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[March 06, 2014]
VERASTEM, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Form 10-K, our actual results may differ materially from those described in or implied by these forward-looking statements. Please also refer to the section under heading "Special Note Regarding Forward-Looking Statement." 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 have initiated multiple clinical trials with our product candidates VS-6063, VS-4718 and VS-5584, 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 clinical trials for our product candidates. To date, we have not generated any revenues and have financed our operations with net proceeds from the private placement of our preferred stock, our initial public offering in February 2012 and our follow-on offering in July 2013.
As of December 31, 2013, we had a deficit accumulated during the development stage of $87.7 million. Our net loss was $41.2 million, $32.0 million, $13.7 million and $87.7 million for the years ended December 31, 2013, 2012 and 2011 and for the period from August 4, 2010 (inception) to December 31, 2013, respectively. 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 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.
77 -------------------------------------------------------------------------------- Table of Contents 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: º • º employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; º • º external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, clinical sites, manufacturing organizations and consultants, including our scientific advisory board; º • º license fees; and º • º 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 and 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 continue costlier development activities, including clinical trials for our product candidates.
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: º • º the scope, rate of progress and expense of our drug discovery efforts and other research and development activities; º • º the potential benefits of our product candidates over other therapies; º • º our ability to market, commercialize and achieve market acceptance for any of our product candidates that we receive regulatory approval for; º • º clinical trial results; º • º the terms and timing of regulatory approvals; and 78 -------------------------------------------------------------------------------- Table of Contents º • º 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.
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 Interest income includes interest earned on our cash equivalent and investment accounts. Prior to September 30, 2011, our cash and cash equivalents were invested in non-interest-bearing accounts. As a result, we did not 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.
79 -------------------------------------------------------------------------------- Table of Contents 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 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 contract research organizations, or CROs, in connection with research and development activities for which we have not yet been invoiced.
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.
80 -------------------------------------------------------------------------------- Table of Contents 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 reliably 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 stock option awards 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. 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 consider including our own historical volatility, based on future expectations. 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 restricted stock units (RSUs) 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 RSUs 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 RSUs 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, 2013, there was approximately $8.2 million, $4.3 million and $2.0 million of unrecognized share-based compensation, net of estimated forfeitures, related to stock options, restricted stock units and restricted stock awards, respectively, which are expected to be recognized over weighted-average periods of 2.7 years, 2.1 and 0.75 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.
81 -------------------------------------------------------------------------------- Table of Contents 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, 2013 to the Year Ended December 31, 2012 Research and development expense. Research and development expense for the year ended December 31, 2013 (2013 Period) was $25.9 million compared to $21.7 million for the year ended December 31, 2012 (2012 Period). The $4.2 million increase from the 2012 Period to the 2013 Period was primarily related to an increase of $4.9 million in contract research organization expense for outsourced biology, chemistry and development services, which includes our clinical trial costs, a $1.8 million increase in personnel costs primarily due to increased average headcount, an approximate $619,000 increase in stock-based compensation expense and an increase of approximately $368,000 in travel fees primarily due to increased travel associated with our clinical trials. These increases were partially offset by a decrease of $3.5 million in license fee expense related to our agreement with Pfizer, Inc.
General and administrative expense. General and administrative expense for the 2013 Period was $15.5 million compared to $10.5 million for the 2012 Period.
The $5.0 million increase from the 2012 Period to the 2013 Period primarily resulted from an increase of $2.4 million in stock-based compensation expense associated with restricted stock units, an increase in professional fees and other costs of $1.5 million, an increase in consulting fees of approximately $514,000, an approximate $274,000 increase in corporate franchise taxes and an approximate $339,000 increase in personnel costs primarily due to increase in salaries and headcount.
Interest income. Interest income decreased to approximately $200,000 for the 2013 Period from approximately $246,000 for the 2012 Period. This decrease was primarily due to lower coupon rates on investments for the 2013 Period compared to the 2012 Period.
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 $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 an approximate $404,000 for laboratory supplies, an increase of an approximate $118,000 for depreciation due to additional laboratory equipment and an approximate $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 an approximate $389,000 in insurance costs primarily related to being a publicly traded company, an increase of an approximate $272,000 in consulting fees and an increase of travel and entertainment costs of an approximate $95,000.
82 -------------------------------------------------------------------------------- Table of Contents Interest income. Interest income increased to approximately $246,000 for the year ended December 31, 2012 from approximately $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.
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, our initial public offering in February 2012 and our follow-on offering in July 2013. As of December 31, 2013, we had received $68.1 million in net proceeds from the issuance of preferred stock and $116.6 million in net proceeds from our public offerings. As of December 31, 2013, we had $123.7 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, government-sponsored enterprise securities and corporate bonds.
Cash flows The following table sets forth the primary sources and uses of cash for each of the periods set forth below.
