Versartis
Versartis, Inc. (Form: 10-Q, Received: 11/07/2014 14:32:01)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2014

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: 001-36361

 

Versartis, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

2834

 

26-4106690

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

4200 Bohannon Drive, Suite 250

Menlo Park, California 94025

(650) 963-8580

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

 

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

As of October 31, 2014, there were 24,194,808 outstanding shares of common stock, par value $0.0001 per share, of Versartis, Inc.

 

 

 

 

 

 

 


 

VERSARTIS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2014

PART I. FINANCIAL INFORMATION

 

Item

  

 

  

Page

1.

  

Financial Statements (unaudited):

  

 

 

  

a. Condensed Balance Sheets at September 30, 2014 and December 31, 2013

  

3

 

  

b. Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013

  

4

 

  

c. Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

  

5

 

  

d. Notes to Condensed Financial Statements

  

6

2.

  

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

  

16

3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

20

4.

  

Controls and Procedures

  

20

PART II. OTHER INFORMATION

1.

  

Legal Proceedings

  

22

1A.

  

Risk Factors

  

22

2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

52

6.

  

Exhibits

  

53

Signatures

  

54

 

 

 

 

2

 


 

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

VERSARTIS, INC.

(A development stage company)

CONDENSED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

181,582

 

 

$

13,288

 

Prepaid expenses and other current assets

 

3,121

 

 

 

978

 

Total current assets

 

184,703

 

 

 

14,266

 

Other assets

 

285

 

 

 

396

 

Property and equipment, net

 

534

 

 

 

21

 

Total assets

$

185,522

 

 

$

14,683

 

Liabilities, convertible preferred stock and stockholders' equity (deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts Payable

$

244

 

 

$

315

 

Accrued liabilities

 

4,045

 

 

 

3,668

 

Total Current Liabilities

 

4,289

 

 

 

3,983

 

Convertible preferred stock warrant liability

 

-

 

 

 

474

 

Convertible preferred stock call option liability

 

-

 

 

 

21

 

Total Liabilities

 

4,289

 

 

 

4,478

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value; 5,000,000, and 135,816,462 shares authorized at

   September 30, 2014 and December 31, 2013, respectively;  zero and 120,648,174 shares issued

   and outstanding at September 30, 2014 and December 31, 2013, respectively; zero and $60,392

   liquidation preference at September 30, 2014 and December 31, 2013 respectively

 

-

 

 

 

57,497

 

Stockholders' equity (deficit)

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 50,000,000 and 15,652,174 shares authorized at

   September 30, 2014 and December 31, 2013, respectively; 24,194,808 and 1,257,311 shares

   issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

2

 

 

 

 

Additional paid-in capital

 

276,837

 

 

 

6,454

 

Deficit accumulated during the development stage

 

(95,606

)

 

 

(53,746

)

Total stockholders' equity (deficit)

 

181,233

 

 

 

(47,292

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$

185,522

 

 

$

14,683

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

 

 

3

 


 

VERSARTIS, INC.

(A development stage company)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period From

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 10,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 (Date of

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Inception) to

 

 

September 30,

 

 

September 30,

 

 

September   30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

10,515

 

 

$

4,576

 

 

$

21,006

 

 

$

11,401

 

 

$

66,879

 

General and administrative

 

3,577

 

 

 

685

 

 

 

9,167

 

 

 

2,023

 

 

$

19,309

 

Total operating expenses

 

14,092

 

 

 

5,261

 

 

 

30,173

 

 

 

13,424

 

 

 

86,188

 

Loss from operations

 

(14,092

)

 

 

(5,261

)

 

 

(30,173

)

 

 

(13,424

)

 

 

(86,188

)

Interest income

 

50

 

 

 

 

 

 

89

 

 

 

 

 

 

93

 

Interest expense

 

 

 

 

 

 

 

 

 

 

(128

)

 

 

(863

)

Other income (expense), net

 

208

 

 

 

252

 

 

 

(11,776

)

 

 

869

 

 

 

(9,746

)

Net loss and comprehensive loss

 

(13,834

)

 

 

(5,009

)

 

 

(41,860

)

 

 

(12,683

)

 

 

(96,704

)

Deemed dividend related to beneficial conversion

     feature of convertible preferred stock

 

 

 

 

 

 

 

(25,559

)

 

 

 

 

 

(25,559

)

Accretion of Series A preferred stock to redemption

     value, net of extinguishment

 

 

 

 

 

 

 

 

 

 

 

 

 

1,098

 

Net loss attributable to common stockholders

$

(13,834

)

 

$

(5,009

)

 

$

(67,419

)

 

$

(12,683

)

 

$

(121,165

)

Net loss per basic and diluted share attributable to

     common stockholders

$

(0.57

)

 

$

(19.98

)

 

$

(3.93

)

 

$

(71.34

)

 

 

 

 

Weighted-average common shares used to compute

     basic and diluted net loss per share

 

24,194,808

 

 

 

250,745

 

 

 

17,137,647

 

 

 

177,777

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

4

 


 

VERSARTIS, INC.

