Cerulean Pharma Inc.
Cerulean Pharma Inc. (Form: 10-Q, Received: 08/04/2016 16:04:46)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2016

OR

o

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 001-36395

 

CERULEAN PHARMA INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

20-4139823

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

35 Gatehouse Drive

Waltham, MA

 

02451

(Address of Principal Executive Offices)

 

(Zip Code)

(781) 996-4300

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o

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

 

Large accelerated filer

 

¨

 

 

  

Accelerated filer

 

x

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

¨

 

(Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

Number of shares of the registrant’s Common Stock, $ 0.0001 par value, outstanding on August 1, 2016: 27,384,492

 

 

 


CERULEAN PHARMA INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

TABLE OF CONTENTS

 

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016
and 2015 (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016
and 2015 (unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

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

9

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

20

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

21

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 6.

Exhibits

56

 

 

 

 

Signatures

57

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

CERULEAN PHARMA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands except share data and par value)

 

 

 

June 30, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,193

 

 

$

75,908

 

Accounts receivable, prepaid expenses, and other current assets

 

 

1,729

 

 

 

1,394

 

Total current assets

 

 

48,922

 

 

 

77,302

 

Property and equipment, net

 

 

740

 

 

 

576

 

Other assets

 

 

230

 

 

 

347

 

Total

 

$

49,892

 

 

$

78,225

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of loan payable

 

$

8,017

 

 

$

7,652

 

Accounts payable

 

 

1,593

 

 

 

2,226

 

Accrued expenses

 

 

4,852

 

 

 

6,459

 

Total current liabilities

 

 

14,462

 

 

 

16,337

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Loan payable, net of current portion

 

 

8,649

 

 

 

12,672

 

Other long-term liabilities

 

 

941

 

 

 

473

 

Total long-term liabilities

 

 

9,590

 

 

 

13,145

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock $0.01 par value; 5,000,000 shares authorized, no shares

     issued or outstanding

 

 

 

 

 

 

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

     27,363,965 and 27,346,780 shares issued and outstanding at June 30, 2016 and

     December 31, 2015, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

211,613

 

 

 

210,115

 

Accumulated deficit

 

 

(185,776

)

 

 

(161,375

)

Total stockholders’ equity

 

 

25,840

 

 

 

48,743

 

Total

 

$

49,892

 

 

$

78,225

 

 

See notes to unaudited condensed consolidated financial statements.

 


 

1


CERULEAN PHARMA INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands except per share and share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

-

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,522

 

 

 

6,678

 

 

 

17,292

 

 

 

11,699

 

General and administrative

 

 

2,773

 

 

 

2,717

 

 

 

5,891

 

 

 

5,398

 

Total operating expenses

 

 

10,295

 

 

 

9,395

 

 

 

23,183

 

 

 

17,097

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

25

 

 

 

1

 

 

 

41

 

 

 

4

 

Interest expense

 

 

(597

)

 

 

(513

)

 

 

(1,260

)

 

 

(1,234

)

Other income (expense)

 

 

8

 

 

 

 

 

 

1

 

 

 

(8

)

Total other expense, net

 

 

(564

)

 

 

(512

)

 

 

(1,218

)

 

 

(1,238

)

Net loss attributable to common stockholders

 

$

(10,859

)

 

$

(9,907

)

 

$

(24,401

)

 

$

(18,335

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.40

)

 

$

(0.37

)

 

$

(0.89

)

 

$

(0.78

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

27,363,965

 

 

 

26,690,673

 

 

 

27,363,304

 

 

 

23,504,303

 

See notes to unaudited condensed consolidated financial statements.

