CEREVEL THERAPEUTICS HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. Certain of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled "Risk Factors," our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled "Risk Factors" to gain an understanding of the material and other risks that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements."
Overview
Introduction
We are a clinical-stage biopharmaceutical company pursuing a targeted approach to neuroscience that combines a deep understanding of disease-related biology and neurocircuitry of the brain with advanced chemistry and CNS target receptor selective pharmacology to discover and design new therapies. We seek to transform the lives of patients through the development of new therapies for neuroscience diseases, including schizophrenia, epilepsy and Parkinson's disease. Our "ready-made" pipeline of 11 small molecule programs, which includes five clinical-stage product candidates, was developed through over a decade of research and investment by Pfizer and was supported by an initial capital commitment from an affiliate ofBain Capital and a keystone equity position from Pfizer. We are advancing our broad and diverse pipeline with seven clinical trials underway or expected to start by the end of 2021 and up to eight clinical data readouts expected by the end of 2023. We have built a highly experienced team of senior leaders and neuroscience drug developers who combine a nimble, results-driven biotech mindset with the proven expertise of large pharmaceutical company experience and capabilities in drug discovery and development. OnOctober 27, 2020 , ARYA completed the acquisition ofCerevel Therapeutics, Inc. , a private company, pursuant to the Business Combination Agreement datedJuly 29, 2020 , as amended onOctober 2, 2020 . ARYA was incorporated as aCayman Islands exempted company onFebruary 20, 2020 and was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses.
Our principal operations commenced onSeptember 24, 2018 , or the Formation Transaction Date, whenCerevel Therapeutics, Inc. , or Old Cerevel, acquired licensed technology to a portfolio of pre-commercial neuroscience assets from Pfizer in exchange for the issuance of Series A-2 Preferred Stock of Old Cerevel and obtained a$350.0 million equity commitment, or the Equity Commitment, from Bain Investor, an affiliate ofBain Capital , to develop the in-licensed assets in exchange for the issuance of Series A-1 Preferred Stock and Series A Common Stock of Old Cerevel, which we refer to collectively as the Formation Transaction. Bain Investor also received the option to purchase up to an additional 10.0 million shares at$10.00 per share, subject to Pfizer's participation rights, or the Share Purchase Option. On the Formation Transaction Date, we received an initial investment of$115.0 million in equity funding from Bain Investor to begin operations. During 2019 we received an additional investment of$60.1 million in equity funding from Bain Investor. Bain Investor contributed an additional$25.0 million in equity financing inJuly 2020 , or the Additional Financing Shares. Upon the closing of the Business Combination Transaction, Old Cerevel, became a wholly owned subsidiary of ARYA and ARYA was renamedCerevel Therapeutics Holdings, Inc. and the Stock Purchase Agreement, the Equity Commitment and the Share Purchase Option related to Old Cerevel were terminated. Upon completion of the Business Combination Transaction, and pursuant to the terms of the Business Combination Agreement, the existing shareholders of Old Cerevel exchanged their interests for shares of common stock ofCerevel Therapeutics Holdings, Inc. , or New Cerevel. Net proceeds from this transaction totaled approximately$439.5 million , which included funds held in ARYA's trust account and the completion of a concurrent private investment in public equity financing, or PIPE Financing, inclusive of the$25.0 million received from Bain Investor inJuly 2020 . 141 -------------------------------------------------------------------------------- We accounted for the Business Combination Transaction as a reverse recapitalization which is the equivalent of Old Cerevel issuing stock for the net assets of ARYA, with ARYA treated as the acquired company for accounting purposes. The net assets of ARYA were stated at historical cost with no goodwill or other intangible assets recorded. Reported results from operations included herein prior to the Business Combination are those of Old Cerevel. The shares and corresponding capital amounts and loss per share related to Old Cerevel's outstanding redeemable convertible preferred stock, redeemable convertible common stock, and common stock prior to the Business Combination Transaction have been retroactively restated to reflect the exchange ratio established in the Business Combination Agreement (1.00 share of Old Cerevel for 2.854 shares of New Cerevel), or the Exchange Ratio. Since Inception, we have incurred significant operating losses and operations have been limited to organizing and staffing the company, business planning, raising capital and performing research and development activities. Prior to the Business Combination Transaction, our operations were funded primarily with the net proceeds received from the issuance of convertible preferred stock, convertible common stock, and common stock. Our net losses totaled$152.1 million and$128.4 million for the years endedDecember 31, 2020 and 2019, respectively, and as ofDecember 31, 2020 , we had an accumulated deficit of$390.9 million . We have not yet generated revenues. For additional information on our operations, please read Note 1, Nature of Operations, to our audited consolidated financial statements included elsewhere in this Annual Report. For additional information on the Business Combination Transaction and the Additional Financing Shares, please read Note 3, Business Combination, to our audited consolidated financial statements included elsewhere in this Annual Report.
Business Environment
The biopharmaceutical industry is extremely competitive. We are subject to risks and uncertainties common to clinical-stage companies in the biopharmaceutical industry. These risks include, but are not limited to, the introduction of new products, therapies, standards of care or technological innovations, our ability to obtain and maintain adequate protection for our licensed technology, data or other intellectual property and proprietary rights and compliance with extensive government regulation and oversight. We are also dependent upon the services of key personnel, including our Chief Executive Officer, executive team and other highly skilled employees. Demand for experienced personnel in the pharmaceutical and biotechnology industries is high and competition for talent is intense. Please read the section entitled "Risk Factors" for additional information. We face potential competition from many different sources, including pharmaceutical and biotechnology companies, academic institutions and governmental agencies as well as public and private research institutions. Many of our competitors are working to develop or have commercialized products similar to those we are developing and have considerable experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products. Our competitors may also have significantly greater financial resources, established presence in the market, expertise in research and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and reimbursement and marketing approved products. Other smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Risks and Liquidity
Product development is very expensive and involves a high degree of risk. Only a
small number of research and development programs result in the
commercialization of a product. We will not generate revenue from product sales
unless and until we successfully complete clinical development, are able to
obtain regulatory approval for and successfully commercialize the product
candidates we are developing or may develop. We currently do not have any
product candidates approved for commercial sale. In addition, we operate in an
environment of rapid change in technology. We are also dependent upon the
services of our employees, consultants, third-party CROs, CMOs and other
third-party organizations.
Our product candidates, currently under development or that we may develop, will
require significant additional research and development efforts, including
extensive clinical testing and regulatory approval prior to commercialization.
These efforts require significant amounts of additional capital, adequate
personnel infrastructure and extensive compliance and reporting capabilities.
There can be no assurance that our research and development activities will be
successfully completed, that adequate protection for our licensed or developed
technology will be obtained and maintained, that products developed will obtain
necessary regulatory approval or that any approved products will be commercially
viable.