(A development stage company)

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Period From

 

 

 

 

 

 

 

 

 

 

December 10,

 

 

 

 

 

 

 

 

 

 

2008 (Date of

 

 

Nine Months Ended

 

 

Inception) to

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(41,860

)

 

$

(12,683

)

 

$

(96,704

)

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

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

59

 

 

 

12

 

 

 

152

 

Loss on sale of assets

 

26

 

 

 

 

 

 

34

 

Reserve for uncollectible receivables

 

 

 

 

 

 

 

52

 

Stock-based compensation expense

 

3,049

 

 

 

144

 

 

 

3,600

 

Amortization of debt discount

 

 

 

 

121

 

 

 

666

 

Non-cash interest expense

 

 

 

 

7

 

 

 

195

 

Non-cash research and development expense

 

 

 

 

 

 

 

1

 

Remeasurement of convertible preferred stock call option liability

 

9,560

 

 

 

(863

)

 

 

7,464

 

Remeasurement of convertible preferred stock warrant liability

 

2,279

 

 

 

(1

)

 

 

2,239

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

84

 

 

 

 

Prepaid expenses and other assets

 

(2,030

)

 

 

(75

)

 

 

(3,350

)

Accounts payable

 

(71

)

 

 

(251

)

 

 

244

 

Accrued liabilities and other liabilities

 

377

 

 

 

1,073

 

 

 

4,045

 

Net cash used in operating activities

 

(28,611

)

 

 

(12,432

)

 

 

(81,362

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

 

 

 

 

 

10

 

Purchase of property and equipment

 

(600

)

 

 

(9

)

 

 

(785

)

Security deposit for facility lease

 

 

 

 

 

 

 

(55

)

Net cash used in investing activities

 

(600

)

 

 

(9

)

 

 

(830

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in initial public offering, net of issuance costs

 

132,138

 

 

 

 

 

 

132,138

 

Proceeds from sale of option for Series A preferred stock purchase rights

 

 

 

 

 

 

 

1,000

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

64,793

 

 

 

20,165

 

 

 

120,113

 

Proceeds from exercise of convertible preferred stock warrants

 

570

 

 

 

 

 

 

1,470

 

Proceeds from exercise of common stock options

 

4

 

 

 

27

 

 

 

53

 

Proceeds from issuance of convertible notes payable

 

 

 

 

 

 

 

9,000

 

Net cash provided by financing activities

 

197,505

 

 

 

20,192

 

 

 

263,774

 

Net increase in cash and cash equivalents

 

168,294

 

 

 

7,751

 

 

 

181,582

 

Cash and cash equivalents at beginning of period

 

13,288

 

 

 

329

 

 

 

 

Cash and cash equivalents at end of period

$

181,582

 

 

$

8,080

 

 

$

181,582

 

Supplemental disclosure

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

$

 

 

$

 

 

$

2

 

Supplemental disclosure of noncash items

 

 

 

 

 

 

 

 

 

 

 

Conversion of notes payable and accrued interest to preferred stock

$

 

 

$

4,588

 

 

$

9,195

 

Conversion of preferred stock call option liability to additional paid in capital

$

9,581

 

 

$

 

 

$

9,581

 

Conversion of preferred stock warrant liability to additional paid in capital

$

2,753

 

 

$

 

 

$

2,753

 

Conversion of preferred stock to common stock and additional paid in capital

$

122,290

 

 

$

 

 

$

122,290

 

Issuance of warrants for preferred stock in connection with convertible notes

$

 

 

$

433

 

 

$

666

 

Accretion of Series A convertible preferred stock to redemption value

$

 

 

$

 

 

$

11,002

 

Issuance of call options related to convertible preferred stock

$

 

 

$

990

 

 

$

3,504

 

Extinguishment of Series A convertible preferred stock

$

 

 

$

 

 

$

12,100

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

 

5

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

 

  

1. Formation and Business of the Company

Versartis, Inc., (the “Company”) a development stage company, was incorporated on December 10, 2008 in the State of Delaware. The Company is an endocrine-focused biopharmaceutical company initially developing long-acting recombinant human growth hormone for the treatment of growth hormone deficiency. The Company is developing drug candidates that it has licensed from Amunix Operating Inc. (“Amunix”).