 


 

2


CERULEAN PHARMA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

 

2016

 

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,401

)

 

$

(18,335

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,457

 

 

 

896

 

Noncash rent expense

 

 

134

 

 

 

(13

)

Depreciation and amortization

 

 

127

 

 

 

83

 

Amortization of debt discount and deferred financing costs

 

 

242

 

 

 

791

 

Loss on disposal of property and equipment

 

 

4

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other current assets

 

 

(334

)

 

 

532

 

Accounts payable

 

 

(458

)

 

 

503

 

Accrued expenses

 

 

(1,272

)

 

 

(195

)

Net cash used in operating activities

 

 

(24,501

)

 

 

(15,738

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(472

)

 

 

(107

)

Decrease (increase) in restricted cash

 

 

117

 

 

 

(230

)

Net cash used in investing activities

 

 

(355

)

 

 

(337

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

 

41

 

 

 

2,472

 

Proceeds from public stock offering, net of issuance costs

 

 

 

 

 

37,185

 

Proceeds from issuance of loans payable

 

 

 

 

 

15,000

 

Payments on loans payable

 

 

(3,900

)

 

 

(3,921

)

Cash paid for debt issuance costs

 

 

 

 

 

(359

)

Net cash (used in) provided by financing activities

 

 

(3,859

)

 

 

50,377

 

Net (decrease) increase in cash and cash equivalents

 

 

(28,715

)

 

 

34,302

 

Cash and cash equivalents — Beginning of period

 

 

75,908

 

 

 

51,174

 

Cash and cash equivalents — End of period

 

$

47,193

 

 

$

85,476

 

Supplemental cash flow information — Interest paid

 

$

708

 

 

$

443

 

See notes to the unaudited condensed consolidated financial statements.

 


 

3


CERULEAN PHARMA INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

NATURE OF BUSINESS AND OPERATIONS

Nature of Business — Cerulean Pharma Inc. (the “Company”) was incorporated on November 28, 2005, as a Delaware corporation and is located in Waltham, Massachusetts. The Company was formed to develop novel, nanotechnology-based therapeutics in the areas of oncology and other diseases.

Basis of Presentation — The condensed consolidated financial statements include the accounts of the Company and its subsidiary, Cerulean Pharma Australia Pty Ltd, a wholly owned Australian-based proprietary limited company. All intercompany accounts and transactions have been eliminated. The consolidated interim financial statements of the Company included herein have been prepared, without audit, 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 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 Company’s audited financial statements as of and for the year ended December 31, 2015, and notes thereto, included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 10, 2016 (the “2015 10-K”).

The unaudited 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 unaudited interim condensed consolidated financial statements contain all adjustments that are necessary to present fairly the Company’s financial position as of June 30, 2016 and the results of its operations for the three and six months ended June 30, 2016 and 2015 and cash flows for the six months ended June 30, 2016 and 2015. Such adjustments are of a normal and recurring nature. The results for the three and six months ended June 30, 2016, are not indicative of the results for the year ending December 31, 2016, or for any future period.

As a clinical stage entity, the Company has incurred historical operating losses resulting in an accumulated deficit of $185.8 million at June 30, 2016. The Company expects to continue to incur significant expenses and increasing operating losses for at least several years.  To date, the Company has financed its operations primarily through private placements of its preferred stock, proceeds from borrowings, an initial public offering completed in 2014 and a follow-on offering completed in 2015. The Company has not completed development of any product candidate and has devoted substantially all of its financial resources and efforts to research and development, including preclinical and clinical development. Accordingly, the Company will continue to depend on its ability to raise capital through equity and debt issuances and/or through strategic partnerships. The Company believes its cash and cash equivalents of approximately $47.2 million at June 30, 2016, are sufficient to fund its planned operations into the second quarter of 2017 and it has the ability to reduce or defer operating expenses as may be needed to fund its operations into the third quarter of 2017.  The Company will need to raise additional capital to continue to fund its long-term operations.  Should its operating plan change further, or prove to be inaccurate, then the Company will be required to reassess its operating capital needs.  However, there can be no assurance that the Company will have the cash resources to fund its operating plan or that additional funding will be available on terms acceptable to it, or at all.

2.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the significant accounting policies previously disclosed in the 2015 10-K.

Recent Accounting Pronouncements – In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 is intended to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases” (“ASU 2016-02”), which provides new accounting guidance on leases.  ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

 

4


In August 2014 , the FASB issued Accounting Standards Update 2014-15, “Disclosure of Uncertainties About an Enti ty’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to contin ue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on the Company’s consolidated financial statements.

3.