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-------------------------------------------------------------------------------- Until such time, if ever, as we can generate substantial product revenue, we will need substantial additional funding to support our continuing operations and pursue our growth strategy, and we may finance our operations through a combination of additional private or public equity offerings, debt financings, collaborations, strategic alliances, marketing, distribution or licensing arrangements with third parties or through other sources of financing. To the extent that we raise additional capital through the sale of private or public equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug 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 or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves, obtain funds through arrangement with collaborators on terms unfavorable to us or pursue merger or acquisition strategies, all of which could adversely affect the holdings or the rights of our stockholders. We have incurred significant operating losses since our Inception and expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future. We believe that our available cash resources as ofDecember 31, 2020 , of$383.6 million , will enable us to fund our operating expense and capital expenditure requirements into 2023.
We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:
• advance our clinical-stage product candidates CVL-231, darigabat,
tavapadon, CVL-871 and CVL-936 through clinical development, including as
we advance these candidates into later-stage clinical trials;
• advance our preclinical stage product candidates into clinical
development including CVL-354 and our PDE4B inhibitor program;
• seek to identify, acquire and develop additional product candidates,
including through business development efforts to invest in or in-license
other technologies or product candidates;
• hire additional clinical, quality control, medical, scientific and other
technical personnel to support our clinical operations;
• expand our operational, financial and management systems and increase
personnel to support our operations;
• meet the requirements and demands of being a public company;
• maintain, expand and protect our intellectual property portfolio;
• make milestone, royalty or other payments due under the Pfizer License
Agreement and any future in-license or collaboration agreements;
• seek regulatory approvals for any product candidates that successfully
complete clinical trials; and
• undertake any pre-commercialization activities to establish sales,
marketing and distribution capabilities for any product candidates for
which we may receive regulatory approval in regions where we choose to
commercialize our products on our own or jointly with third parties.
Impact of the COVID-19 Pandemic
InMarch 2020 theWorld Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. 143 -------------------------------------------------------------------------------- We are closely monitoring the impact of the pandemic of COVID-19 on all aspects of our business, including how it will impact our operations and the operations of our suppliers, vendors and business partners. We have taken steps to identify and mitigate the adverse impacts on, and risks to, our business posed by its spread and actions taken by governmental and health authorities to address this pandemic; however, the spread of COVID-19 has caused us to modify our business practices, including implementing a temporary work-from-home policy for all employees who are able to perform their duties remotely and temporarily restricting all non-essential travel and discouraged employee attendance at industry events and in-person work-related meetings. We expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of COVID-19. More specifically, the onset of the COVID-19 pandemic caused brief pauses in patient screening and enrollment in our Phase 3 trials of tavapadon for the treatment of Parkinson's (which we subsequently resumed in the second half of 2020), and we remain particularly vigilant about patient safety given the elderly nature of this population. While we have taken measures to revise clinical trial protocols, the ultimate extent to which COVID-19 impacts our business, results of operation and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions to contain COVID-19 or treat its impact, among others. In addition, recurrences or additional waves of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage were to experience prolonged business shutdowns or other disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business, results of operation and financial condition. The estimates of the impact on our business may change based on new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets.
We have not incurred any significant impairment losses in the carrying values of our assets as a result of the pandemic and we are not aware of any specific related event or circumstance that would require us to revise our estimates reflected in our audited consolidated financial statements.
Our Agreements with Licensors and Stockholders
Pfizer License Agreement
InAugust 2018 , we entered into the Pfizer License Agreement pursuant to which we were granted an exclusive, sublicensable, worldwide license under certain Pfizer patent rights, and a non-exclusive, sublicensable, worldwide license under certain Pfizer know-how to develop, manufacture and commercialize certain compounds and products, which currently constitute the entirety of our asset portfolio, in the field of treatment, prevention, diagnosis, control and maintenance of all diseases and disorders in humans, subject to the terms and conditions of the Pfizer License Agreement. Additionally, Pfizer has an exclusive right of first negotiation in the event that we seek to enter into any significant transaction with a third party with respect to a product either globally or in certain designated countries. Significant transactions include exclusive licenses, assignments, sales, exclusive co-promotion arrangements, and other transfers of all commercial rights to a product globally or in certain designated countries, as well as exclusive distribution agreements globally or in certain designated countries. Under the Pfizer License Agreement, we are solely responsible for the development, manufacture, regulatory approval and commercialization of compounds and products in the field. We are also required to use commercially reasonable efforts to develop and seek regulatory approval for a product that contains or incorporates one of certain scheduled compounds to exert a therapeutic effect on certain targets in each of the following countries:United Kingdom ,Germany ,France ,Italy ,Spain ,China ,Japan andthe United States , each a major market country. We are also required to use commercially reasonable efforts to commercialize each such product, if approved, in each major market country in which regulatory approval for such product has been obtained. The Pfizer License Agreement requires Pfizer to transfer certain know-how and data, regulatory filings and materials, inventory, and other materials, records and documents, and provide certain other transitional support and assistance which has been and is expected to be immaterial, to us to facilitate our development, manufacture and commercialization of compounds and products in the field. 144 -------------------------------------------------------------------------------- As partial consideration for the licensed assets, we issued Pfizer 3,833,333.33 shares of Old Cerevel Series A-2 Preferred Stock with an estimated fair value of$100.4 million , or$26.20 per share. We also reimbursed Pfizer for$11.0 million of direct expenses related to the Pfizer License Agreement, bringing the total consideration to$111.4 million . Upon the closing of the Business Combination Transaction, Pfizer's 3,833,333.33 shares of Series A-2 Preferred Stock were converted into 26,149,211 shares of common stock after giving effect to the anti-dilution protections and the Exchange Ratio. Under the terms of the Pfizer License Agreement, we are also required to make regulatory approval milestone payments to Pfizer, ranging from$7.5 million to$40.0 million on a compound-by-compound basis, upon the first regulatory approval inthe United States for the first product containing or comprised of a given compound, with the amount of the payments determined by which designated group the compound falls into and with each such group generally characterized by the compounds' stage of development. Each such regulatory approval milestone is payable only once per compound. If all of our product candidates included in the table in the section entitled "Business-Our Pipeline" are approved inthe United States , the total aggregate amount of such regulatory approval milestones payable to Pfizer would be approximately$220.0 million . To date, no regulatory approval milestone payments were made or became due under this agreement. In addition, we are required to pay Pfizer commercial milestone payments up to an aggregate of$170.0 million per product, when aggregate net sales of products under the Pfizer License Agreement in a calendar year first reach various thresholds ranging from$500.0 million to$2.0 billion . Each commercial milestone payment is payable only once upon first achievement of the applicable commercial milestone. If all of our product candidates included in the table in the section entitled "Business-Our Pipeline" achieves all of the commercial milestones, the total aggregate amount of such commercial milestones payable to Pfizer would total approximately$1.7 billion . To date, no Pfizer commercial milestone payments were made or became due under this agreement. We are also required to pay Pfizer tiered royalties on the aggregate net sales during each calendar year, determined on a product-by-product basis, with respect to products under the Pfizer License Agreement, at percentages ranging from the low-single to mid-teens, with the royalty rate determined by which designated group the applicable compound for such product falls into and with each such group generally characterized by the compounds' stage of development, and subject to certain royalty deductions for the expiration of patent, regulatory and data exclusivity, generic competition and third-party royalty payments as set forth in the Pfizer License Agreement. The royalty term expires, on a product-by-product and country-by-country basis, on the later of (1) expiration of all regulatory or data exclusivity for such product in such country, (2) the date upon which the manufacture, use, sale, offer for sale or importation of such product in such country would no longer infringe, but for the license granted in the Pfizer License Agreement, a valid claim of the licensed patents and (3) 12 years following the first commercial sale of such product in such country. To date, no royalty payments were made or became due under this agreement. Pfizer can terminate the Pfizer License Agreement in its entirety upon our material breach, subject to specified notice and cure provisions. However, if such material breach is with respect to one or more, but not all, products, targets or countries, Pfizer's right to terminate is only with respect to such products, targets or countries. Either party may terminate the Pfizer License Agreement in its entirety upon event of a bankruptcy, insolvency or other similar proceeding of the other party or a force majeure event that prohibits the other party from performing for a period of time. Absent early termination, the term of the Pfizer License Agreement will continue on a country-by-country basis and product-by-product basis, until the expiration of the royalty term for the country and the product. Upon Pfizer's termination of the Pfizer License Agreement for our material breach or either party's termination for bankruptcy, insolvency or other similar proceeding or force majeure, we would grant Pfizer an exclusive, sublicensable, royalty-free, worldwide, perpetual license under certain intellectual property we develop during the term of the Pfizer License Agreement. In addition, we would negotiate a transition plan with Pfizer that would address, among other things, the transfer of know-how and data, regulatory approvals and filings and materials, inventory and other materials, records and documents, and the provision of certain other transitional support and assistance for the terminated products, targets or countries.