The Company’s headquarters and operations are in Menlo Park, California. Since incorporation, the Company has been primarily performing research and development activities, including early clinical trials, filing patent applications, obtaining regulatory approvals, hiring personnel, and raising capital to support and expand these activities.

Unaudited Interim Financial Information

The accompanying financial information as of September 30, 2014 is unaudited. The Condensed Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that management considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The December 31, 2013 Condensed Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America, or GAAP. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying Condensed Financial Statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2013 included in the Company’s prospectus filed pursuant to Rule 424(b)(4) on March 21, 2014 with the U.S. Securities and Exchange Commission (“SEC”).

Initial Public Offering

In March 2014, the Company completed its initial public offering of shares of its common stock, or IPO, pursuant to which the Company issued 6,900,000 shares of common stock, which includes shares issued pursuant to the underwriters’ exercise of their over-allotment option, and received net proceeds of approximately $132.1 million, after underwriting discounts, commissions and offering expenses. In addition, in connection with the completion of the Company’s IPO, all convertible preferred stock converted into common stock. Effective with the closing of the IPO, the Company’s Amended and restated Certificate of Incorporation authorizes the Company to issue 50.0 million shares of common stock and 5.0 million shares of preferred stock.

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying financial statements have been prepared in accordance with GAAP and following the rules and regulations of the SEC for interim reporting. As permitted under those rules, certain disclosures or financial information that are normally required by GAAP can be condensed or omitted. The preparation of the accompanying financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States of America.

Reclassification

Certain amounts within the condensed consolidated balance sheet for the prior period have been reclassified to conform with the current period presentation. These reclassifications had no impact on the Company’s previously reported financial position.

 

 

6

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

Reverse Stock Split

On March 6, 2014, the Company effected a 1-for-11.5 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding common stock share and per share amounts included in the accompanying financial statements have been adjusted to reflect this reverse stock split for all periods presented, and the conversion ratio of the preferred stock was adjusted accordingly.

Concentration of c redit r isk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. All of the Company’s cash and cash equivalents are held at four financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers.

Products developed by the Company require clearances from the U.S. Food and Drug Administration (“FDA”) or other international regulatory agencies prior to commercial sales. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed or the Company was unable to maintain clearance, it could have a materially adverse impact on the Company.

The Company expects to incur substantial operating losses for the next several years and will need to obtain additional financing in order to complete clinical studies and launch and commercialize any product candidates for which it receives regulatory approval. There can be no assurance that such financing will be available or will be at terms acceptable by the Company.

Cash and c ash e quivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At September 30, 2014 the Company’s cash and cash equivalents were held in four institutions in the United States and include deposits in money market funds which were unrestricted as to withdrawal or use. At December 31, 2013, the Company’s cash and cash equivalents were held in an institution in the United States and include deposits in a money market fund which was unrestricted as to withdrawal or use. Included in cash and cash equivalents at September 30, 2014 and December 31, 2013 was approximately $0.1 million of restricted cash held by a bank as security for the Company’s credit cards.

Property and e quipment, Net

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

Impairment of Long-Lived Assets

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by the comparison of the carrying amount to the undiscounted future net cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value (i.e. determined through estimating projected discounted future net cash flows or other acceptable methods of determining fair value) arising from the asset. There have been no such impairments of long-lived assets as of September 30, 2014, December 31, 2013, or the cumulative period from December 10, 2008 (date of inception) to September 30, 2014.

 

7

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. Convertible preferred stock call option liability and convertible preferred stock warrant liability were carried at fair value.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

Level I

  

Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level II

  

 

Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level III

  

 

Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments consist of Level I assets and Level III liabilities. Level I securities are comprised of a highly liquid money market fund. Level III liabilities that are measured at fair value on a recurring basis consist of convertible preferred stock warrant liability and convertible preferred stock call option liability. The fair values of these instruments are measured using an option pricing model. Inputs used to determine estimated fair market value include the estimated fair value of the underlying stock at the valuation measurement date, the remaining expected term of the instrument, risk-free interest rates, expected dividends and the expected volatility.