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

The Company computes diluted loss per common share after giving effect to the dilutive effect of stock options, warrants and shares of unvested restricted stock that are outstanding during the period, except where the inclusion of such securities would be antidilutive.

The Company has reported a net loss for all periods presented and, therefore, diluted net loss per common share is the same as basic net loss per common share.

The following potentially dilutive securities that were outstanding prior to the use of the treasury stock method have been excluded from the computation of diluted weighted-average shares outstanding, because the inclusion of such securities would have an antidilutive impact due to the losses reported (in common stock equivalent shares):

 

 

As of  June 30,

 

 

 

2016

 

 

2015

 

Options to purchase common stock

 

 

4,145,988

 

 

 

2,989,627

 

Warrants to purchase common stock

 

 

300,564

 

 

 

300,564

 

4.

ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

 

 

As of June 30,

2016

 

 

As of December 31,

2015

 

Accrued clinical trial costs

 

$

1,789

 

 

$

2,631

 

Accrued contract manufacturing expenses

 

 

1,016

 

 

 

945

 

Accrued compensation and benefits

 

 

1,234

 

 

 

1,864

 

Accrued interest

 

 

104

 

 

 

136

 

Other accrued expenses

 

 

709

 

 

 

883

 

Total accrued expenses

 

$

4,852

 

 

$

6,459

 

 

 

5 .

LOAN AGREEMENTS

On January 8, 2015, the Company entered into a loan and security agreement with Hercules Technology Growth Capital, Inc. (“Hercules”) to borrow up to $26.0 million (the “Hercules Loan Agreement”). The proceeds were used to repay the Company’s then-existing term loan facility with Lighthouse Capital Partners VI, L.P. (“Lighthouse Capital”) and for general corporate and working capital purposes.  At June 30, 2016 and December 31, 2015, the Company had $17.1 million and $21.0 million, respectively, outstanding under the Hercules Loan Agreement.

The Hercules Loan Agreement will mature on July 1, 2018. Each advance under the Hercules Loan Agreement accrues interest at a floating per annum rate equal to the greater of (i) 7.30% or (ii) the sum of 7.30% plus the prime rate minus 5.75%. The Hercules Loan Agreement provided for interest-only payments on a monthly basis until December 31, 2015. Thereafter, payments are payable monthly in equal installments of principal and interest to fully amortize the outstanding principal over the remaining term of the loan, subject to recalculation upon a change in the prime rate. Failure to make payments or comply with other covenants as stated in the Hercules Loan Agreement could result in an event of default and acceleration of amounts due. In such case, the Company may not be able to make accelerated payments, and Hercules could seek to enforce security interests in the collateral securing such indebtedness, which includes substantially all of the Company’s assets other than its intellectual property. At the end of the loan term (whether at maturity, by prepayment in full or otherwise), the Company shall pay a final end of term charge to Hercules in the amount of 6.7% of the aggregate original principal amount advanced by Hercules. The amount of the end of term charge is being accrued over the loan term as interest expense.

In connection with the Hercules Loan Agreement, the Company issued to Hercules a warrant to purchase shares of the common stock of the Company at an exercise price of $6.05 per share. The warrant is exercisable for 171,901 shares of common stock. The warrant is exercisable until January 8, 2020. The Company estimated the fair value of the warrant for shares exercisable on the issue

 

5


date in January 2015 to be $ 824 ,000. The value of the warrant was recorded as a discount to the loan and will be amortized to interest expense using the effective interest method over the term of the loan.

In December 2011, the Company entered into a loan and security agreement with Lighthouse Capital to borrow up to $10.0 million in one or more advances by December 31, 2012.  In both March 2012 and August 2012, the Company borrowed $5.0 million under the loan and security agreement, for a total of $10.0 million. This amount was being repaid over 36 months beginning on December 1, 2012, at an interest rate of 8.25%.   In addition, the Company was required to make an additional payment in the amount of $600,000 at the end of the loan term. The amount was accrued over the loan term as interest expense. In January 2015, the Company repaid in full the amount outstanding under the Lighthouse Capital loan, or $3.6 million, with the proceeds from the Hercules Loan Agreement.

