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Covid

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

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: 001-36544

 

Sage Therapeutics, Inc.

(Exact name of registrant as specified in its Charter)

 

 

 

Delaware

27-4486580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

215 First Street

Cambridge, Massachusetts 02142

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: (617299-8380

 

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

SAGE

The Nasdaq Global Market

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

Emerging Growth Company

 

 

 

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

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

As of April 30, 2020, there were 51,917,819 shares of the registrant’s common stock, $0.0001 par value per share, outstanding.

 

 

 

 

 


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our views as to potential future results of our ongoing commercialization efforts in the U.S. with respect to ZULRESSO™ (brexanolone) injection which is approved in the U.S. for the treatment of postpartum depression, or PPD;

 

our planned clinical and regulatory activities with respect to zuranolone (SAGE-217) in the treatment of major depressive disorder, or MDD, and PPD and related timelines, and our statements regarding the potential for zuranolone in those indications and in additional indications, including our view of the potential product profile and treatment paradigm impact for zuranolone, if successfully developed and approved;

 

our plans for development of our other product candidates in the central nervous system, or CNS, disorders we discuss in this Quarterly Report, and potentially in other indications, and expected timelines for our planned activities;

 

our ability, within the expected time frames, to initiate clinical trials and non-clinical studies of existing or future product candidates, including pivotal clinical trials, and to successfully complete and announce the results of ongoing or future clinical trials;

 

our plans and potential outcomes with respect to interactions with regulatory authorities and other research and development activities;

 

our plans for and potential outcomes of business development efforts;

 

our plans and expectations with respect to the potential development of any product or product candidate for markets outside the U.S.;

 

our estimates regarding the level of expenses we may incur in connection with our activities; use of cash and projected cash on hand at any given timepoint; timing of future cash needs; capital requirements; sources of future financings; and our ability to obtain additional financing when needed to fund future operations;

 

our expectations with respect to the availability of supplies of ZULRESSO and our product candidates, and the expected performance of our third-party manufacturers;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets and other forms of exclusivity relevant to our business;

 

the estimated number of patients with diseases or disorders of interest to us; the potential size of the market for ZULRESSO in PPD and for our product candidates in the indications we are studying or plan to study; the potential for ZULRESSO as a treatment for PPD and current or future product candidates, if successfully developed and approved, for the indications and in the markets for which they are approved; and our ability to serve those markets;

 

the potential for success of competing products that are or become available for PPD or MDD or any of the other indications that we are pursuing or may pursue in the future with our products and our product candidates;

 

the potential risk of loss of key scientific or management personnel;

 

our views as to the potential impact of the COVID-19 pandemic, including mitigation efforts and economic effects, on our business, results of operation, activities and on any of the foregoing statements; and

2


 

 

other risks and uncertainties, including those listed under Part II, Item 1A, Risk Factors.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our business and future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties; industry, medical and general publications; government data; and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

 

 

 

3


 

Sage Therapeutics, Inc.

INDEX

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

5

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

5

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

 

7

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019

 

8

 

 

Notes to Condensed Consolidated Financial Statements

 

9

Item 2.

 

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

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

Item 4.

 

Controls and Procedures

 

41

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 6.

 

Exhibits

 

87

 

 

Signatures

 

88

 

4


 

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

Sage Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

199,444

 

 

$

126,705

 

Marketable securities

 

 

673,313

 

 

 

881,688

 

Prepaid expenses and other current assets

 

 

25,479

 

 

 

26,700

 

Total current assets

 

 

898,236

 

 

 

1,035,093

 

Property and equipment, net

 

 

8,684

 

 

 

9,126

 

Restricted cash

 

 

2,367

 

 

 

2,367

 

Right-of-use operating asset

 

 

31,992

 

 

 

33,771

 

Other long-term assets

 

 

3,694

 

 

 

3,793

 

Total assets

 

$

944,973

 

 

$

1,084,150

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,910

 

 

$

15,266

 

Accrued expenses

 

 

52,180

 

 

 

86,618

 

Operating lease liability, current portion

 

 

10,270

 

 

 

10,244

 

Total current liabilities

 

 

70,360

 

 

 

112,128

 

Operating lease liability, net of current portion

 

 

24,951

 

 