Preclinical and Clinical Trial Accruals

The Company’s clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations (“CROs”) that conduct and manage clinical trials on the Company’s behalf.

The Company estimates preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Convertible Preferred Stock Warrants

The Company accounted for its convertible preferred stock warrants as liabilities based upon the characteristics and provisions of each instrument. Convertible preferred stock warrants classified as derivative liabilities were recorded on the Company’s balance sheet at their fair value on the date of issuance and revalued on each subsequent balance sheet, with fair value changes recognized as increases or reductions to other income (expense), net in the condensed statements of operations.

 

8

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

Prior to the IPO in March 2014, the Company had outstanding warrants which were classified as a liability and remeasured to fair value each reporting period. The Company had estimated the fair value of these liabilities using an option pricing model and assumptions that were based on the individual characteristics of the warrants on the valuation date, as well as assumptions for expected volatility, expected life, dividends, and risk-free interest rate. Immediately prior to the completion of the Company’s IPO in March 2014, all of the warrants were either exercised for cash or automatically net exercised for a total issuance of 158,179 shares of common stock, pursuant to the terms of the warrants. Just prior to the exercises, all outstanding warrants, covering 173,910 shares, were remeasured using the intrinsic value of the warrant computed as the difference between the $21.00 per share IPO price and the $5.17 per share exercise price of the warrant. The remeasurement of the fair value of these warrants from December 31, 2013 through the date of the conversion to a common stock warrant and following exercise resulted in a $2.3 million expense recorded to other income (expense), net in our condensed statement of operations. The resulting fair value of approximately $2.8 million was reclassified to additional paid in capital upon completion of the IPO.

Convertible Preferred Stock Call Option

The Company determined that the Company’s obligation to issue, and the investors’ obligation to purchase, additional shares of the Company’s convertible preferred stock represented a freestanding financial instrument. The freestanding convertible preferred stock call option liability was initially recorded at fair value, with fair value changes recognized as increases or reductions to other income (expense), net in the condensed statement of operations. At the time of the deemed exercise of the call option, the remaining value of the option was reclassified to additional paid in capital. Immediately prior to the Series D-2 financing completed in February 2014, the Company remeasured the fair value of the preferred stock call option liability associated with the Series D convertible preferred stock financing and recorded other expense of approximately $9.6 million in the condensed statement of operations. Fair value was computed using a discount from the Company’s public offering price less the liquidation value of the underlying Series D convertible preferred stock.

Convertible Preferred Stock

The Company classified the convertible preferred stock as temporary equity on the balance sheets due to certain change in control events that are outside the Company’s control, including liquidation, sale or transfer of the Company, as holders of the convertible preferred stock can cause redemption of the shares. Upon the IPO in March 2014, all of the outstanding shares of convertible preferred stock automatically converted into 15,876,104 shares of common stock.

In February 2014, the Company issued 48,758,857 shares of its Series E convertible preferred stock at a purchase price of $1.128 per share for an aggregate purchase price of approximately $55.0 million. The shares of convertible preferred stock automatically converted into 4,239,984 shares of common stock upon completion of the Company’s IPO. Pursuant to Accounting Standards Codification 470-20 , Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments , the Company recorded a deemed dividend of approximately $25.6 million, which reflected a beneficial conversion feature on the underlying Series E preferred stock, in connection with the closing of the IPO on March 26, 2014.

Research and d evelopment

Research and development costs are charged to operations as incurred. Research and development costs include, but are not limited to, payroll and personnel expenses, laboratory supplies, consulting costs, external research and development expenses and allocated overhead, including rent, equipment depreciation, and utilities. Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are expensed to research and development costs when incurred.

Income t axes

The Company accounts for income taxes under the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

9

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

Stock-Based c ompensation

For stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the grant-date estimated fair value. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables.

Stock-based compensation expense related to stock options granted to nonemployees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from the nonemployee.

Stock-based compensation expense, net of estimated forfeitures, is reflected in the condensed statements of operations and comprehensive loss as follows (in thousands):

 

          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period From

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 10,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008  (Date of

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Inception) to

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

2014

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

394

 

 

$

34

 

 

$

761

 

 

$

88

 

 

$

1,130

 

General and administrative

 

1,162

 

 

 

21

 

 

 

2,288

 

 

 

56

 

 

 

2,470

 

Total

$

1,556

 

 

$

55

 

 

$

3,049

 

 

$

144

 

 

$

3,600

 

 

 

Comprehensive Loss

Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources. There have been no items qualifying as other comprehensive loss and, therefore, for all periods presented, the Company’s comprehensive loss was the same as its reported net loss.

