Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
VSTM > SEC Filings for VSTM > Form 10-K on 26-Mar-2013All Recent SEC Filings

Show all filings for VERASTEM, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for VERASTEM, INC.


26-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk factors" section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.


Table of Contents

OVERVIEW

We are a clinical-stage biopharmaceutical company focused on discovering and developing proprietary small molecule drugs targeting cancer stem cells along with proprietary companion diagnostics. A cancer stem cell is a particularly aggressive type of tumor cell, resistant to conventional cancer therapy, that we believe is an underlying cause of tumor recurrence and metastasis. Our scientific co-founders have made discoveries that link the epithelial-to-mesenchymal transition, or EMT, to the emergence of cancer stem cells. This transition involves the transformation of one type of cancer cell into a more aggressive and drug resistant type of cancer cell. Building on these discoveries, our scientific co-founders developed proprietary technology to create a stable population of cancer stem cells that we use to screen for and identify small molecule compounds that target cancer stem cells. We expect to initiate multiple clinical trials with our product candidates VS-6063, VS-4718 and VS-5584 in 2013, including a potentially pivotal trial of VS-6063 in mesothelioma.

We commenced active operations in the second half of 2010. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates, undertaking preclinical studies of our most advanced product candidates and, recently, initiating a clinical trial for VS-6063. To date, we have not generated any revenues and have financed our operations with net proceeds from the private placement of our preferred stock and our initial public offering.

As of December 31, 2012, we had a deficit accumulated during the development stage of $46.5 million. Our net loss was $32.0 million for the year ended December 31, 2012, $13.7 million for the year ended December 31, 2011, $784,000 for the period from August 4, 2010 (inception) to December 31, 2010 and $46.5 million for the period from August 4, 2010 (inception) to December 31, 2012. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so.

FINANCIAL OPERATIONS OVERVIEW

Revenue

To date, we have not generated any revenues. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates.

Research and development expenses

Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts, and the development of our therapeutic product candidates and companion diagnostics. Our research and development expenses consist of:


employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;


Table of Contents


external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, manufacturing organizations and consultants, including our scientific advisory board;


license fees; and


facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment, and laboratory and other supplies.

We expense research and development costs to operations as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

We use our employee and infrastructure resources across multiple research and development projects. We do not allocate employee-related expenses or depreciation to any particular project. Because all of our development projects are in preclinical development, we do not track research and development costs by project. The components of our research and development costs are described in more detail in "-Results of operations."

We anticipate that our research and development expenses will increase significantly in future periods as we increase the scope and rate of our drug discovery efforts and begin costlier development activities, including clinical trials for our current and additional product candidates in the future.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our product candidates or the period, if any, in which material net cash inflows from our product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:


the scope, rate of progress and expense of our drug discovery efforts and other research and development activities;


the potential benefits of our product candidates over other therapies;


our ability to market, commercialize and achieve market acceptance for any of our product candidates that we are developing or may develop in the future;


clinical trial results;


the terms and timing of regulatory approvals; and


the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.


Table of Contents

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including stock-based compensation expense, in our executive, finance and business development functions. Other general and administrative expenses include allocated facility costs and professional fees for legal, patent, investor and public relations, consulting, insurance premiums, and accounting services.

Interest income

Prior to September 30, 2011, our cash and cash equivalents were invested in non-interest-bearing accounts. As a result, we didn't earn interest income until the last three months of 2011.

Accretion of preferred stock

Prior to the conversion of our preferred stock into 11,740,794 shares of common stock upon the closing of our initial public offering in February 2012, our preferred stock was redeemable beginning in 2016 at its original issue price plus any declared but unpaid dividends upon a specified vote of the preferred stockholders. Accretion of preferred stock reflects the periodic accretion of issuance costs on our preferred stock to its redemption value.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation described in greater detail below. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. However, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

Accrued research and development expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include fees paid to CROs in connection with research and development activities for which we have not yet been invoiced.


Table of Contents

We base our expenses related to CROs on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period.

Stock-based compensation

Prior to becoming a public company, we utilized significant estimates and assumptions in determining the fair value of our common stock. We granted stock options at exercise prices not less than the fair market value of our common stock as determined by the board of directors, with input from management. The board of directors determined the estimated fair value of our common stock based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector and the prices at which we sold shares of redeemable convertible preferred stock, the superior rights and preferences of securities senior to our common stock at the time and the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company.