 

26,848

 

Other liabilities

 

 

456

 

 

 

519

 

Total liabilities

 

 

95,767

 

 

 

139,495

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized

   at March 31, 2020 and December 31, 2019; no shares issued or

   outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.0001 par value per share; 120,000,000 shares authorized

   at March 31, 2020 and December 31, 2019; 51,920,852 and 51,880,227

   shares issued at March 31, 2020 and December 31, 2019; 51,917,819 and

   51,877,194 shares outstanding at March 31, 2020 and December 31, 2019

 

 

5

 

 

 

5

 

Treasury stock, at cost, 3,033 shares

   at March 31, 2020 and December 31, 2019

 

 

(400

)

 

 

(400

)

Additional paid-in capital

 

 

2,620,700

 

 

 

2,587,322

 

Accumulated deficit

 

 

(1,770,307

)

 

 

(1,643,567

)

Accumulated other comprehensive gain (loss)

 

 

(792

)

 

 

1,295

 

Total stockholders’ equity

 

 

849,206

 

 

 

944,655

 

Total liabilities and stockholders’ equity

 

$

944,973

 

 

$

1,084,150

 

 

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

5


 

Sage Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Product revenue, net

 

$

2,286

 

 

$

 

Collaboration revenue

 

 

 

 

 

465

 

Total revenue

 

 

2,286

 

 

 

465

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

170

 

 

 

 

Research and development

 

 

63,610

 

 

 

86,398

 

Selling, general and administrative

 

 

70,130

 

 

 

83,919

 

Total operating costs and expenses

 

 

133,910

 

 

 

170,317

 

Loss from operations

 

 

(131,624

)

 

 

(169,852

)

Interest income, net

 

 

4,729

 

 

 

6,442

 

Other income, net

 

 

155

 

 

 

4

 

Net loss

 

$

(126,740

)

 

$

(163,406

)

Net loss per share—basic and diluted

 

$

(2.44

)

 

$

(3.37

)

Weighted average number of common shares

   outstanding—basic and diluted

 

 

51,908,760

 

 

 

48,491,834

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(126,740

)

 

$

(163,406

)

Other comprehensive items:

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable

   securities

 

 

(2,087

)

 

 

409

 

Total other comprehensive gain (loss)

 

 

(2,087

)

 

 

409

 

Total comprehensive loss

 

$

(128,827

)

 

$

(162,997

)

 

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

 

6


 

Sage Therapeutics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(126,740

)

 

$

(163,406

)

Adjustments to reconcile net loss to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

31,110

 

 

 

44,116

 

Premium on marketable securities

 

 

(240

)

 

 

(739

)

Amortization of discount on marketable securities

 

 

(18

)

 

 

(2,322

)

Depreciation

 

 

669

 

 

 

415

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,221

 

 

 

1,637

 

Other long-term assets

 

 

99

 

 

 

(1,378

)

Right-of-use operating asset

 

 

1,778

 

 

 

2,942

 

Operating lease liabilities, current

 

 

25

 

 

 

(156

)

Operating lease liabilities, non-current

 

 

(1,897

)

 

 

(2,344

)

Accounts payable

 

 

(7,307

)

 

 

(20,507

)

Accrued expenses and other liabilities

 

 

(35,391

)

 

 

(8,192

)

Net cash used in operating activities

 

 

(136,691

)

 

 

(149,934

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

275,197

 

 

 

307,263

 

Purchases of marketable securities

 

 

(68,651

)

 

 

(580,916

)

Purchases of property and equipment

 

 

(276

)

 

 

(1,257

)

Net cash provided by (used in) investing activities

 

 

206,270

 

 

 

(274,910

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises and employee stock purchase

   plan issuances

 

 

3,160

 

 

 

15,681

 

Payment of employee tax obligations related to vesting of

   restricted stock units

 

 

 

 

 

(692

)

Payments of offering costs

 

 

 

 

 

(70

)

Proceeds from public offerings of common stock, net of commissions

   and underwriting discounts

 

 

 

 

 

561,277

 

Net cash provided by financing activities

 

 

3,160

 

 

 

576,196

 

Net increase in cash, cash equivalents and restricted cash

 

 

72,739

 

 

 

151,352

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

129,072

 