Net Loss per Share of Common Stock

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, convertible preferred stock, convertible notes payable, stock options and convertible preferred stock warrants are considered to be potentially dilutive securities. Because the Company has reported a net loss for all of the periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

 

10

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-10 , Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation , or ASU 2014-10, which eliminates the definition of a development stage entity, the development stage presentation and disclosure requirements under ASC 915, Development Stage Entities , and amends provisions of existing variable interest entity guidance under ASC 810, Consolidation . As a result of the changes, the financial statements of entities which meet the former definition of a development stage entity will no longer: (1) present inception-to-date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. Furthermore, ASU 2014-10 clarifies disclosures about risks and uncertainties under ASC Topic 275, Risks and Uncertainties that apply to companies that have not commenced planned principal operations. Finally, variable interest entity rules no longer contain an exception for development stage entities and, as a result, development stage entities will have to be evaluated for consolidation in the same manner as non-development stage entities.

In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company will apply the guidance and disclosure provisions of the new standard upon adoption.

Under ASU 2014-10, entities are no longer required to apply the presentation and disclosure provisions of ASC 915 during annual periods beginning after December 15, 2014. In addition, the revisions to the consolidation standards are effective for annual periods beginning after December 15, 2015 for public companies and are effective for annual periods beginning after December 15, 2016 for nonpublic entities. Early adoption is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). The Company is currently evaluating the impact of adopting ASU 2014-10, but does not expect there to be any impact on its financial position, results of operations or cash flows.

 

3. Balance Sheet Components

Prepaid expenses and other current assets (in thousands)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Preclinical and clinical (1)

$

2,128

 

 

$

847

 

Other

 

993

 

 

 

131

 

Total

$

3,121

 

 

$

978

 

 

(1)

A substantial majority of these prepayments consist of advances to our contract manufacturers.

Accrued Liabilities (in thousands)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Payroll and related

$

1,264

 

 

$

539

 

Preclinical and clinical

 

2,403

 

 

 

1,726

 

Professional services

 

103

 

 

 

1,265

 

Other

 

275

 

 

 

138

 

Total

$

4,045

 

 

$

3,668

 

 

 

11

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

4. Fair Value Measurements

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

Fair Value Measurements at September 30, 2014

 

  

(unaudited)

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

175,083

 

 

$

175,083

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2013

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

12,761

 

 

$

12,761

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock warrant liability

$

474

 

 

$

 

 

$

 

 

$

474

 

Convertible preferred stock call option liability

 

21

 

 

 

 

 

 

 

 

 

21

 

Total liabilities

$

495

 

 

$

 

 

$

 

 

$

495

 

 

The fair value measurement of the convertible preferred stock warrant liability and convertible preferred stock call option liability was based on significant inputs not observed in the market and thus represents a Level III measurement. Level III instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s assumptions in measuring fair value. The Company’s estimated fair value of the convertible preferred stock warrant liability was calculated using an option pricing model and key assumptions including the probabilities of settlement scenarios, enterprise value, time to liquidity, risk-free interest rates, discount for lack of marketability and volatility. The Company’s estimated fair value of the preferred stock call option liability was calculated using an option pricing model and key assumptions including the estimated fair value of the Company’s preferred stock, risk-free interest rates and volatility and the probability of the closing of the future financing tranche. The estimates were based, in part, on subjective assumptions.

During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level III inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the year ended December 31, 2013 or the nine month period ended September 30, 2014.

 

12

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

The following table sets forth a summary of the changes in the fair value of the Company’s Level III financial instruments as follows (in thousands):

 

 

Convertible

 

 

Convertible

 

 

preferred stock

 

 

preferred stock

 

 

call option

 

 

warrant

 

 

liability

 

 

liability

 

Balance at January 1, 2014

$

21

 

 

$

474

 

Fair value of call option liability recognized upon issuance of preferred stock

 

 

 

 

 

Change in fair value recorded in other income (expense), net

 

9,560

 

 

 

2,279

 

Conversion of preferred stock into common stock and reclassification to permanent equity

 

(9,581

)

 

 

(2,753

)

Balance at September 30, 2014

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

Convertible

 

 

preferred stock

 

 

preferred stock

 

 

call option

 

 

warrant

 

 

liability

 

 

liability

 

Balance at January 1, 2013

$

 

 

$

433

 

Issuance of financial instruments

 

990

 

 