We utilized various valuation methodologies in accordance with the framework of the 2004 American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation , to estimate the fair value of our common stock. The methodologies included an asset-based approach and the current value method for our initial common stock valuation as of November 30, 2010, the option pricing method utilizing the reverse backsolve method to estimate our underlying equity value as of July 31, 2011 and a methodology that determined an estimated value under an initial public offering scenario and a sale scenario based upon an assessment of the probability of occurrence of each scenario as of September 30, 2011, November 17, 2011, and December 31, 2011. Each valuation methodology included estimates and assumptions that required our judgment. These estimates included assumptions regarding future performance, including the successful completion of preclinical studies and clinical trials and the time to completing an initial public offering or sale. Significant changes to the key assumptions used in the valuations could have resulted in different fair values of common stock at each valuation date.

We recognize stock-based compensation expense for stock options issued to employees based on the grant date fair value of the awards on a straight-line basis over the requisite service period. We record stock-based compensation expense for stock options issued to non-employees based on the estimated fair value of the services received or of the equity instruments issued, whichever is more reliability measured, based on the vesting date fair value of the awards on a straight-line basis over the vesting period.

We estimate the fair value of the share- based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of share-based awards requires the use of subjective assumptions, including the expected term of the award and expected stock price volatility. The assumptions used in determining the fair value of share-based awards represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change, and we use different assumptions, our share-based compensation could be materially different in the future. The risk-free interest rate used for each grant is based on a U.S.


Table of Contents

Treasury instrument whose term is consistent with the expected term of the stock option. Because we do not have a sufficient history to estimate the expected term, we use the simplified method as described in SAB Topic 14.D.2 for estimating the expected term. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. Because there was no public market for our common stock prior to our initial public offering, we lacked company-specific historical and implied volatility information. Therefore, we used the historical volatility of a representative group of public biotechnology and life sciences companies with similar characteristics to us. In 2012, subsequent to our initial public offering, we began to use a blended volatility rate using our own historical volatility and that of a representative group of public biotechnology and life sciences companies with similar characteristics to us. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. We also recognize compensation expense for only the portion of options that are expected to vest. Accordingly, we have estimated expected forfeitures of stock options based on our historical forfeiture rate, adjusted for known trends, and used these rates in developing a future forfeiture rate.

We have also granted performance-based stock options with terms that allow the recipients to vest in a specific number of shares based upon the achievement of performance-based milestones as specified in the grants. Share-based compensation expense associated with these performance-based stock options is recognized if the performance condition is considered probable of achievement using management's best estimates of the time to vesting for the achievement of the performance-based milestones. If the actual achievement of the performance-based milestones varies from our estimates, share-based compensation expense could be materially different than what is recorded in the period. The cumulative effect on current and prior periods of a change in the estimated time to vesting for performance-based stock options will be recognized as compensation cost in the period of the revision, and recorded as a change in estimate.

While the assumptions used to calculate and account for share-based compensation awards represents management's best estimates, these estimates involve inherent uncertainties and the application of management's judgment. As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period.

As of December 31, 2012, there was approximately $5.4 million, $6.7 million and $4.2 million of unrecognized share-based compensation, net of estimated forfeitures, related to stock options, restricted stock units and shares of restricted stock awards, respectively, which are expected to be recognized over weighted average periods of 3.0 years, 3.1 and 1.75 years, respectively. The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures. See Notes 2 and 8 to our consolidated financial statements located in this Annual Report on Form 10-K for further discussion of share-based compensation.

RESULTS OF OPERATIONS

The information reported within our consolidated financial statements from August 4, 2010 to December 31, 2011 was based solely on the accounts of Verastem, Inc. In December 2012, Verastem Securities Company, our wholly owned subsidiary, was incorporated. All financial information presented after December 31, 2011 has been consolidated and includes the accounts of our wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011

Research and development expense. Research and development expense for the year ended December 31, 2012 was $21.7 million compared to $9.9 million for the year ended December 31, 2011. The $11.8 million increase is primarily related to increased contract research organization expense of


Table of Contents

$4.1 million, an increase of $3.6 million in license fees due to our agreement with Pfizer, Inc., including expense associated with the issuance of 192,012 shares of common stock, an increase of $3.3 million for personnel costs, including stock-based compensation of $2.0 million, primarily due to a higher fair value of our common stock, an increase of $404,000 for laboratory supplies, an increase of $118,00 for depreciation due to additional laboratory equipment and $86,000 in additional occupancy costs due to a full year of costs associated with our new facility that we occupied in May 2011.

General and administrative expense. General and administrative expense for the year ended December 31, 2012 was $10.5 million compared to $3.8 million for the year ended December 31, 2011. The $6.7 million increase resulted from an increase of $4.6 million for personnel costs, including stock-based compensation of $3.8 million, primarily due to higher fair value of our common stock, an increase of $1.1 million in professional fees primarily related to additional legal and accounting fees for being a publicly traded company, an increase of $389,000 in insurance costs primarily related to being a publicly traded company, an increase of $272,000 in consulting fees and an increase of travel and entertainment costs of $95,000.