 

 

193,310

 

Cash, cash equivalents and restricted cash at end of period

 

$

201,811

 

 

$

344,662

 

Supplemental disclosure of non-cash operating and investing

   activities

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

15

 

 

$

78

 

Public offering costs included in accounts payable

 

$

 

 

$

259

 

 

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

 

 

7


 

Sage Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

46,888,263

 

 

$

5

 

 

 

3,033

 

 

$

(211

)

 

$

1,827,021

 

 

$

(515

)

 

$

(963,329

)

 

$

862,971

 

Issuance of common stock from exercise of stock options

 

 

287,659

 

 

 

 

 

 

 

 

 

 

 

 

14,072

 

 

 

 

 

 

 

 

 

14,072

 

Issuance of common stock under the employee stock purchase plan

 

 

16,398

 

 

 

 

 

 

 

 

 

 

 

 

1,799

 

 

 

 

 

 

 

 

 

1,799

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(189

)

 

 

 

 

 

 

 

 

 

 

 

(189

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,622

 

 

 

 

 

 

 

 

 

43,622

 

Public offering of common stock, net of offering costs

 

 

3,833,334

 

 

 

 

 

 

 

 

 

 

 

 

560,948

 

 

 

 

 

 

 

 

 

560,948

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

409

 

 

 

 

 

 

409

 

Vesting of restricted stock units, net of employee tax obligations

 

 

8,518

 

 

 

 

 

 

 

 

 

 

 

 

(692

)

 

 

 

 

 

 

 

 

(692

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(163,406

)

 

 

(163,406

)

Balances at March 31, 2019

 

 

51,034,172

 

 

$

5

 

 

 

3,033

 

 

$

(400

)

 

$

2,446,770

 

 

$

(106

)

 

$

(1,126,735

)

 

$

1,319,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2019

 

 

51,877,194

 

 

$

5

 

 

 

3,033

 

 

$

(400

)

 

$

2,587,322

 

 

$

1,295

 

 

$

(1,643,567

)

 

$

944,655

 

Issuance of common stock from exercise of stock options

 

 

7,196

 

 

 

 

 

 

 

 

 

 

 

 

367

 

 

 

 

 

 

 

 

 

367

 

Issuance of common stock under the employee stock purchase plan

 

 

33,429

 

 

 

 

 

 

 

 

 

 

 

 

2,793

 

 

 

 

 

 

 

 

 

2,793

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,218

 

 

 

 

 

 

 

 

 

30,218

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,087

)

 

 

 

 

 

(2,087

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(126,740

)

 

 

(126,740

)

Balances at March 31, 2020

 

 

51,917,819

 

 

$

5

 

 

 

3,033

 

 

$

(400

)

 

$

2,620,700

 

 

$

(792

)

 

$

(1,770,307

)

 

$

849,206

 

 

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

 

8


 

SAGE THERAPEUTICS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Nature of the Business

Sage Therapeutics, Inc. (“Sage” or the “Company”) is a biopharmaceutical company committed to developing and commercializing novel medicines with the potential to transform the lives of people with debilitating disorders of the brain.  The Company’s first product, ZULRESSO™ (brexanolone) injection, was approved by the U.S. Food and Drug Administration (“FDA”) in March 2019, for the treatment of postpartum depression (“PPD”) in adults, and was made commercially available in the U.S. beginning on June 24, 2019 after completion of controlled substance scheduling of brexanolone by the U.S. Drug Enforcement Administration and incorporation of the scheduling into the FDA-approved label and other product information. The Company has a portfolio of other product candidates with a current focus on modulating two critical central nervous system (“CNS”) receptor systems, GABA and NMDA. The GABA receptor family, which is recognized as the major inhibitory neurotransmitter in the CNS, mediates downstream neurologic and bodily function via activation of GABAA receptors.  The NMDA-type receptors of the glutamate receptor system are a major excitatory receptor system in the CNS.  Dysfunction in these systems is implicated in a broad range of CNS disorders.  The Company is targeting CNS indications where patient populations are easily identified, clinical endpoints are well-defined, and development pathways are feasible.

The Company was incorporated under the laws of the State of Delaware on April 16, 2010, and commenced operations on January 19, 2011 as Sterogen Biopharma, Inc. On September 13, 2011, the Company changed its name to Sage Therapeutics, Inc.