 

 

Fair value of call option liability recognized upon issuance of preferred stock

 

(127

)

 

 

 

Change in fair value recorded in other income (expense), net

 

(863

)

 

 

(1

)

Balance at September 30, 2013

$

-

 

 

$

432

 

 

5. Convertible Preferred Stock Warrants

In connection with the convertible note purchase agreements (“2010 Notes”), the Company issued convertible preferred stock warrants equal to 20% of the shares issuable upon conversion of the 2010 Notes. Using an option pricing model with a volatility of 85%, term of 1.75 years and a risk-free interest rate of 0.53%, the fair value of the warrants was determined to be approximately $233,000 and was recorded as warrant liability and a debt discount against the 2010 Notes and amortized to interest expense over the term of the 2010 Notes. The convertible preferred stock warrants were exercised in 2012 for 2.0 million shares of Series B convertible preferred stock at an exercise price of $900,000.

In connection with the convertible note purchase agreements (“2012 Notes”), the Company issued convertible preferred stock warrants equal to 20% of the shares issuable on conversion of the 2012 Notes. The convertible preferred stock warrants were exercisable into shares of the same class of convertible preferred stock issued upon conversion of the related 2012 Notes. The convertible preferred stock warrants had a five-year term and an expiration date of October 12, 2017. The estimated fair value of these warrants of $433,000 at issuance was recorded as a debt discount on the 2012 Notes, and amortized to interest expense using the effective interest method through the original maturity date in 2013. The convertible preferred stock warrants were valued using an option pricing model with a risk-free interest rate of 0.21%, volatility of 90%, and an expected life equal to 1.5 years. As of December 31, 2013, the fair value of the warrants was estimated to be $474,000.

 

13

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

The 2012 warrants remained unexercised as of December 31, 2013. The terms of the warrants provided that they would expire at the earlier of (i) the closing of an initial public offering, (ii) a sale of the company or (iii) October 12, 2017; provided that if a holder of the warrants does not notify us of the holder’s intent to exercise or not to exercise the warrant prior to the expiration date, and the fair market value of the underlying shares on the expiration date is greater than the exercise price, then the holder will be deemed to have net exercised the warrant immediately prior to the expiration date. Upon the closing of our IPO, the warrants were exercised for a total of 158,179 shares of our common stock.

Prior to the IPO in March 2014, the Company had outstanding warrants which were classified as a liability and remeasured to fair value each reporting period. The Company had estimated the fair value of these liabilities using an option pricing model and assumptions that were based on the individual characteristics of the warrants on the valuation date, as well as assumptions for expected volatility, expected life, dividends, and risk-free interest rate. Immediately prior to the completion of the Company’s IPO in March 2014, all of the warrants were either exercised for cash or automatically net exercised for a total issuance of 158,179 shares of common stock, pursuant to the terms of the warrants. Just prior to the exercises, all outstanding warrants, covering 173,910 shares, were remeasured using the intrinsic value of the warrant computed as the difference between the $21.00 per share IPO price and the $5.17 per share exercise price of the warrant. The remeasurement of the fair value of these warrants from December 31, 2013 through the date of the conversion to a common stock warrant and following exercise resulted in a $2.3 million expense recorded to other income (expense), net in our condensed statement of operations. The resulting fair value of approximately $2.8 million was reclassified to additional paid in capital upon completion of the IPO.

The assumptions used to value the convertible preferred stock warrants were as follows:

 

 

December 31,

 

 

2013

 

Expected term (in years)

 

1.1

 

Expected volatility

 

75.00

%

Risk-free interest rate

 

13.00

%

Dividend yield

 

0

%

 

 

6. Commitments and Contingencies

Facility Leases

In August 2011, the Company signed an operating facility lease for its corporate office that included approximately 5,740 square feet of office space in Redwood City, California. The lease term was for thirty months and commenced in October 2011.

In March 2014, the Company entered into an operating facility lease agreement to lease 12,943 square feet in Menlo Park, California for its new headquarters building for a period of thirty-nine months. The total obligation for the Company under this lease is approximately $1.6 million as of September 30, 2014.

 

7. Equity Incentive Plans

The Company’s Board of Directors, or Board, and stockholders previously approved the 2009 Stock Plan, or the 2009 Plan. In March 2014, the stockholders approved the 2014 Equity Incentive Plan, or the 2014 Plan. As of March 21, 2014, the effective date of the 2014 Plan, the Company suspended the 2009 Plan and no additional awards may be granted under the 2009 Plan. Any shares of common stock covered by awards granted under the 2009 Plan that terminate after March 21, 2014 by expiration, forfeiture, cancellation or other means without the issuance of such shares, will be added to the 2014 Plan reserve.