Years Ended December 31, 2011 2012 2013 Net cash provided by (used in) Net cash used in operating activities $ (9,372 ) $ (22,601 ) $ (26,305 ) Net cash used in investing activities (36,722 ) (45,859 ) (23,393 ) Net cash provided by financing activities 63,464 57,602 58,491 Net increase (decrease) in cash and cash equivalents $ 17,370 $ (10,858 ) $ 8,793 Operating activities. The use of cash in all periods resulted from our net losses adjusted for non-cash charges and changes in the components of working capital. The increase in cash used for the year ended December 31, 2013 compared to the year ended December 31, 2012 is primarily due to an increase in research and development expenses related to our ongoing clinical trials and development of our lead product candidates. The increase in cash used in operating activities for the year ended December 31, 2012 compared to the year ended December 31, 2011 is due to an increase in research and development expenses as we increased our research and development headcount and increased spending on external research and development costs. We expect cash used in operating activities to continue to increase for the foreseeable future as we fund our increased research, development and clinical activities.
Investing activities. The cash used in investing activities for the year ended December 31, 2013 includes $23.3 million in net purchases of investments and approximately $56,000 of property and 83 -------------------------------------------------------------------------------- Table of Contents equipment purchases. The cash used in investing activities for the year ended December 31, 2012 reflects the net purchases of investments of $45.5 million and the purchase of approximately $310,000 of property and equipment. The cash used in investing activities for the year ended December 31, 2011 included $35.9 million purchase of investments, approximately $785,000 of purchases of property and equipment and an $86,000 increase in restricted cash related to a standby letter of credit issued as a security deposit for our facility lease.
Financing activities. The cash provided by financing activities for the year ended December 31, 2013 is primarily related the $59.8 million of net proceeds from our follow-on offering offset by $1.3 million cash used to settle our restricted stock liability. The cash provided by financing activities for the year ended December 31, 2012 reflects the $57.6 million of net proceeds from our initial public offering not including costs incurred in 2011 related to the transaction. The cash provided by financing activities in the year ended December 31, 2011 is primarily the result of the sale and issuance of 12,000,000 shares of our series A preferred stock for net proceeds of $12.0 million, the sale and issuance of 16,025,000 shares of our series B preferred stock for net proceeds of $31.9 million, the sale and issuance of 9,067,825 shares of our series C preferred stock for net proceeds of $20.2 million.
In December 2013, the Company entered into an agreement under which it may offer and sell, from time to time, shares of our common stock in "at the market" offerings up to a total aggregate market value of $35 million. The Company may use this facility at its discretion and no shares have been sold under this facility through February 28, 2014.
Funding requirements We have three product candidates currently in clinical trials. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we: º • º continue our research, preclinical and clinical development of our product candidates, including the registration-directed trial of VS-6063 in mesothelioma; º • º initiate additional clinical trials for our product candidates; º • º seek marketing approvals for any of our product candidates that successfully complete clinical trials; º • º ultimately establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; º • º maintain, expand and protect our intellectual property portfolio; º • º acquire or in-license other products and technologies; º • º hire additional clinical, development and scientific personnel; and º • º add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.
We expect that our existing cash, cash equivalents and investments will enable us to fund our current operating plan and capital expenditure requirements into the first half of 2016. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses 84 -------------------------------------------------------------------------------- Table of Contents associated with completing the development of our current product candidates.
Our future capital requirements will depend on many factors, including: º • º the rate of progress, results and cost of completing of registration-directed trial of VS-6063 in mesothelioma; º • º assuming favorable clinical results, the cost, timing and outcome of our efforts to seek approval in mesothelioma in the United States and elsewhere in the world, including to fund the preparation and filing of regulatory submissions with the FDA and other regulatory agencies worldwide; º • º the scope, progress and, results of our other ongoing and potential future clinical trials; º • º the extent to which we acquire or in-license other products and technologies; º • º the costs, timing and outcome of regulatory review of our product candidates; º • º the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval; º • º revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; º • º the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and º • º our ability to establish collaborations on favorable terms, if at all.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements.
We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table summarizes our contractual obligations at December 31, 2013.
Less than More than (in thousands) Total 1 year 1 - 3 years 3 - 5 years 5 years Operating lease obligations $ 307 $ 307 - - - License agreements(1) - - - - - -------------------------------------------------------------------------------- º (1) º As discussed in Note 11 to the financial statements appearing elsewhere in this Annual Report on Form 10-K, we have executed several agreements to license intellectual property. The license agreements require us to pay upfront license fees and ongoing annual license maintenance fees, 85 -------------------------------------------------------------------------------- Table of Contents totaling a minimum of $160,000 per year beginning in 2014 up to a maximum amount of $440,000 per year beginning in 2017, as well as reimburse certain patent costs incurred by the licensors, as applicable. We have not included maintenance fees in the table above since the minimum annual payments are perpetual and the agreements are cancelable by us at any time upon prior written notice to the licensor.