The Company is subject to risks and uncertainties common to companies in the biotech and pharmaceutical industries, including, but not limited to, the risks associated with developing product candidates at each stage of non-clinical and clinical development; the challenges associated with gaining regulatory approval of such product candidates; the risks associated with commercializing pharmaceutical products for marketing and sale; the potential for development by third parties of new technological innovations that may compete with the Company’s products; the dependence on key personnel; the challenges of protecting proprietary technology; the need to comply with government regulations; the high costs of drug development; the impact of the COVID-19 pandemic on its operations; and the uncertainty of being able to secure additional capital when needed to fund operations.

 

Under Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), or ASC 205-40, the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. The Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2020, the Company had an accumulated deficit of $1.8 billion. From its inception through March 31, 2020, the Company received net proceeds of $2.2 billion from the sales of redeemable convertible preferred stock, the issuance of convertible notes, and the sales of common stock in its initial public offering (“IPO”) in July 2014 and follow-on public offerings. Until such time, if ever, as the Company can generate substantial product revenue and achieve profitability, the Company expects to also finance its cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other sources of funding.  If the Company is unable to raise additional funds through equity or debt financings when needed, the Company may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop and market products or product candidates that the Company would otherwise prefer to develop and market itself.

 

9


 

The Company expects that, based on its current operating plans, the Company’s existing cash, cash equivalents and marketable securities will be sufficient to fund its current planned operations for at least the next twelve months from the issuance of these unaudited interim condensed consolidated financial statements (“condensed consolidated financial statements”). At some point after that time, the Company will require additional financing to fund its future operations. Even if the Company believes it has sufficient funds for its current or future operating plans, the Company may seek additional capital if market conditions are favorable or in light of other strategic considerations.

 

COVID-19

 

The COVID-19 pandemic is causing major disruptions to businesses and financial markets worldwide. The recent rapid spread of COVID-19 in the United States has resulted in a significant reduction in patient demand for ZULRESSO and in the number of sites available to administer ZULRESSO. This has had a negative impact on the Company’s revenue from sales of ZULRESSO.  While there have been no material impairments to date, any prolonged material disruptions to the work of the Company’s employees, suppliers, contract manufacturers, or vendors could negatively impact the Company’s activities, availability of supplies, or the Company’s operating results. Similarly, while to date the Company has not experienced any significant impacts to the Company’s development activities, any material disruption to the Company’s development activities as a result of the pandemic may increase the Company’s costs and impact the Company’s operating results. In addition, the COVID-19 pandemic has caused major volatility in capital markets and a significant global economic downturn, and the Company’s ability to access the capital markets in the future could be impacted if disruptions in the capital markets and the economic downturn continue.

 

2.

Summary of Significant Accounting Policies

The following is a summary of significant accounting policies followed in the preparation of these condensed consolidated financial statements.

Basis of Presentation

The condensed consolidated financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2020, its results of operations and comprehensive loss for the three months ended March 31, 2020 and 2019, its cash flows for the three months ended March 31, 2020 and 2019, and its statements of changes in stockholders’ equity for the three months ended March 31, 2020 and 2019. The consolidated balance sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three months ended March 31, 2020 are not necessarily indicative of the results for the year ending December 31, 2020, or for any future period.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as disclosed in Note 2, Summary of Significant Accounting Policies, within the “Notes to Consolidated Financial Statements” accompanying its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Intercompany accounts and transactions have been eliminated.

 

10


 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods. Actual results could differ from those estimates.

Research and Development Costs and Accruals

Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, overhead costs, depreciation, contract services and other related costs. Research and development costs are expensed to operations as the related obligation is incurred.

The Company has entered into various research and development contracts with research institutions and other companies both inside and outside of the U.S. These agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations to those third parties as of the end of the reporting period.  Any accrual estimates are based on a number of factors, including the Company’s knowledge of the progress towards completion of the research and development activities, invoicing to date under the contracts, communication from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced, and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the Company have not been materially different from the actual costs.

Stock-Based Compensation

The Company recognizes compensation expense for stock-based awards, including grants of stock options and restricted stock units, made to employees and non-employee directors based on the estimated fair value on the date of grant, over the requisite service period. The Company recognizes stock-based compensation expense for only the portion of awards that are expected to vest.