For additional information on our Pfizer License Agreement, please read Note 6, Pfizer License Agreement, to our audited consolidated financial statements included elsewhere in this Annual Report.
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--------------------------------------------------------------------------------Equity Commitment
In connection with the Formation Transaction, we entered into a Stock Purchase Agreement with Pfizer and Bain Investor pursuant to which Bain Investor contributed$115.0 million in exchange for 6,900,000 shares of Old Cerevel Series A-1 Preferred Stock and 4,600,000 shares of Old Cerevel Series A Common Stock. Additionally, Bain Investor had the ability, pursuant to conditions set forth in more detail below, purchase a combination of additional shares of Series A-1 Preferred Stock and Series A Common Stock at a price of$10.00 per share. The Stock Purchase Agreement, among other things, provided that if we have not received$350.0 million in aggregate gross cash proceeds in exchange for equity interests, which such amount includes the proceeds received in the initial financing and subsequent financings and is referred to as the Financing Threshold, bySeptember 24, 2022 , Bain Investor would have been required to purchase that amount of shares of our common stock such that the Financing Threshold would have been met:
• if any time, prior to the Financing Threshold having been met, our cash
balance was equal to or less than
been required to purchase an amount of additional shares of our Series
A-1 Preferred Stock and Series A Common Stock that allowed us to maintain
a reasonable level of cash to fund our operations in accordance with the
previously agreed development plan for at least six months; and• until the time the Financing Threshold was met, Bain Investor had the
right to purchase up to that amount of shares of Series A-1 Preferred
Stock and Series A Common Stock at a purchase price of $10.00 per share
that results in the Financing Threshold having been met.
In June 2019 , pursuant to the Stock Purchase Agreement, Bain Investor
contributed an additional $0.1 million in exchange for additional shares of
Series A-1 Preferred Stock and shares of Series A Common Stock. In December
2019 , pursuant to the Stock Purchase Agreement, Bain Investor contributed an
additional $60.0 million in exchange for additional shares of Series A-1
Preferred Stock and shares of Series A Common Stock. In July 2020 , pursuant to
the Stock Purchase Agreement, Bain Investor contributed an additional
$25.0 million in exchange for additional shares of Series A-1 Preferred Stock
and shares of Series A Common Stock. As a result of these transactions, the
remaining Equity Commitment as of September 30, 2020 , was $149.9 million .
Upon closing of the Business Combination Transaction, the Equity Commitment was
terminated and the remaining Equity Commitment of $149.9 million was considered
satisfied.
For additional information on the Equity Commitment, please read Note 7, Equity
Commitment and Share Purchase Option, to our audited consolidated financial
statements included elsewhere in this Annual Report. For additional information
on the Business Combination Transaction, please read Note 3, Business
Combination, to our audited consolidated financial statements included elsewhere
in this Annual Report.
Components of Operating Results
Revenues
We have not generated any revenues since our Inception and do not expect to generate any revenues from the sale of products in the near future, if at all. If our development efforts for our current product candidates or additional product candidates that we may develop in the future are successful and can be commercialized, we may generate revenue in the future from product sales. Additionally, we may enter into collaboration and license agreements from time to time that provide for certain payments due to us. Accordingly, we may generate revenue from payments from such collaboration or license agreements in the future. Research and Development We support our drug discovery and development efforts through the commitment of significant resources to our preclinical and clinical development activities. Our research and development expense includes:
• employee-related expenses, consisting of salaries, benefits and
equity-based compensation for personnel engaged in our research and
development activities;
• expenses incurred in connection with the preclinical and clinical
development of our product candidates, including costs incurred under
agreements with clinical research organizations, or CROs, investigative
clinical trial sites and consultants and other third-party organizations
that conduct research and development activities on our behalf;
• costs associated with preclinical studies and clinical trials, including
research materials;
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• materials and supply costs associated with the manufacture of drugsubstance and drug product for preclinical testing and clinical trials;
• costs related to regulatory compliance requirements; and
• certain indirect costs incurred in support of overall research and
development activities, including facilities, depreciation and technology
expenses.
We expense research and development expenses as incurred. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. We estimate and accrue the value of goods and services received from CROs, CMOs and other third parties each reporting period based on estimates of the level of services performed and progress in the period when we have not received an invoice from such organizations. When evaluating the adequacy of accrued liabilities, we analyze progress of the studies or clinical trials, including the phase of completion of events, invoices received and contracted costs. We reassess and adjust our accruals as actual costs become known or as additional information becomes available. Our historical accrued estimates have not been materially different from actual costs. Our external research and development expenses for our clinical stage product candidates are tracked on a program-by-program basis and consist primarily of fees, reimbursed materials and other costs paid to consultants, contractors, CROs and CMOs. External research and developments costs that directly support our discovery activities and preclinical programs are classified within other research and development programs. Program costs for the periods presented do not reflect an allocation of expenses associated with personnel costs, equity-based compensation expense, activities that benefit multiple programs or indirect costs incurred in support of overall research and development, such as technology and facilities-related costs. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities both in the near-term and beyond as we continue to invest in activities to develop our product candidates and preclinical programs and as certain product candidates advance into later stages of development. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, scope and duration of later-stage clinical trials. Furthermore, the process of conducting the necessary clinical trials to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we cannot accurately estimate or know the nature, timing and costs that will be necessary to complete the preclinical and clinical development for any of our product candidates or when and to what extent we may generate revenue from the commercialization and sale of any of our product candidates or achieve profitability.
The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include:
• per patient trial costs; • the number of patients that participate in the trials; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the number of doses that patients receive; • the drop-out or discontinuation rates of patients;
• potential additional safety monitoring or other studies requested by
regulatory agencies;
• the duration of patient follow-up; and
• the efficacy and safety profile of our product candidates.
