CSPC is obligated to fund certain global development costs related to worldwide clinical trials[109] 16. Income Taxes The company did not record any federal or state income tax provision or benefit for the period - No federal or state income tax provision or benefit recorded for Q1 2019 or Q1 2018[111] - Reason for no tax provision/benefit: expected losses and full valuation allowance against net deferred tax assets[111] 17. Commitments and Contingencies The company's primary commitment is a lease agreement for office space in Needham, Massachusetts - Primary commitment is a lease agreement for 27,810 square feet of office space in Needham, Massachusetts[112] - A security deposit of $0.2 million in the form of a letter of credit is held for the lease, included in restricted cash[112] 18. Subsequent Events The only material subsequent event was the execution of the Fourth Amendment to the Loan and Security Agreement with Hercules Capital, Inc - The only material subsequent event is the Fourth Amendment to the Loan and Security Agreement with Hercules Capital, Inc[113] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for Q1 2019 Overview Verastem is a biopharmaceutical company focused on cancer, with its first commercial product, COPIKTRA, approved in September 2018 - Verastem is a biopharmaceutical company developing and commercializing medicines for cancer patients[116] - COPIKTRA™ (duvelisib) was approved by the FDA on September 24, 2018, for relapsed or refractory CLL/SLL and FL[117] - The company had an accumulated deficit of $413.7 million as of March 31, 2019, and expects to incur significant expenses and operating losses for the foreseeable future[122] Critical Accounting Policies and Significant Judgments and Estimates This section highlights accounting policies that require significant management judgment and estimates - Critical accounting policies involve significant judgments and estimates, including accrued R&D, stock-based compensation, revenue recognition, collaborative arrangements, accounts receivable, inventory, and intangible assets[123][124] - The company adopted ASC 842, Leases, effective January 1, 2019, as the only material change to significant accounting policies during the three months ended March 31, 2019[124] Revenue Recognition Revenue is recognized when customers gain control of goods or services, applying a five-step model - Revenue recognition follows a five-step model under ASC 606, applied when collection of consideration is probable[125] - Product revenue from COPIKTRA sales is recognized upon delivery, net of variable consideration such as trade discounts, chargebacks, government rebates, co-pay assistance, and product returns[126][127] - For exclusive licenses of intellectual property, upfront fees are recognized when the license is transferred, and milestone payments are included in the transaction price if probable of being achieved without significant revenue reversal[137][141] Accounts Receivable, Net Accounts receivable primarily consists of amounts due from customers and collaboration partners - Accounts receivable are primarily from customers and license/collaboration partners, typically due within 31 days[144] - An allowance for doubtful accounts was not deemed necessary as of March 31, 2019, due to the nature and limited history of collectability[144] Inventory Inventory costs for COPIKTRA are capitalized when regulatory approval is highly likely and costs are expected to be recoverable - Inventory costs for COPIKTRA are capitalized when regulatory approval is highly likely and costs are expected to be recoverable[145] - Inventories are valued at the lower of cost or estimated net realizable value, using a first-in, first-out basis[146] - Impairment assessments are performed each reporting period, with write-downs recorded in cost of product revenues[146] Intangible Assets Finite-lived intangible assets are recorded at fair value and amortized over their useful lives - Finite-lived intangible assets are recorded at fair value and amortized over their useful lives, typically using the straight-line method[148] - Impairment assessments are performed at least annually or when indicators suggest impairment, comparing estimated undiscounted cash flows to carrying value[149] Leases Effective January 1, 2019, the company adopted ASC 842, requiring the recognition of right-of-use assets and lease liabilities - Adopted ASC 842 effective January 1, 2019, requiring recognition of right-of-use assets and lease liabilities for leases over one year[150] - Elected not to recognize leases with terms of one year or less on the balance sheet[151] - Elected to account for lease and non-lease components as a single lease component, allocating all contract consideration to the lease component[152] Results of Operations This section provides a comparative analysis of the company's financial performance for Q1 2019 versus Q1 2018 Summary of Results of Operations (in thousands, except per share amounts) | Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change (YoY) | % Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $1,671 | $— | $1,671 | 100% | | Total operating expenses | $36,341 | $20,761 | $15,580 | 75% | | Loss from operations | $(34,670) | $(20,761) | $(13,909) | 67% | | Interest income | $1,497 | $191 | $1,306 | 684% | | Interest expense | $(4,929) | $(480) | $(4,449) | 927% | | Net loss | $(38,102) | $(21,050) | $(17,052) | 81% | Product Revenue, Net Net product revenue was $1.7 million for Q1 2019, representing the first commercial sales of COPIKTRA in the United States - Commercial sales of COPIKTRA in the U.S. began in September 2018[154] Product Revenue, Net (in thousands) | Period | Product Revenue, Net | | :--- | :--- | | Three months ended March 31, 2019 | $1,671 | | Three months ended March 31, 2018 | $— | Costs of Revenues, Excluding Amortization of Acquired Intangible Assets Costs of revenues for Q1 2019 were approximately $0.2 million, comprising manufacturing costs, royalties, and period costs - Costs include COPIKTRA manufacturing, royalties to Infinity Pharmaceuticals, Inc., and period costs[154] - Certain COPIKTRA manufacturing costs recognized as revenue in Q1 2019 were expensed prior to FDA approval and are not included in current cost of sales[154] Costs of Revenues (in thousands) | Period | Costs of Revenues | | :--- | :--- | | Three months ended March 31, 2019 | $158 | | Three months ended March 31, 2018 | $— | Research and Development Expense Research and development expense decreased by $1.1 million (11%) to $9.8 million in Q1 2019 - Decrease in COPIKTRA-related costs driven by $0.9 million decrease in consulting fees and $1.1 million decrease in CRO costs due to study site closures, partially offset by $0.7 million increase in PRIMO Phase 2 study costs[157] Research and Development Expense (in thousands) | Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | COPIKTRA | $4,715 | $5,992 | $(1,277) | | Defactinib | $853 | $440 | $413 | | Unallocated and other R&D expense | $3,770 | $4,054 | $(284) | | Unallocated stock-based compensation expense | $420 | $448 | $(28) | | Total research and development expense | $9,758 | $10,934 | $(1,176) | Selling, General and Administrative Expense Selling, general and administrative expense increased significantly by $16.2 million (165%) to $26.0 million in Q1 2019 - Increase driven by $8.7 million in personnel costs (including stock-based compensation) for sales and commercial teams[158] - Also increased by $5.9 million in consulting and professional fees for commercial operations and $1.6 million in travel and other costs[158] Selling, General and Administrative Expense (in thousands) | Period | Amount | | :--- | :--- | | Three months ended March 31, 2019 | $26,033 | | Three months ended March 31, 2018 | $9,827 | | Change (YoY) | $16,206 | | % Change (YoY) | 165% | Amortization of Acquired Intangible Assets Amortization of acquired intangible assets was approximately $0.4 million for Q1 2019 - Expense relates to the COPIKTRA finite-lived intangible asset, which began amortizing in September 2018[159] Amortization of Acquired Intangible Assets (in thousands) | Period | Amount | | :--- | :--- | | Three months ended March 31, 2019 | $392 | | Three months ended March 31, 2018 | $— | Interest Income Interest income increased significantly by $1.3 million (684%) to $1.5 million in Q1 2019 - Increase attributed to higher investment cost basis and higher interest rates[161] Interest Income (in thousands) | Period | Amount | | :--- | :--- | | Three months ended March 31, 2019 | $1,497 | | Three months ended March 31, 2018 | $191 | | Change (YoY) | $1,306 | | % Change (YoY) | 684% | Interest Expense Interest expense increased substantially by $4.4 million (927%) to $4.9 million in Q1 2019 - Increase due to higher principal balance and interest rates on Hercules loan, acceleration of end-of-term fee, and issuance of Convertible Senior Notes in October 2018[162] Interest Expense (in thousands) | Period | Amount | | :--- | :--- | | Three months ended March 31, 2019 | $4,929 | | Three months ended March 31, 2018 | $480 | | Change (YoY) | $4,449 | | % Change (YoY) | 927% | Liquidity and Capital Resources The company's liquidity is primarily from public offerings, debt facilities, and license agreements Sources of Liquidity The company's primary liquidity sources include public stock offerings, debt facilities, and license agreement payments - Primary liquidity sources: public stock offerings, ATM programs, Hercules loan, upfront payments from Yakult and CSPC, and $150.0 million convertible notes[163] - Product revenue from COPIKTRA, launched in September 2018, has recently begun to finance operations[163] Cash, Cash Equivalents and Short-Term Investments (as of March 31, 2019, in millions) | Item | Amount | | :--- | :--- | | Cash, cash equivalents and short-term investments | $211.7 | Cash Flows Net cash used in operating activities increased by $16.3 million to $38.8 million in Q1 2019 - Increase in cash used in operating activities primarily due to higher SG&A expenses for commercial teams supporting COPIKTRA[166] - Investing activities in Q1 2019 primarily from net maturities of investments ($0.4 million)[167] Cash Flow Summary (in thousands) | Item | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(38,780) | $(22,454) | $(16,326) | | Net cash provided by investing activities | $363 | $4,435 | $(4,072) | | Net cash provided by financing activities | $75 | $299 | $(224) | | Decrease in cash, cash equivalents and restricted cash | $(38,342) | $(17,720) | $(20,622) | License and Collaboration Agreements The company has license and collaboration agreements with Yakult and CSPC for exclusive rights to duvelisib in certain Asian regions - Yakult Agreement (June 2018) grants exclusive rights for duvelisib in Japan, with potential milestones up to $90.0 million and double-digit royalties[177] - CSPC Agreement (September 2018) grants exclusive rights for duvelisib in China, Hong Kong, Macau, and Taiwan, with potential milestones up to $160.0 million and double-digit royalties[180] - Both agreements include limited manufacturing rights for partners if the company cannot supply sufficient quantities[177][180] Funding Requirements The company expects significant future expenses and operating losses due to commercializing COPIKTRA and continuing clinical trials - Expects significant expenses and operating losses from commercializing COPIKTRA, continuing clinical trials, and expanding intellectual property[184] - Future capital requirements depend on commercialization costs, clinical trial progress, acquisitions, regulatory review, and ability to form collaborations[186] - May need to raise additional capital through equity offerings (diluting stockholders), debt financings (with covenants), or collaborations (relinquishing rights)[185] Contractual Obligations and Commitments There have been no material changes to the company's contractual obligations and commitments since its 2018 Annual Report - No material changes to contractual obligations and commitments since the December 31, 2018, Form 10-K[188] - Exception: Fourth Amendment to the Loan and Security Agreement with Hercules Capital, Inc., as described in Note 11[188] Off-Balance Sheet Arrangements The company did not have any off-balance sheet arrangements - The company has no off-balance sheet arrangements as defined under SEC rules[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk primarily from changes in interest rates - Primary market risk exposure is interest rate sensitivity, affecting $211.7 million in cash, cash equivalents, and short-term investments[190] - Due to short-term duration and low-risk profile of investments, a 100 basis point change in interest rates would not materially affect fair value[190] - Floating-rate debt (Hercules loan) is subject to interest rate changes; a 10% increase in current rates would have an immaterial effect on Q1 2019 cash interest expense[192] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2019 Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level - Management, with CEO and CFO participation, evaluated disclosure controls and procedures as of March 31, 2019[194] - Concluded that disclosure controls and procedures were effective at the reasonable assurance level[194] Changes in Internal Control Over Financial Reporting There have been no material changes in the company's internal control over financial reporting during the quarter - No material changes in internal control over financial reporting during Q1 2019[195] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings for the period - No legal proceedings to report[198] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2018 Annual Report - No material changes to risk factors disclosed in the Annual Report on Form 10-K for December 31, 2018[199] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales or purchases of its own equity securities during the period Recent Sales of Unregistered Securities The company had no recent sales of unregistered securities - No recent sales of unregistered securities[200] Purchase of Equity Securities The company did not purchase any of its equity securities during the period - No purchases of equity securities during the period[201] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities[202] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - No mine safety disclosures[203] Item 5. Other Information This section includes disclosures regarding the Q1 2019 financial results announcement and a change in executive leadership - Announced financial results for Q1 2019 on May 9, 2019, via press release (Exhibit 99.1)[204] - Joseph Lobacki resigned as Chief Commercial Officer on May 9, 2019, to pursue other opportunities, remaining until a successor is appointed[205] Item 6. Exhibits This section incorporates by reference the Exhibit Index, which lists all exhibits filed as part of this report - The Exhibit Index lists all exhibits filed with this Form 10-Q[208] Exhibit Index The Exhibit Index provides a comprehensive list of all documents filed or furnished with the Form 10-Q - Includes Amendment No. 4 to the Loan and Security Agreement with Hercules Capital, Inc. (Exhibit 10.1)[211] - Contains certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[211] - Includes the Press Release issued on May 9, 2019 (Exhibit 99.1) and XBRL Instance Documents[211] Signatures This section contains the duly authorized signatures of the company's CEO and CFO, certifying the filing of the report - Report signed by Robert Forrester, President and Chief Executive Officer, and Robert Gagnon, Chief Financial Officer[215] - Date of signing: May 9, 2019[215]