For awards that vest upon achievement of a performance condition, the Company recognizes compensation expense when achievement of the performance condition is met or during the period from which meeting the condition is deemed probable until the expected date of meeting the performance condition.

The fair value of each option grant is estimated using the Black-Scholes option-pricing model. Through December 31, 2015, the Company lacked sufficient Company-specific historical and implied volatility information, and as a result, the Company used the volatility of a group of publicly-traded peer companies in the Black-Scholes calculations.  Beginning in 2016, the Company estimated its expected volatility using a weighted average of the historical volatility of publicly-traded peer companies and the volatility of its common stock and expected to continue to do so until such time as it has adequate historical data regarding the volatility of its common stock price for the duration of the expected term. Effective January 1, 2020, the Company began using the volatility of its common stock, as there is adequate historical data for the duration of the expected term.

The expected term of the options granted to employees and non-employee directors by the Company has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. Through December 31, 2018, the expected term of its options granted to non-employee consultants has been determined based on the contractual

11


 

term of the options, and effective January 1, 2019, the “simplified” method is used. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The Company also applies a forfeiture rate in order to calculate stock-based compensation expense. Expected forfeitures are based on the historical experience of the Company and management’s expectations of future forfeitures. To the extent actual forfeitures differ from the estimates, the difference is recorded as a cumulative adjustment in the period in which the estimates are revised.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. As of March 31, 2020 and December 31, 2019, cash equivalents were comprised of cash equivalents, commercial paper and money market funds.

Marketable securities

Marketable securities consist of investments with original maturities greater than 90 days. The Company has classified its investments with maturities beyond one year as short-term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of marketable securities to be available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as the accumulated other comprehensive items in stockholders’ equity. When the fair value is below the amortized cost of the asset, an estimate of expected credit losses is made. The credit-related impairment amount is recognized in net income; the remaining impairment amount and unrealized gains are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Credit losses are recognized through the use of an allowance for credit losses account and subsequent improvements in expected credit losses are recognized as a reversal of an amount in the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, then the allowance for the credit loss is written-off and the excess of the amortized cost basis of the asset over its fair value is recorded in net income.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1

 

 

Quoted market prices in active markets for identical assets or liabilities.

 

 

 

 

 

Level 2

 

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; 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 assets or liabilities.

 

 

 

 

 

Level 3

 

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

The Company’s cash equivalents and marketable securities at March 31, 2020 and December 31, 2019 were carried at fair value, determined according to the fair value hierarchy; see Footnote 3, Fair Value Measurements.

 

The carrying amounts reflected in the condensed consolidated balance sheets for accounts payable and accrued expenses approximate their fair values due to their short-term maturities at March 31, 2020 and December 31, 2019, respectively.

12


 

Revenue Recognition

The Company received approval of ZULRESSO from the FDA in March 2019 and subsequently began to record revenues from product sales in June 2019. Prior to the second quarter of 2019, all of the revenues of the Company were derived from the Company’s collaboration agreement with Shionogi & Co., Ltd., (“Shionogi”). The terms of the Company’s collaboration agreement include consideration such as non-refundable license fees, reimbursement of any development costs the Company incurs on behalf of Shionogi, payments due upon the achievement of clinical and pre-clinical performance-based development milestones, regulatory milestones, manufacturing services to supply drug product for clinical trials, and sales-based milestones and royalties on product sales. To date, revenue from the Company’s collaboration agreement with Shionogi has come from an initial, upfront fee upon execution of the agreement and for the supply of drug product for Shionogi’s clinical trials.

 

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right may be accounted for as a contract modification or as a continuation of the contract for accounting purposes. For contracts determined to be within the scope of Topic 606, the Company assesses whether the goods or services promised within each contract are distinct to identify those that are performance obligations. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Company allocates the transaction price (the amount of consideration it expects to be entitled to from a customer in exchange for the promised goods or services) to each performance obligation and recognizes the associated revenue when (or as) each performance obligation is satisfied. The Company’s estimate of the transaction price for each contract includes all variable consideration to which the Company expects to be entitled.