Changes in any of these assumptions could significantly impact the cost and
timing associated with the development of our product candidates. Additionally,
future competition and commercial and regulatory factors beyond our control may
also impact our clinical development programs and plans.
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--------------------------------------------------------------------------------General and Administrative
We expense general and administrative costs as incurred. General and administrative expenses consist primarily of salaries, benefits, equity-based compensation and outsourced labor for personnel in executive, finance, human resources, legal and other corporate administrative functions. General and administrative expenses also include legal fees incurred relating to corporate and patent matters, professional fees incurred for accounting, auditing, tax and administrative consulting services, insurance costs, facilities and depreciation expenses. We estimate and accrue for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from our service providers. We reassess and adjust our accruals as actual costs become known or as additional information becomes available. We expect our general and administrative expenses will increase over the next several years as we increase our headcount to support the continued development of our product candidates. We also anticipate that we will incur increased costs and other expenses associated with being a public company and as we continue to build general corporate infrastructure.
Interest Income, Net
Interest income, net primarily consists of interest earned on our cash, cash equivalents and restricted cash.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains (losses) on the fair value remeasurement of the Equity Commitment and Share Purchase Option, which were terminated upon the completion of the Business Combination Transaction. Other income (expense), net also includes amounts for other miscellaneous income and expense unrelated to our core operations. The Equity Commitment and Share Purchase Option were free-standing financial instruments, which were recorded at their fair value on the Formation Transaction Date. We revalued these instruments each reporting period and recorded increases or decreases in their respective fair value as an adjustment to other income (expense), net in our consolidated statements of operations and comprehensive loss. Changes in the fair value of these financial instruments resulted from changes to one or multiple inputs, including adjustments to the discount rates and expected volatility and dividend yield as well as changes in the amount and timing of the anticipated future funding required to settle these instruments and the fair value of our preferred and common stock that were expected to be exchanged to complete that additional funding. Discount rates in our valuation models represent a measure of the credit risk associated with settling the financial instruments. The expected dividend yield was assumed to be zero as we have never paid dividends, nor do we have current plans to do so in the future. Significant judgment was employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
Income Taxes Benefit (Provision), Net
To date, we have not recorded any significant amounts related to income tax expense, we have not recognized any reserves related to uncertain tax positions, nor have we recorded any income tax benefits for net operating losses incurred to date or for our research and development tax credits. We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or our tax returns. Deferred tax assets and liabilities are determined based on difference between the financial statement carrying amounts and tax bases of existing assets and liabilities and for loss and credit carryforwards, which are measured using the enacted tax rates and laws in effect in the years in which the differences are expected to reverse. The realization of our deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Valuation allowances are provided, if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As ofDecember 31, 2020 and 2019, we continue to maintain a full valuation allowance against all of our deferred tax assets based on our evaluation of all available evidence. 148
-------------------------------------------------------------------------------- We file income tax returns in theU.S. federal tax jurisdiction and state jurisdictions and may become subject to income tax audit and adjustments by related tax authorities. Our initial tax return period forU.S. federal income taxes was the 2018 period. We currently remain open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for this period and for the 2019 tax year. We record reserves for potential tax payments to various tax authorities related to uncertain tax positions. The nature of uncertain tax positions is subject to significant judgment by management and subject to change, which may be substantial. These reserves are based on a determination of whether and how much a tax benefit taken by us in our tax filings or positions is more likely than not to be realized following the resolution of any potential contingencies related to the tax benefit. We develop our assessment of uncertain tax positions, and the associated cumulative probabilities, using internal expertise and assistance from third-party experts. As additional information becomes available, estimates are revised and refined. Differences between estimates and final settlement may occur resulting in additional tax expense. Potential interest and penalties associated with such uncertain tax positions is recorded as a component of our income taxes benefit (provision), net. To date, no amounts are being presented as an uncertain tax position. Results of Operations The following table summarizes our results of operations for the years endedDecember 31, 2020 and 2019: For the For the Year Ended Year Ended December 31, December 31, (In thousands) 2020 2019 Change Operating expenses: Research and development$ 103,303 $ 50,294 105 % General and administrative 45,813 33,169 38 % Total operating expenses 149,116 83,463 79 % Loss from operations (149,116 ) (83,463 ) 79 % Interest income, net 224 1,552 (86 %) Other income (expense), net (3,274 ) (46,433 ) (93 %) Loss before income taxes (152,166 ) (128,344 ) 19 % Income tax benefit (provision), net 24 (45 ) (153 %) Net loss$ (152,142 ) $ (128,389 ) 19 % Research and Development
The following table summarizes the components of research and development
expense for the years ended
For the For the
Year Ended Year Ended
December 31, December 31,
(In thousands) 2020 2019 Change
Tavapadon $ 31,678 $ 16,973 87 %
Darigabat 10,984 8,174 34 %
CVL-231 16,360 2,646 518 %
CVL-936 2,110 2,201 (4 %)
CVL-871 1,003 - 100 %
Other research and development programs 6,304 1,224 415 %
Unallocated 8,608 3,587 140 %
Personnel costs 23,017 12,887 79 %
Equity-based compensation 3,239 2,602 24 %
Total research and development $ 103,303 $ 50,294 105 %
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For 2020 compared to 2019, the increase in research and development expense was
primarily due to an increase in program costs related to advancing our pipeline
and increased personnel costs, including equity-based compensation, as well as
an increase in unallocated costs as we grew our organization. The increase in
unallocated costs is primarily related to an increase in professional services
and other indirect research and development costs reflecting our increased
investment in technology, increased consulting and professional fees for
cross-program support activities and other overhead expenses.
General and Administrative
For the For the
Year Ended Year Ended
December 31, December 31,
(In thousands) 2020 2019 Change
General and administrative $ 45,813 $ 33,169 38 %
For 2020 compared to 2019, the increase in general and administrative expense
was primarily due to increased personnel costs, including equity-based
compensation, higher facility-related costs as we grew our organization, as well
as certain non-recurring charges recognized in connection with our Business
Combination Transaction.
The increase in facility-related costs is primarily associated with the lease
for our headquarters in Cambridge, Massachusetts . General and administrative
expense for 2020 includes a $3.0 million charge recognized in October 2020
related to the payment of remaining management fees due pursuant to the
Management Agreement with affiliate entities of Bain Investor upon the
completion of the Business Combination Transaction.
General and administrative expense for 2020 also includes a $2.5 million charge
related to the write-off of deferred financing costs directly associated with
our previously anticipated IPO and other financing activities that were
abandoned in June 2020 upon signing of the term sheet for our Business
Combination Transaction.
Interest income, net
For the For the
Year Ended Year Ended
December 31, December 31,
(In thousands) 2020 2019 Change
Interest income, net $ 224 $ 1,552 (86 %)
Interest income, net primarily consists of interest earned on our cash, cash
equivalents and restricted cash. The decrease in interest income, net, reflects
a reduction in market interest rates and lower average comparative cash, cash
equivalents and restricted cash balances.