In connection with the loan and security agreement with Lighthouse Capital, the Company issued Lighthouse Capital a warrant to purchase a maximum of 66,436 shares of the Company’s Series D Preferred Stock, at an exercise price of $12.04 per share and with an expiration date 10 years from the date of issue (December 2021).  The Company determined the fair value of the warrant at the end of each reporting period using the Black-Scholes option pricing model until the warrant converted to a warrant to purchase 66,436 shares of common stock upon the completion of the Company’s initial public offering.  The value of the warrant was recorded as a discount to the loan and was being amortized as interest expense using the effective interest method over the 36-month repayment term.  The unamortized discount relating to the warrants, or $0.2 million, was expensed as interest expense upon repayment of the loan in January 2015.

6 .

STOCK-BASED COMPENSATION

In March 2014, the Company’s board of directors adopted and its stockholders approved the 2014 Stock Incentive Plan (the “2014 Plan”) and the 2014 Employee Stock Purchase Plan (the “ESPP”), which became effective in April 2014.

Stock Options

The 2014 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.  A summary of stock option activity for employee, director and nonemployee awards under all stock option plans during the six months ended June 30, 2016 is presented below (Aggregate Intrinsic Value in thousands):

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding — January 1, 2016

 

 

3,454,926

 

 

$

5.39

 

 

 

8.9

 

 

$

 

Granted

 

 

707,070

 

 

$

2.78

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(16,008

)

 

$

4.46

 

 

 

 

 

 

 

 

 

Outstanding — June 30, 2016

 

 

4,145,988

 

 

$

4.95

 

 

 

8.6

 

 

$

7

 

Options expected to vest — June 30, 2016

 

 

2,619,425

 

 

$

4.57

 

 

 

9.1

 

 

$

7

 

Options exercisable — June 30, 2016

 

 

1,394,581

 

 

$

5.68

 

 

 

7.6

 

 

$

 

 

The weighted-average per share grant date fair value of options granted during the six months ended June 30, 2016 and 2015 was $1.31 and $2.44, respectively.  

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model based on the assumptions noted in the table below. Expected volatility for the Company’s common stock was determined based on an average of the historical volatility of a peer-group of similar public companies. The Company has limited option exercise information, and as such, the expected term of the options granted was calculated using the simplified method that represents the average of the contractual term of the option and the weighted-average vesting period of the option. The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. The risk-free rate for periods within the contractual life of the option is based upon the U.S. Treasury yield curve in effect at the time of grant.

The Company has recorded stock-based compensation expense related to the issuance of stock option awards to employees of $690,000 and $403,000 for the three months ended June 30, 2016 and 2015, respectively, and $1.4 million and $823,000 for the six months ended June 30, 2016 and 2015, respectively. The assumptions used in the Black-Scholes option-pricing model for stock

 

6


options granted to employees and to direct ors in respect of board services during the three and six months ended June 3 0 , 2016 and 2015 are as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2016

 

 

2015

 

2016

 

2015

Expected life

 

5.5 years

 

 

5.4-6.1 years

 

5.5-6.1 years

 

5.4-6.1 years

Risk-free interest rate

 

 

1.2

%

 

1.8%-2.0%

 

1.2%-1.9%

 

1.5%-2.0%

Expected volatility

 

61%

 

 

61%

 

61%

 

61%-63%

Expected dividend rate

 

—%

 

 

—%

 

—%

 

—%

The Company recorded stock-based compensation expense related to nonemployee awards of $14,000 and $53,000 for the three months ended June 30, 2016 and 2015, respectively and $52,000 and $73,000 for the six months ended June 30, 2016 and 2015, respectively. The compensation expense related to nonemployee awards is included in the total stock-based compensation each year and is subject to re-measurement until the options vest. The fair value of the grants is being expensed over the vesting period of the options on a straight-line basis as the services are being provided.  The Black-Scholes assumptions used to estimate fair value for the three and six months ended June 30, 2016 and 2015 were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

2015

 

Expected life

 

9.0-9.6 years

 

 

10 years

 

 

6.9-9.7 years

 

10 years

 

Risk-free interest rate

 

1.7%-2.0%

 

 

2.2%-2.3%

 

 

1.7%-2.0%

 

2.2%-2.3%

 

Expected volatility

 

 

61

%

 

 

59

%

 

60%-61%

 

 

59

%

Expected dividend rate

 

—%

 

 

—%

 

 

—%

 

—%

 

There were no nonemployee stock option awards granted during the six months ended June 30, 2016.  During the six months ended June 30, 2015, the Company granted nonemployee stock options to purchase 180,000 shares of the Company’s common stock.  The weighted-average exercise price and the weighted-average grant date fair value of nonemployee stock options granted for the six months ended June 30, 2015 was $5.30 per share and $3.07 per share, respectively.