Interest income. Interest income increased to $246,000 for the year ended December 31, 2012 from $15,000 for the year ended December 31, 2011. The increase in interest income was caused by an increase in the average cash balances available for investment and an increase in interest rates earned on investments. The increase in the average cash balances for investment was primarily due to the net proceeds from the sale of Series C redeemable convertible preferred stock in November 2011 and net proceeds from our initial public offering in February 2012. For most of the year ended December 31, 2011, our cash was deposited in non-interest bearing accounts.

Accretion of preferred stock. During 2012, we recorded $6,000 of accretion reflecting the periodic accretion of issuance costs associated with our series A, series B and series C preferred stock through the date of our initial public offering when all outstanding shares of preferred stock converted into common stock compared to $32,000 for the year ended December 31, 2011.

Discussion of the Year Ended December 31, 2011

We were incorporated on August 4, 2010. As a result, our results of operations reflect the year ended December 31, 2011 and the period from August 4, 2010 (inception) to December 31, 2010. There is no comparable period for 2010.

Research and development expenses. Research and development expenses were $9.9 million for the year ended December 31, 2011. Expenses during the year included:


Contract research organization expenses of $3.7 million, representing 37% of total research and development expenses during the year, comprised of expenses for outsourced biology, chemistry and development services.


Payroll expense of $1.5 million, representing 15% of total research and development expenses during the year, including salaries, payroll taxes and benefits for our employees in research and development. We had 11 employees in research and development at December 31, 2011. Payroll expense also included stock-based compensation expense for employees of $30,000.


Consulting fees of $1.3 million, representing 13% of total research and development expenses during the year, including $476,000 for our scientific advisory board, $232,000 for recruitment consultants and $143,000 for database consultants.


Laboratory supply expense of $1.0 million, representing 11% of total research and development expenses during the year.


Table of Contents


Non-employee stock-based compensation expense of $1.0 million, representing 10% of total research and development expenses during the year, related to stock options and restricted stock awarded to members of our scientific advisory board.


License fee expense of $842,000, representing 9% of total research and development expense during the year, comprised of upfront and annual license fees, including $406,000 for the obligation to issue a warrant for the purchase of 142,857 shares of our common stock to Poniard Pharmaceuticals, Inc.


Occupancy expense of $465,000, representing 5% of total research and development expenses during the year, which is an allocated portion of rent and other occupancy costs.

General and administrative expenses. General and administrative expenses were $3.8 million for the year ended December 31, 2011. Expenses during the year included:


Payroll expense of $1.4 million, representing 38% of total general and administrative expenses during the year, including salaries, payroll taxes and benefits for our general and administrative employees. Payroll expense included stock-based compensation expense for employees of $62,000.


Consulting fees of $696,000, representing 18% of total general and administrative expenses during the year, including business development, public relations and finance consultants.


Professional fee expense of $666,000, representing 18% of total general and administrative expenses during the year, comprised of fees for audit, tax and legal services, including the reimbursement to the Whitehead Institute of patent costs related to our licenses with the Whitehead Institute.


Non-employee stock-based compensation expense of $592,000, representing 16% of total general and administrative expenses during the year, related to restricted stock awarded to our co-founders.


Occupancy expense of $207,000, representing 5% of total general and administrative expenses during the year, which is an allocated portion of rent and other occupancy costs.


Travel expense of $190,000, representing 5% of total general and administrative expenses during the year, including travel, meals, entertainment and conferences.

Interest income. We recorded $15,000 of interest income in the year ended December 31, 2011 associated with our cash equivalents and investments.

Accretion of preferred stock. We recorded $32,000 of accretion in the year ended December 31, 2011 reflecting the periodic accretion of issuance costs associated with our series A, series B and series C preferred stock.

LIQUIDITY AND CAPITAL RESOURCES

Sources of liquidity

To date, we have not generated any revenues. We have financed our operations to date through private placements of our preferred stock and our initial public offering, which we completed in February 2012. As of December 31, 2012, we had received $68.1 million in net proceeds from the issuance of preferred stock and $56.8 million in net proceeds from our initial public offering in February 2012. As of December 31, 2012, we had $91.5 million in cash, cash equivalents, short-term investments and long-term investments. We primarily invest our cash, cash equivalents and investments in a U.S. Treasury money market fund, U.S. agency notes and corporate bonds.

. . .

  Add VSTM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for VSTM - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.