 

Product revenue

The Company recognizes product revenues, net of variable consideration related to certain allowances and accruals that are determined using the expected value method, in its condensed consolidated financial statements at the point in time when control transfers to the customer, which is typically when the product has been delivered to the customer’s location. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s only performance obligation identified for ZULRESSO is to deliver the product to the location specified by the customer’s order. The Company records shipping and handling costs associated with delivery of product to its customers within selling, general and administrative expenses on its condensed consolidated statements of operations and comprehensive loss. The Company expenses incremental costs of obtaining a contract as incurred if the expected amortization period of the asset would be less than one year. If the Company were to incur incremental costs with an amortization period greater than a year, such costs would be capitalized as contract assets, as they are expected to be recovered, and would be expensed by amortizing on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The Company did not have any contract assets (unbilled receivables) at March 31, 2020, as customer invoicing generally occurs before or at the time of revenue recognition. The Company did not have any contract liabilities at March 31, 2020, as the Company did not receive any payments in advance of satisfying its performance obligations to its customers. Amounts billed or invoiced are included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

 

13


 

The Company records reserves, based on contractual terms, for the following components of variable consideration related to product sold during the reporting period, as well as its estimate of product that remains in the distribution channel inventory of its customers at the end of the reporting period. On a quarterly basis, the Company will update its estimates and record any necessary material adjustments in the period they are identified.

 

Inventory

 

Inventory is stated at the lower of cost or estimated net realizable value with cost determined on a first-in, first-out basis. Inventory costs include raw materials, third-party contract manufacturing, third-party packaging services, and freight. Raw and intermediate materials that may be utilized for either research and development or commercial purposes are identical and, as a result, are both classified as inventory. Amounts in inventory associated with research and development are charged to research and development expense when the product enters the research and development process and can no longer be used for commercial purposes and, therefore, does not have an “alternative future use” as defined in authoritative guidance. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period and writes down any excess and obsolete inventory to its estimated net realizable value in the period it is identified. If they occur, such impairment charges are recorded as a component of cost of goods sold in the condensed consolidated statements of operations and comprehensive loss. Inventory is included in prepaid expenses and other current assets on the condensed consolidated balance sheets and the amount was not significant as of March 31, 2020.

 

Prior to the initial date regulatory approval is received, costs related to the production of inventory are recorded as research and development expense on the Company’s condensed consolidated statements of operations and comprehensive loss in the period incurred. The Company received FDA approval for ZULRESSO on March 19, 2019 and subsequently began capitalizing costs related to inventory manufacturing.

Cost of Goods Sold

 

Cost of goods sold includes direct and indirect costs related to the manufacturing and distribution of ZULRESSO, including third-party manufacturing costs, packaging services, freight, third-party royalties payable on the Company’s net product revenues and amortization of intangible assets associated with ZULRESSO. Cost of goods sold may also include period costs related to certain inventory manufacturing services, inventory adjustment charges, as well as manufacturing variances. In connection with the FDA approval of ZULRESSO on March 19, 2019, the Company subsequently began capitalizing inventory manufactured or purchased after this date. As a result, certain manufacturing costs associated with product shipments of ZULRESSO were expensed prior to FDA approval and, therefore, are not included in cost of goods sold during the current period.

14


 

Accounts Receivable

The Company’s trade accounts receivable consist of amounts due from specialty distributors; specialty pharmacies; and medically-supervised healthcare settings that have been certified under a Risk Evaluation and Mitigation Strategy, or REMS, program, in the U.S. related to sales of ZULRESSO and have standard payment terms that generally require payment within 30 to 90 days from the invoice date. The Company monitors the financial performance and creditworthiness of customers so that it can properly assess and respond to changes in their credit profile. The Company reserves against trade accounts receivable for estimated losses that may arise from a customer’s inability to pay and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected. Trade accounts receivable are included in prepaid expenses and other current assets on the condensed consolidated balance sheets. As of March 31, 2020, the Company has not provided any allowance for bad debts against the trade accounts receivable and the amount of trade accounts receivable was not significant.

Leases

The Company determines if an arrangement is a lease at contract inception. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses the implicit interest rate when readily determinable and uses the Company’s incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments.