In July 2012, we entered into a License Agreement with Pfizer Inc., ("Pfizer"), under which Pfizer granted us worldwide, exclusive rights to research, develop, manufacture and commercialize products containing certain of Pfizer's inhibitors of focal adhesion kinase (the "Products") for all therapeutic, diagnostic and prophylactic uses in humans. We have the right to grant sublicenses under the foregoing licensed rights, subject to certain restrictions. We are solely responsible, at our own expense, for the clinical development of the Products, which is to be conducted in accordance with an agreed-upon development plan. We are also responsible for all manufacturing and commercialization activities at our own expense.
Pfizer was required to provide us with an initial quantity of clinical supply of one of the Products for an agreed upon price. We made a one-time cash payment to Pfizer in the amount of $1.5 million and issued 192,012 shares of our common stock. Pfizer is also eligible to receive up to $2 million in developmental milestones and up to an additional $125 million based on the successful attainment of regulatory and commercial sales milestones. Pfizer is also eligible to receive high single to mid double digit royalties on future net sales of Products. Our royalty obligations with respect to each Product in each country begin on the date of first commercial sale of the Product in that country, and end on the later of 10 years after the date of first commercial sale of the Product in that country or the date of expiration or abandonment of the last claim contained in any issued patent or patent application licensed by Pfizer to us that covers the Product in that country.
Under our drug discovery platform license agreement, which we amended and restated in January 2012, we also have agreed to make milestone payments to the Whitehead Institute upon achieving various development, regulatory and commercialization milestones. For each licensed product, we agreed to make milestone payments of up to an aggregate of $1,560,000 plus an additional amount for each subsequent approval of additional indications for a maximum number of licensed products. For each identified product that is not a licensed product, we agreed to make milestone payments of up to an aggregate of $815,000 plus an additional amount for each subsequent approval of additional indications for a maximum number of identified products. Each type of specified milestone payment is payable only for each of the maximum number of licensed products and the maximum number of identified products, as the case may be, to achieve the applicable milestone. In addition, a separate milestone payment is due upon the first commercial sale of each licensed product or identified product that is a diagnostic or prognostic test. A single additional milestone payment is due for the first issuance of licensed patent rights in the United States, the United Kingdom, France, Germany, Spain or Italy. In addition, we have agreed to pay the Whitehead Institute royalties as a percentage of net sales of licensed products. The royalty rate is in the low single digits as a percentage of net sales for licensed products that are therapeutics, the mid single digits for licensed products that are diagnostics or prognostics and less than one percent for identified products.
Under our license agreement with Poniard that we entered into in November 2011 relating to VS-4718 and certain other compounds, we paid an upfront license fee and agreed to pay Poniard milestone payments upon the achievement of specified development and regulatory milestones. In February 2014, we purchased the assets which were the subject of our license agreement with Poniard from Encarta, Inc. (Encarta), who had previously purchased those assets in 2013. In consideration for the assets, we issued 97,500 shares of common stock, a warrant to purchase 142,857 shares of common stock with an exercise price equal to $17.16 per share and paid $25,000. All existing obligations under the license agreement, including an achieved development milestone and an obligation to issue a warrant, were settled as part of this transaction. In connection with the asset purchase agreement, we also assumed the rights and obligations under the Scripps License Agreement. Pursuant to the Scripps 86 -------------------------------------------------------------------------------- Table of Contents License Agreement, we are obligated to pay Scripps potential product development milestone payments of up to an aggregate of $3,000,000 upon the achievement of specified development and regulatory milestones. In addition, we are obligated to pay Scripps low single-digit royalties as a percentage of net sales of licensed products, subject to adjustments in certain circumstances. Our obligation to pay royalties on net sales is on a country by country basis.
Under our separate exclusive license agreement with the Whitehead Institute, or the cancer diagnostic license agreement, which we amended and restated in December 2011, we paid an upfront license fee and agreed to make milestone payments of up to an aggregate of $825,000 to the Whitehead Institute upon achieving specified regulatory and commercialization milestones. In addition, we have agreed to pay the Whitehead Institute royalties as a percentage of net sales of licensed products. The royalty rate is in the mid-single digits as a percentage of net sales.
OFF-BALANCE SHEET ARRANGEMENTS We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.
TAX LOSS CARRYFORWARDS As of December 31, 2013, we had federal and state net operating loss carryforwards of $65.7 million and $65.0 million, respectively, which are available to reduce future taxable income. We also had federal tax credits of $1.5 million and state tax credits of approximately $514,000, which may be used to offset future tax liabilities. The net operating loss and tax credit carryforwards will expire at various dates through 2033. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. At December 31, 2013, we recorded a 100% valuation allowance against our net operating loss and tax credit carryforwards of approximately $29.7 million, as we believe it is more likely than not that the tax benefits will not be fully realized. In the future, if we determine that a portion or all of the tax benefits associated with our tax carryforwards will be realized, net income would increase in the period of determination.
RECENTLY ADOPTED ACCOUNTING STANDARDS We have not recently adopted any new accounting standards.
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