As of September 30, 2014, the total number of shares of common stock available for issuance under the 2014 Plan was 4,100,255, which includes the 1,695,652 shares of common stock that were available for issuance under the 2009 Plan as of the effective date of the 2014 Plan. Unless the Board provides otherwise, beginning on January 1, 2015, and continuing until the expiration of the 2014 Plan, the total number of shares of common stock available for issuance under the 2014 Plan will automatically increase annually on January 1 by 4.5% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year. As of September 30, 2014, approximately 648,000 shares of common stock were subject to outstanding awards under the 2014 Plan.

 

14

 


VERSARTIS, INC.

(A development stage company)

NOTES TO FINANCIAL STATEMENTS  (CONTINUED) (unaudited)

In March 2014, the Board and stockholders approved the 2014 Employee Stock Purchase Plan, or the ESPP, which became effective as of March 5, 2014. The Company has reserved a total of 150,000 shares of common stock for issuance under the ESPP. Unless the Board provides otherwise, beginning on January 1, 2015, and continuing until the expiration of the ESPP, the total number of shares of common stock available for issuance under the ESPP will automatically increase annually on January 1 by the lesser of (i) 1% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year, or (ii) 300,000 shares of common stock. As of September 30, 2014, the Company has not issued any shares of common stock under the ESPP.

 

8. Net loss per share of Common Stock

The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company (in thousands, except share and per share data):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss attributable to common stockholders - basic and diluted

$

(13,834

)

 

$

(5,009

)

 

$

(67,419

)

 

$

(12,683

)

Weighted-average shares outstanding

 

24,194,808

 

 

 

250,991

 

 

 

17,137,647

 

 

 

178,023

 

Less: weighted average shares subject to repurchase

 

 

 

 

(246

)

 

 

 

 

 

(246

)

Weighted-average shares used to compute basic and diluted net

   loss per share

 

24,194,808

 

 

 

250,745

 

 

 

17,137,647

 

 

 

177,777

 

Basic and diluted net loss per common share

$

(0.57

)

 

$

(19.98

)

 

$

(3.93

)

 

$

(71.34

)

 

Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period, determined using the treasury-stock method and the as-if converted method, for convertible securities, if inclusion of these is dilutive. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.

The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the computation of diluted shares outstanding:

 

 

 

 

 

September 30,

 

 

2014

 

 

2013

 

Convertible preferred stock

 

 

 

 

8,945,252

 

Warrants to purchase convertible preferred stock (1)

 

 

 

 

173,910

 

Options to purchase common stock

 

2,477,446

 

 

 

828,382

 

Restricted stock units

 

104,821

 

 

 

 

 

 

 

(1)

Assumes exercise of warrants to purchase convertible preferred stock at $5.17 per share.

 

 

 

 

15

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2013, included in our prospectus dated March 21, 2014, filed with the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Prospectus”).

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

Versartis, Inc. (the “Company” “We” “Our”) is an endocrine-focused biopharmaceutical company initially developing our novel long-acting recombinant human growth hormone, VRS-317, for growth hormone deficiency, or GHD, an orphan disease. A key limitation to current recombinant human growth hormone, or rhGH, products is that they impose the burden of daily injections over multiple years, often resulting in poor compliance, which in turn can lead to suboptimal treatment outcomes in GHD patients. VRS-317 is intended to reduce the burden of daily treatment by requiring significantly fewer injections, potentially improving compliance and, therefore, treatment outcomes. We have completed the Phase 2a stage of our pediatric GHD clinical trial in which we evaluated weekly, semi-monthly and monthly dosing regimens and have received feedback from various authorities, including the FDA and the European Medicines Agency, or EMA, providing guidance on the design of our planned Phase 3 clinical trial, which we intend to initiate by early 2015. We have also received feedback from the Japanese regulatory agency, Pharmaceuticals Medicines and Devices Agency, or PMDA, on our plans for a pediatric GHD Phase 2/3 clinical trial in Japan, which we also intend to initiate by early 2015. We have global rights to VRS-317 and, if VRS-317 is approved, given the highly concentrated prescriber base, we intend to commercialize it with our own specialty sales force in the United States and Canada, and potentially other geographies.