The lease payments used to determine the Company’s operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation, when determinable, and are recognized in the Company’s operating lease assets in the Company’s condensed consolidated balance sheets. In addition, the Company’s contracts contain lease and non-lease components. The Company combines lease and non-lease components, which are accounted for together as lease components.

The Company’s operating leases are reflected in the right-of-use operating asset; operating lease liability, current portion; and operating lease liability, net of current portion in the Company’s condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease.

Variable lease payments are the amounts owed by the Company to a lessor that are not fixed, such as reimbursement for common area maintenance and utilities costs for facility leases; and maintenance and tolls for leased vehicles, and are expensed when incurred.

Recently Issued Accounting Pronouncements

15


 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases, which replaced the existing guidance in ASC 840, “Leases”. The FASB subsequently issued the following amendments to ASU No. 2016-02 that have the same effective date and transition date: ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Leases (Topic 842): Targeted Improvements; ASU No. 2018-20, Narrow-Scope Improvement for Lessors; and ASU No. 2019-01, Leases (Topic 842): Codification Improvements. The Company adopted these amendments with ASU No. 2016-02 effective January 1, 2019. The ASC 842 standard generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the condensed consolidated balance sheets and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. Presentation of leases within the condensed consolidated statements of operations and comprehensive loss and condensed consolidated statements of cash flows is generally consistent with the former lease accounting guidance. The Company elected the package of practical expedients permitted under the transition guidance and as such, the adoption of this ASU did not change the classification of any of the Company’s leases. The Company elected to combine lease and non-lease components, elected not to record leases with an initial term of 12 months or less on the condensed consolidated balance sheets and will recognize the associated lease payments in the condensed consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.  On the implementation date, $44.2 million was recognized as total lease liabilities and $41.1 million was recognized as total right-of-use assets on the Company’s condensed consolidated balance sheet.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities are required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities are no longer permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. The Company adopted the standard on the required effective date of January 1, 2020, on a prospective basis. This guidance did not have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. The Company adopted the standard on the required effective date of January 1, 2020. This guidance did not have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard enhances and simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intra-period tax allocation exception to the incremental approach, ownership changes in investments, changes from a subsidiary to an equity method investment, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This guidance will be effective for the Company for annual and interim periods beginning after December 31, 2020; however, early adoption is permitted. The Company is currently in the process of evaluating the impact to its consolidated financial statements.

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Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements upon adoption.

3.

Fair Value Measurements

The Company’s cash equivalents are classified within Level 1 and Level 2 of the fair value hierarchy.  The Company’s investments in marketable securities are classified within Level 2 of the fair value hierarchy.

The fair values of the Company’s marketable securities are based on prices obtained from independent pricing sources. Consistent with the fair value hierarchy described in Note 2, Summary of Significant Accounting Policies, securities with validated quotes from pricing services are reflected within Level 2, as they are primarily based on observable pricing for similar assets or other market observable inputs. Typical inputs used by these pricing services include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers or estimates of cash flow, prepayment spreads and default rates.

 

The following tables summarize the Company’s money market funds and marketable securities as of March 31, 2020 and December 31, 2019.

 

 

 

March 31, 2020

 

 

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

199,444

 

 

$

169,249

 

 

$

30,195

 

 

$

 

Total cash equivalents

 

 

199,444

 

 

 

169,249

 

 

 

30,195

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

145,913

 

 

 

 

 

 

145,913

 

 

 

 

U.S. corporate bonds

 

 

362,161

 

 

 

 

 

 

362,161

 

 

 

 

International corporate bonds

 

 

116,396

 

 

 

 

 

 

116,396

 

 

 

 

U.S. commercial paper

 

 

27,904

 

 

 

 

 

 

27,904

 

 

 

 

International commercial paper

 

 

20,939

 

 

 

 

 

 

20,939

 

 

 

 

Total marketable securities

 

 

673,313

 

 

 

 

 

 

673,313

 

 

 

 

 

 

$

872,757

 

 

$

169,249

 

 

$

703,508

 

 

$

 

 

 

 

December 31, 2019

 

 

 

Total

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

126,705

 

 

$

65,414

 

 

$

61,291

 

 

$

 

Total cash equivalents

 

 

126,705

 

 

 

65,414

 

 

 

61,291