Other Income (Expense), Net
The following table summarizes other income (expense), net for the years endedDecember 31, 2020 and 2019: For the For the Year Ended Year Ended December 31, December 31, (In thousands) 2020 2019 Change Loss on fair value remeasurement of Equity Commitment$ (3,530 ) $ (51,562 ) (93 %) Gain on fair value remeasurement of Share Purchase Option 260 5,120 (95 %) Other, net (4 ) 9 (144 %) Other income (expense), net$ (3,274 ) $ (46,433 ) (93 %) For 2020 compared to 2019, other income (expense), net, primarily reflects the net changes related to the fair value remeasurement of the Equity Commitment and the Share Purchase Option. 150
-------------------------------------------------------------------------------- For 2020, the change in fair value remeasurement of Equity Commitment reflects a$5.5 million loss recognized on the partial settlement of the Equity Commitment liability inJuly 2020 upon the Bain Investor contributing an additional$25.0 million in exchange for the issuance of convertible preferred and convertible common stock as well as a net gain of$2.0 million related to the fair value remeasurement of the Equity Commitment through its termination. For 2019, the change in the fair value remeasurement of Equity Commitment reflects the loss recognized upon the partial settlement of the Equity Commitment liability upon the issuance of Series A-1 Preferred Stock and Series A Common Stock inDecember 2019 as well as changes in fair value remeasurement of Equity Commitment and Share Purchase Option also reflect changes in the probability of exercise and timing of future expected funding required in settlement of the Equity Commitment and Share Purchase Option and increases in the fair value of our preferred and common stock expected to be exchanged for that additional funding. For additional information on our Equity Commitment and Share Purchase Option, please read Note 7, Equity Commitment and Share Purchase Option, to our audited consolidated financial statements included elsewhere in this Annual Report.
Liquidity and Capital Resources
Sources of Liquidity and Capital
We have incurred significant operating losses since our Inception and we expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future. Our net losses totaled$152.1 million and$128.4 million for the years endedDecember 31, 2020 and 2019, respectively, and as ofDecember 31, 2020 , we had an accumulated deficit of$390.9 million . We have not yet generated revenues. Prior to the Business Combination, our operations were funded primarily from the issuance of convertible preferred stock, convertible common stock and common stock, as described above in Note 1, Nature of Operations, to our audited consolidated financial statements included elsewhere in this Annual Report. Upon the closing of the Business Combination Transaction inOctober 2020 , we received net proceeds totaling approximately$439.5 million . Our cash and cash equivalents totaled$383.6 million as ofDecember 31, 2020 . Until required for use in our business, we typically invest our cash in investments that are highly liquid, readily convertible to cash with original maturities of 90 days or less at the date of purchase. We attempt to minimize the risks related to our cash and cash equivalents by maintaining balances in accounts only with accredited financial institutions and, consequently, we do not believe we are subject to unusual credit risk beyond the normal credit risk associated with ordinary commercial banking relationships.
Future Funding Requirements
Our primary use of cash is to fund operating expenses, primarily related to our research and development activities. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. We have incurred significant operating expenses since our Inception, and we expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future. While we believe that our cash resources, inclusive of funds received upon closing of our Business Combination Transaction, will enable us to fund our operating expense and capital expenditure requirements into 2023, we will require additional capital to meet operational needs and capital requirements for clinical trials, other research and development expenditures, and business development activities.
Our future funding requirements will depend on many factors, including:
• the scope, progress, results and costs of researching and developing our
current product candidates, as well as other additional product
candidates we may develop and pursue in the future;
• the timing of, and the costs involved in, obtaining marketing approvals
for our product candidates and any other additional product candidates we
may develop and pursue in the future;
• the number of future product candidates that we may pursue and their
development requirements;
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• subject to receipt of regulatory approval, the costs of commercialization
activities for our product candidates, to the extent such costs are not
the responsibility of any future collaborators, including the costs and
timing of establishing product sales, marketing, distribution and
manufacturing capabilities;
• subject to receipt of regulatory approval, revenue, if any, received from
commercial sales of our product candidates or any other additional
product candidates we may develop and pursue in the future;
• the achievement of milestones that trigger payments under the Pfizer
License Agreement;
• the royalty payments due under the Pfizer License Agreement;
• the extent to which we in-license or acquire rights to other products,
product candidates or technologies;
• our ability to establish collaboration arrangements for the development
of our product candidates on favorable terms, if at all;
• our headcount growth and associated costs as we expand our research and
development and establish a commercial infrastructure;
• the costs of preparing, filing and prosecuting patent applications,
maintaining and protecting our intellectual property rights, including
enforcing and defending intellectual property related claims; and
• the costs of operating as a public company.
Because of the numerous risks and uncertainties associated with the development
and commercialization of our product candidates, we are unable to estimate the
total amounts of increased capital outlays and operating expenditures associated
with our current and anticipated clinical trials and preclinical studies.
Our expectations with respect to our ability to fund current planned operations
is based on estimates that are subject to risks and uncertainties. Our operating
plan may change as a result of many factors currently unknown to us and there
can be no assurance that the current operating plan will be achieved in the time
frame anticipated by us, and we may need to seek additional funds sooner than
planned. If adequate funds are not available to us on a timely basis, we may be
required to delay, limit, reduce or terminate certain of our research, product
development or future commercialization efforts, obtain funds through
arrangements with collaborators on terms unfavorable to us, or pursue other
merger or acquisition strategies, all of which could adversely affect the
holdings or the rights of our stockholders.
For additional information on risks associated with our substantial capital requirements, please read the section entitled "Risk Factors" included elsewhere in this Annual Report.
Warrants ARYA issued public warrants and private placement warrants (collectively, the warrants) in its IPO inJune 2020 . The warrants will become exercisable beginning onJune 9, 2021 . Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the warrants. Each whole warrant entitles the holder to purchase one share of common stock at an exercise price of$11.50 per share. We will use our commercially reasonable efforts to maintain the effectiveness of our registration statement and a current prospectus relating to those common shares issuable upon exercise of the warrants until the warrants expire or are redeemed, as specified in the warrant agreement. If the common stock at the time of any exercise of a warrant is not listed on a national securities exchange, we may, at our option, require holders of the warrants who exercise their warrants to do so on a "cashless basis." We are not required to file or maintain in effect a registration statement. In no event will the company be required to net cash settle any warrant. Except as described in the warrant agreement, the private placement warrants have terms and provisions that are identical to those of the public warrants. If the private placement warrants are held by holders other than the Sponsor or its permitted transferees, the private placement warrants will be redeemable by us and exercisable by the holders on the same basis as the public warrants.
Once the warrants become exercisable, we may call the warrants for redemption:
• in whole and not in part;
• upon not less than 30 days' prior written notice of redemption to each
warrant holder; and
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• if, and only if, the closing price of our common stock equals or
exceeds $18.00 per share (as adjusted for share splits, share
capitalizations, reorganizations, recapitalizations and the like) for
any 20 trading days within a 30-trading day period ending on the third
trading day prior to the date on which notice of the redemption is
given to the warrant holder.