VRS-317 is a fusion protein consisting of rhGH and a proprietary half-life extension technology known as XTEN, which we in-license from Amunix Operating, Inc., or Amunix. Amunix has granted us an exclusive license under its patents and know-how related to the XTEN technology to develop and commercialize up to four licensed products, including VRS-317. Once we start commercializing a licensed product, we will owe to Amunix a royalty on net sales of the licensed products until the later of the expiration of all licensed patents or ten years from the first commercial sale in the relevant country. The royalty payable is one percent of net sales for the first two marketed products, but higher single-digit royalties are payable if we market additional products, or if we substitute one marketed product for another. If we elect to substitute one marketed product for another, in addition to royalties, we would also be required to make milestone and other payments totaling up to $40 million per marketed product.

First Nine Months of 2014 and Other Recent Highlights

On March 21, 2014, our registration statement on Form S-1 relating to our initial public offering (IPO) of common stock became effective. Our IPO closed on March 26, 2014 at which time we sold 6,900,000 shares of our common stock, which included 900,000 shares issued pursuant to the exercise in full by the underwriters of their over-allotment option. We received cash proceeds of approximately $132.1 million from the IPO, net of underwriting discounts and commissions and expenses paid by us.

 

16

 


 

Financial overview

Summary

We have not generated net income from operations, and, at September 30, 2014, we had an accumulated deficit of $95.6 million, primarily as a result of research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments and research and development payments in connection with potential future strategic partnerships, we have not yet generated any revenue. VRS-317 is at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to incur significant and increasing losses from operations for the foreseeable future as we seek to advance VRS-317 into a Phase 3 clinical trial, and there can be no assurance that we will ever generate significant revenue or profits.

Research and development expenses

We recognize both internal and external research and development expenses as incurred. Our external research and development expenses consist primarily of:

·

the cost of acquiring and manufacturing clinical trial and other materials, including expenses incurred under agreements with contract manufacturing organizations;

·

expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities; and

·

other costs associated with development activities, including additional studies.

Internal research and development costs consist primarily of salaries and related fringe benefit costs for our employees (such as workers’ compensation and health insurance premiums), stock-based compensation charges, travel costs, and allocated overhead expenses.

We expect to continue to incur substantial expenses related to our development activities for the foreseeable future as we transition to and prepare for a potential Phase 3 clinical trial. As product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, we expect that our research and development expenses will increase substantially in the future.

General and administrative expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding infrastructure, other administrative expenses and increased professional fees associated with being a public reporting company.

Other income (expense), net

Other income (expense), net is comprised of changes in the fair value of the convertible preferred stock warrant and call option liabilities.   In addition, other income (expense), net includes any potential gains and losses on foreign currency transactions primarily related to third-party contracts with foreign based contract manufacturing organizations.

Critical accounting policies, significant judgments and use of estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in 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 and conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed financial statements and in Note 1 to our audited financial statements contained in the prospectus filed pursuant to Rule 424(b)(4) on March 21, 2014 with the U.S. Securities and Exchange Commission (“Prospectus”). There have been no significant or material changes in our critical accounting policies during the three and nine months ended September 30, 2014, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates” in the Prospectus.

 

17

 


 

 

Results of operations

Comparison of the Three and Nine Months Ended September 30, 2014 and 2013

The following table summarizes our net loss during the periods indicated (in thousands, except percentages):

 

 

Three Months Ended

 

 

Increase/

 

 

Nine Months Ended

 

 

Increase/

 

 

 

September 30,

 

 

(Decrease)

 

 

September 30,

 

 

(Decrease)

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

10,515

 

 

$

4,576

 

 

$

5,939

 

 

 

130

%

 

$

21,006

 

 

$

11,401

 

 

$

9,605

 

 

 

84

%

 

General and administrative

 

3,577

 

 

 

685

 

 

 

2,892

 

 

 

422

%

 

 

9,167

 

 

 

2,023

 

 

 

7,144

 

 

 

353

%

 

Loss from operations

 

(14,092

)

 

 

(5,261

)

 

 

8,831

 

 

 

168

%

 

 

(30,173

)

 

 

(13,424

)

 

 

16,749

 

 

 

125

%

 

Interest income

 

50

 

 

 

 

 

 

50

 

 

NM

 

(1)

 

89

 

 

 

-

 

 

 

89

 

 

NM

 

(1)

Interest expense

 

 

 

 

 

 

 

 

 

NM

 

(1)

 

 

 

 

(128

)

 

 

128

 

 

NM

 

(1)

Other income (expense), net