If and when the warrants become redeemable by us, we may exercise our redemption
right even if we are unable to register or qualify the underlying securities for
sale under all applicable state securities laws. If we call the public warrants
for redemption, as described above, we will have the option to require any
holder that wishes to exercise the public warrants to do so on a "cashless
basis," as described in the warrant agreement.
Commencing ninety days after the warrants become exercisable, we may redeem the outstanding warrants:
• in whole and not in part;
• at $0.10 per warrant upon a minimum of 30 days' prior written notice
of redemption, provided that holders will be able to exercise their
warrants on a cashless basis prior to redemption and receive that
number of shares determined by reference to the table included in the
warrant agreement, based on the redemption date and the "fair market
value" of our shares of common stock, except as otherwise described
below;
• if, and only if, the closing price of the shares of common stock
equals or exceeds $10.00 per share (as adjusted for share
subdivisions, share dividends, reorganizations,reclassifications,
recapitalizations and the like) on the trading day before we send the
notice of redemption to the warrant holders;
• if, and only if, the private placement warrants are also concurrently
called for redemption on the same terms as the outstanding public
warrants, as described above; and
• if, and only if, there is an effective registration statement covering
the issuance of common stock issuable upon exercise of the warrants
and a current prospectus relating thereto available throughout
the 30-day period after written notice of redemption is given.
The warrants will expire five years after the completion of the Business Combination Transaction, or earlier upon redemption or liquidation.
Working Capital
The following table summarizes our total working capital, defined as current
assets less current liabilities as of
As of December 31,
(In thousands) 2020 2019 Change
Current assets $ 390,560 $ 87,077 349 %
Current liabilities (29,548 ) (14,876 ) 99 %
Total working capital $ 361,012 $ 72,201 400 %
The change in working capital at
The net increase in total current assets was primarily driven by a net increase in our cash and cash equivalents following the completion of the Business Combination Transaction, partially offset by$117.8 million of net cash flows used in operations and$18.9 million of cash used for the purchase of property and equipment. The net increase in current liabilities was primarily driven by an increase in accounts payable and increases in accrued expenses and other current liabilities related to compensation, external research and development services and construction-in-progress accruals related to the build-out of ourCambridge, Massachusetts headquarters. 153
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Cash Flows
The following table summarizes our sources and uses of cash for the years endedDecember 31, 2020 and 2019: For the For the Year Ended Year Ended December 31, December 31, (In thousands) 2020 2019 Change
Net cash flows used in operating activities
67 %
Net cash flows used in investing activities (18,892 ) (1,099 ) 1,619 %
Net cash flows provided by financing
activities 440,835 60,058 634 %
Net increase (decrease) in cash and cash
equivalents $ 304,141 $ (11,761 ) (2,686 %)
Cash flows used in Operating Activities
Net cash flows used in operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. We expect cash provided by financing activities will continue to be our primary source of funds to finance operating needs and capital expenditures for the foreseeable future.
Net cash flows used in operating activities is derived by adjusting our net loss
for:
• non-cash operating items such as depreciation and amortization, non-cashrent expense, equity-based compensation, impairments and write-offs of
deferred charges;
• changes in operating assets and liabilities reflect timing differences
between the receipt and payment of cash associated with transactions and
when they are recognized in results of operations; and
• changes in the fair value remeasurement of the Equity Commitment and the
Share Purchase Option.
For 2020, cash used in operating activities primarily reflects our net loss for the period of$152.1 million , adjusted for net non-cash charges totaling$16.6 million and a net change of$17.7 million in our net operating assets and liabilities. Our non-cash charges primarily consisted of$10.5 million of equity-based compensation expense, net losses totaling$3.3 million recognized in relation to the Equity Commitment and Share Purchase Option and a$2.5 million charge related to the write-off of deferred financing costs directly associated with our previously anticipated IPO and other financing activities that were abandoned inJune 2020 upon signing of the term sheet for our Business Combination Transaction. The net change in our operating assets and liabilities was primarily due to an increase in account payable and accrued expenses and other liabilities associated with compensation, external research and development services and an increase in operating lease liabilities resulting from landlord reimbursement for tenant improvements. For 2019, net cash used in operating activities primarily reflected our net loss for the period of$128.4 million , adjusted by non-cash charges totaling$57.3 million and a net change of$0.3 million in relation to our net operating assets and liabilities. Our non-cash charges primarily consisted of net losses totaling$46.4 million recognized related to the Equity Commitment and Share Purchase Option,$8.3 million of equity-based compensation expense and$2.4 million of non-cash rent expense. The net change in our operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses and other current liabilities, partially offset by an increase in prepaid expenses, other current assets and other assets.
Cash flows used in Investing Activities
For 2020, cash used in investing activities reflected$18.9 million used for purchases of property and equipment, primarily related to the build-out of ourCambridge, Massachusetts headquarters.
For 2019, cash used in investing activities reflected
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--------------------------------------------------------------------------------Cash flows provided by Financing Activities
For 2020, net cash provided by financing activities totaled
For 2019, net cash provided by financing activities totaled$60.1 million , which primarily consisted of net proceeds from the issuance of Series A-1 Preferred Stock and Series A Common Stock.
Management Agreement
In connection with the initial financing, on the Formation Transaction Date, Old Cerevel entered into an agreement withBain Capital Private Equity, LP andBain Capital Life Sciences, LP , which are entities related to Bain Investor, whereby such entities provided certain management services to us for a fee of$1.0 million per year, paid in quarterly, non-refundable installments, or the Management Agreement. This agreement obligated the company to pay such entities, in the aggregate, a$5.0 million fee upon the completion of a qualified public offering or change of control transaction, less any quarterly fees previously paid to such entities. Upon completion of the Business Combination Transaction, described in Note 3, Business Combination, of our audited consolidated financial statements included elsewhere in this Annual Report, we paid the remaining approximately$3.0 million of management fees payable under the Management Agreement and no additional fees remain payable pursuant to this agreement. Inclusive of this final payment made under the Management Agreement, we incurred management fees toBain Capital Private Equity, LP andBain Capital Life Sciences, LP totaling$3.8 million and$1.0 million during the years endedDecember 31, 2020 and 2019, respectively. Following the closing of the Business Combination Transaction, we entered into a new management agreement withBain Capital Private Equity, LP andBain Capital Life Sciences, LP providing for the expense reimbursement and indemnification of such entities.
Contractual Obligations and Other Commitments
Our contractual obligations primarily consist of our obligations under
non-cancellable operating leases, contracts and other purchase obligations. We
did not have any debt obligations as of
Our most significant contracts relate to agreements with CROs for clinical trials and preclinical studies, CMOs and other service providers for operating purposes, which we enter into in the normal course of business. We have not included these payments in the table of contractual obligations below since these contracts are generally cancelable at any time by us following a certain period after notice and therefore, we believe that our non-cancelable obligations under these agreements are not material. In addition, we have obligations with respect to potential future royalties payable, contingent development, regulatory and commercial milestone payments and amounts related to uncertain tax positions. We have not included these amounts in the table of contractual obligations below, because the timing and amount of such obligations are unknown or uncertain as ofDecember 31, 2020 . For additional information on potential royalties and milestone payments payable to Pfizer, see "Our Agreements with Licensors and Stockholders-Pfizer License Agreement." The following table summarizes our contractual obligations as ofDecember 31, 2020 , excluding amounts related to CROs and CMOs, potential future royalties payable, contingent development, regulatory and commercial milestone payments and amounts related to uncertain tax positions: Payments Due by Period (In thousands) Less than 1 year 1 to 3
years 3 to 5 years More than 5 years Total Operating lease obligations(1)
$ 5,737 $ 12,014 $ 12,745 $ 29,085 $ 59,581
Purchase and other obligations(2) 5,716 - - - $ 5,716
Total contractual obligations $ 11,453 $ 12,014 $ 12,745 $ 29,085 $ 65,297 (1) Amounts in the table above reflect payments due under our lease for our
current headquarters in
Amounts reflected within the table above detail future minimum rental
commitments under non-cancelable operating leases as of
of the periods presented. In addition to the minimum rental commitments,
these leases may require us to pay additional amounts for taxes, insurance,
maintenance and other operating expenses.
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(2) Purchase and other obligations due in less than 1 year, include
approximately
to the build out of our corporate headquarters. For additional information
related to our lease for our future corporate headquarters in
financial statements included elsewhere in this Annual Report.
As ofDecember 31, 2020 and 2019, we recorded accrued expenses of approximately$7.1 million and$2.2 million , respectively, in our consolidated balance sheets for expenditures incurred by CROs and CMOs.
Tax Related Obligations
To date, we have not recognized any reserves related to uncertain tax positions.
As of
Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements and do not have holdings in any variable interest entities.
Critical Accounting Policies and Estimates
This management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles, orU.S. GAAP. The preparation of the consolidated financial statements in conformity withU.S. GAAP requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Other significant accounting policies are outlined in Note 4, Summary of Significant Accounting Policies, to our audited consolidated financial statements included elsewhere in this Annual Report. Fair Value Measurements Certain of our assets and liabilities are carried at fair value underU.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three categories:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs (other than Level 1 quoted prices), such as quoted
prices in active markets for similar assets or liabilities, quoted
prices in markets that are not active for identical or similar assets
or liabilities, or other inputs that are observable or can be
corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to determining the fair value of
the assets or liabilities, including pricing models, discounted cash
flow methodologies, and similar techniques.
To the extent that the valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment exercised by us in
determining fair value is greatest for instruments categorized in Level 3. A
financial instrument's level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement.
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--------------------------------------------------------------------------------The carrying amounts reflected in our consolidated balance sheets for cash, cash equivalents and restricted cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature.
Our cash, cash equivalents and restricted cash are comprised of funds held in an exchange traded money market fund, are measured at fair value on a recurring basis using quoted market prices for that fund and are classified as Level 1. As ofDecember 31, 2020 , we held$387.8 million in money market funds (Level 1), inclusive of restricted cash balances, with no unrealized gains or losses. As ofDecember 31, 2019 , we held$83.7 million in money market funds (Level 1), inclusive of restricted cash balances, with no unrealized gains or losses. As ofDecember 31, 2019 , the Equity Commitment and Share Purchase Option approximated their fair value based on Level 3 inputs. InOctober 2020 , the Equity Commitment and Share Purchase Option were terminated upon completion of the Business Combination Transaction. Immediately prior to the closing of the Business Combination Transaction, the closing of this transaction was considered certain to occur which reduced the fair value of the remaining Equity Commitment and Share Purchase Option to zero and as a result, we recognized a gain of$7.8 million and$0.9 million in relation to these instruments, respectively. We do not have any other financial or non-financial assets or liabilities that should be recognized or disclosed at fair value on a recurring basis atDecember 31, 2020 or 2019.
Fair Value of Equity Commitment and Share Purchase Option
The Equity Commitment and Share Purchase Option were free-standing financial
instruments that may have required us to transfer equity upon settlement or
exercise, respectively, and were recorded at fair value on the Formation
Transaction Date. The fair value of each financial instrument on the Formation
Transaction Date was allocated to the Series A-1 Preferred Stock, Series A-2
Preferred Stock and Series A Common Stock.
We utilized a hybrid methodology that combines both an income approach and a
market approach, which incorporated a probability weighted expected return
(PWERM) related to pre-IPO funding, to estimate the fair value of our Equity
Commitment and Share Purchase Option during 2019 and throughout 2020, until the
Equity Commitment and Share Purchase Option were terminated upon completion of
the Business Combination Transaction. Under this methodology, these financial
instruments were valued based upon a probability weighted-average of two
separate models prepared following an income approach and a market approach. The
fair value of the funding obligation under each model was estimated as the net
present value of the anticipated future funding, reduced by the value of the
additional shares of preferred and common stock that would be exchanged for
future funding.
We revalued these financial instruments each reporting period, until the Equity
Commitment and Share Purchase Option were terminated, utilizing models that are
sensitive to changes in the unobservable inputs such as changes in the estimated
future funding dates or fair value of our stock. Changes in the fair value of
these instruments resulted from changes to one or multiple inputs, including
adjustments to the discount rates and expected volatility and dividend yield as
well as changes in the amount and timing of the anticipated future funding
required in settlement of the Equity Commitment and Share Purchase Option and
the fair value of our preferred and common shares expected to be exchanged for
that additional funding. Discount rates in our valuation models represented a
measure of the credit risk associated with settling the financial instruments.
The expected dividend yield was assumed to be zero as we have never paid
dividends and do not have current plans to pay any dividends on our common
stock. Significant judgment was employed in determining these assumptions as of
the Formation Transaction Date and for each subsequent period.
Changes in fair value of the Equity Commitment and Share Purchase Option were
recognized as a component of other income (expense), net in our consolidated
statements of operations and comprehensive loss. We classified the fair value of
the remaining Equity Commitment and the fair value of the Share Purchase Option
as an asset or liability within our consolidated balance sheets. Immediately
prior to the closing of the Business Combination Transaction, these financial
instruments were adjusted to their final fair value of zero and were terminated
upon Closing.
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Equity-Based Compensation
We determine the fair value of each award issued under our equity-based compensation plan on the date of grant. We recognize compensation expense for service-based awards on a straight-line basis over the requisite service period which generally approximates the vesting term. For service-based awards with performance or market conditions, we recognize compensation expense on a straight-line basis over the requisite service period for each separate vesting portion of the award, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date. Equity-based compensation expense for awards with performance conditions are recognized to the extent we determine that the condition is considered probable to be met. We reassess the probability of achieving these performance conditions each reporting period until the date such conditions are settled. Cumulative adjustments are recorded each period to reflect the estimated outcome of the performance condition. We elected to account prospectively for forfeitures as they occur rather than apply an estimated forfeiture rate to equity-based compensation expense. We classify equity-based compensation expense in our consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's salary and related costs are classified or in which the award recipient's service payments are classified, as applicable.
Determination of the Fair Value - Preferred and Common Stock
Prior to the completion of the Business Combination Transaction, given the absence of an active market for our common stock, we were required to estimate the fair value of our common stock at the time of each grant of an equity-based award. We have utilized various valuation methodologies in accordance with the framework of theAmerican 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. Each valuation methodology includes estimates and assumptions that require judgment. These estimates and assumptions included a number of objective and subjective factors in determining the value of our common stock at each grant date, including the following factors:
• prices paid for our convertible preferred stock and common stock, and the
rights, preferences, and privileges associated with our convertible
preferred stock and common stock;
• the progress of our research and development efforts, including the
status of preclinical studies and planned clinical trials for our
investigational medicines;
• our stage of development and projected growth;
• the fact that the grants of equity-based awards involved illiquid
securities in a private company;
• the likelihood of achieving a liquidity event for the common stock
underlying the equity-based awards, such as an initial public offering,
or IPO, given prevailing market conditions;
• the analysis of IPOs and the market performance of similar companies in
the biotechnology and pharmaceutical industries;
• the valuation of publicly traded companies in the life sciences and
biotechnology sectors; and
• any external market conditions affecting the biotechnology industry, and
trends within the biotechnology industry.
We used a hybrid methodology that combines both an income approach and a market
approach to estimate the business enterprise value and our total equity value to
calculate the fair value of our preferred stock and common stock during 2019 and
throughout 2020, until completion of the Business Combination Transaction. A
probability-weighted discounted cash flow analysis was first prepared reflecting
multiple scenarios for future outcomes associated with the acquired product
candidates in order to estimate the cash flows associated with estimated
liquidity events (i.e., an IPO). We also used a PWERM to determine the fair
value of pre-IPO funding scenarios. We then used a market approach to estimate
the value as of each potential date of liquidity, resulting in an estimate of
the total equity value, including the value of planned future funding. The value
of the preferred stock and common stock was then estimated using an option
pricing method, allocating total equity value based on an assumed future
liquidity date, the liquidation preference of the preferred stock and the
assumed funding in each scenario. Each of these scenarios was
probability-weighted based on the expected outcomes to arrive at a final
estimated fair value per share of the common stock.
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Subsequent to the closing of the Business Combination Transaction, our board of
directors determines the fair value of each share of common stock underlying
stock-based awards based on the closing price of our common stock as reported by
Nasdaq on the date of grant.
We believe our methodologies are reasonable based upon our internal peer company
analyses and further supported by transactions involving our preferred stock. If
different assumptions had been made, equity-based compensation expense,
consolidated net loss and consolidated net loss per share could have been
significantly different.
For financial reporting purposes, we performed common stock valuations, with the
assistance of a third-party specialist, at various dates, which resulted in
valuations of Old Cerevel common stock, unadjusted by the Exchange Ratio, of
$9.15 per share as of March 31, 2019 , $9.45 per share as of June 30, 2019 ,
$11.25 per share as of September 30, 2019 , $10.00 per share as of October 31,
2019 , $16.35 per share as of December 31, 2019 , $14.60 per share as of March 31,
2020 , $26.80 per share as of June 30, 2020 , $26.75 per share as of September 30,
2020 and $28.54 immediately prior to the completion of the Business Combination
Transaction. Subsequent to the closing of the Business Combination Transaction,
our board of directors determines the fair value of each share of common stock
underlying stock-based awards based on the closing price of our common stock as
reported by Nasdaq on the date of grant.
Determination of Fair Value - Stock Option Awards
Subsequent to the closing of the Business Combination Transaction, we estimate the fair value of our stock option awards using the Black Scholes method utilizing the "simplified method," for determining the expected life of the award, which is based on the mid-point between the vesting date and the end of the contractual term as all options granted after becoming a public entity will be granted "at-the-money." We determine the volatility for options granted based on an analysis of reported data for a peer group of companies. The expected volatility of granted options has been determined using a weighted-average of the historical volatility measures of this peer group of companies. We will continue to apply this method until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. The risk-free interest rate utilized in our calculations is based on a treasury instrument whose term is consistent with the expected life of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on our common stock. Prior to the closing of the Business Combination Transaction, we estimated the fair value of the stock option awards on the date of grant using the option pricing method, which is a variant of an income approach. The option pricing method was used given that a portion of the option awards have an exercise price that is considered to be "deeply out of the money," The option pricing method incorporated the probability of the performance and market conditions being met and adjustments to the estimated life and value of the options to reflect the necessary growth in the common share value for such shares to become exercisable. As there was no public market for our common stock prior to the closing of the Business Combination Transaction, we determined the volatility for options granted based on an analysis of reported data for a peer group of companies. The expected volatility of granted options were determined using a weighted-average of the historical volatility measures of this peer group of companies. The expected life of options for these awards were determined by probability-weighting the calculated expected life of the option at each month the option was eligible to be at- or in-the-money to estimate the overall adjusted expected life. We did not utilize the "simplified method" to determine expected life as this method is not valid for options that are "deeply out of the money." The risk-free interest rate utilized in our calculations is based on a treasury instrument whose term is consistent with the expected life of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and does not have current plans to pay any dividends on our common stock.
Our option awards granted through
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--------------------------------------------------------------------------------Vesting Terms
Stock options granted to employees generally vest 25% on the first anniversary of the applicable vesting start date of each grant with the remainder vesting in 36 equal monthly installments thereafter, subject to continued employment. Stock options granted to our non-employee directors vesting in 36 monthly installments through the third anniversary of the grant date.
Restricted stock unit awards granted generally vest in three equal annual installments beginning on the first anniversary of the date of grant.
Conversion of Equity Awards
Pursuant to the terms of our Business Combination Agreement, the shareholders of Old Cerevel exchanged their shares of common stock in Old Cerevel for shares ofCerevel Therapeutics Holdings, Inc. , based upon the Exchange Ratio. Awards under the company's previously existing equity incentive plans, including the 2020 Old Cerevel Equity Incentive Plan and the 2018 Old Cerevel Equity Incentive Plan, were also exchanged for awards issued under a new equity incentive plan adopted byCerevel Therapeutics Holdings, Inc. at the same Exchange Ratio.
For additional information on the Business Combination and our equity-based incentive plans, please read Note 3, Business Combination and Note 12, Equity-Based Compensation, to our audited consolidated financial statements included elsewhere in this Annual Report.
We have entered into various agreements with CROs, CMOs and other service providers. Our research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued liabilities on the balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered. To date, our estimated accruals have not differed materially from actual costs incurred.
Emerging Growth Company and Smaller Reporting Company Status
We qualify as an "emerging growth company" as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, we are eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year (a) in which we are deemed to be a "large accelerated filer" under the Exchange Act, (b) in which we have total annual gross revenue of at least$1.07 billion , or (c) following the fifth anniversary of the closing of ARYA's initial public offering; or (ii) the date on which we have issued more than$1 billion in non-convertible debt in the prior three-year period. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. We have elected to take advantage of this exemption and will therefore, for so long as we are an emerging growth company, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are also a "smaller reporting company" meaning that the market value of our voting and non-voting common equity held by non-affiliates was less than$700 million as of our most recently completed second fiscal quarter and our annual revenue was less than$100 million during our most recently completed fiscal year. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 160 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
For a discussion of new accounting standards and their expected impact on our consolidated financial statements or disclosures, please read Note 5, Recent Accounting Guidance, to our audited consolidated financial statements included elsewhere in this Annual Report.
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