 

Employee Stock Purchase Plan

The ESPP permits eligible employees to enroll in a six-month offering period whereby participants may purchase shares of the Company’s common stock, through payroll deductions, at a price equal to 85% of the closing price of the common stock on the first day of the offering period or the last day of the offering period, whichever is lower. Purchase dates under the ESPP occur on or about June 30 and December 31 of each year.  The first offering period under the ESPP opened on July 1, 2015.  During the six months ended June 30, 2016, 17,185 shares of common stock were purchased under the ESPP at a price of $2.38 per share.  The stock-based compensation expense related to the ESPP for the three and six months ended June 30, 2016 was $12,000 and $24,000, respectively.  There was no stock-based compensation related to the ESPP recorded for the three and six months ended June 30, 2015.

7 .

FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash equivalents, accounts payable, accrued expenses, and debt obligations. The carrying amount of accounts payable and accrued expenses are considered a reasonable estimate of their fair value, due to the short-term maturity of these instruments. The carrying amount of debt is also considered to be a reasonable estimate of its fair value based on the short term nature of the debt and because the debt bears interest at the prevailing market rate for instruments with similar characteristics.

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. Valuation techniques used to measure fair value are performed in a manner to maximize the use of observable inputs and minimize the use of unobservable inputs.

The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the market date for identical unrestricted assets or liabilities.

 

7


Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by obs ervable 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.

A summary of the financial assets and liabilities that are measured on a recurring basis at fair value as of June 30, 2016 and December 31, 2015, is as follows (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Carrying

 

 

Quoted Prices   in

Active Markets

for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

46,616

 

 

$

 

 

$

46,616

 

 

$

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

75,325

 

 

$

 

 

$

75,325

 

 

$

 

 

The Company believes that its debt obligations bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, the carrying values for these instruments approximate fair value.  The Company’s debt obligations are Level 2 measurements in the fair value hierarchy.

The Company’s money market funds have been valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. The Company is ultimately responsible for the consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources.

No transfers between levels occurred during the periods presented.

 

 

 

 

 

8


Item 2.

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

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

Overview

We are a clinical-stage, oncology-focused company applying our proprietary Dynamic Tumor Targeting™ Platform to develop differentiated therapies. We were incorporated under the laws of the State of Delaware on November 28, 2005, under the name Tempo Pharmaceuticals, Inc. In October 2008, we changed our name to Cerulean Pharma Inc.

Our Dynamic Tumor Targeting Platform is designed to create nanoparticle-drug conjugates, or NDCs, with the aim of providing safer and more effective therapies for patients living with cancer.  NDCs consist of anti-cancer therapeutics, or payloads, covalently linked to a proprietary polymer.  We believe our NDCs concentrate their anti-cancer payloads inside tumor cells while sparing normal tissue because they are small enough to pass through the leaky pores of new blood vessels in tumors as an entry portal into tumor tissue, but are too large to pass through the pores of healthy blood vessels.  Once inside tumors, we believe our NDCs are actively taken up into tumor cells where they slowly release their anti-cancer payloads, providing a durable inhibition of their targets.  

We believe that the ability to combine our NDCs with other agents, either approved or experimental, is a key differentiating feature of our platform.  Based on their properties and design, our NDCs have the potential to enable synergistic combination therapies that can offer better tolerability and efficacy.  We believe that better tolerability can be achieved through the preferential accumulation of the NDC in the tumor cells while better efficacy can be achieved by combining drugs that have different and complementary mechanisms of action.  

Our platform has generated two clinical-stage NDCs.  Our first platform-generated clinical candidate, CRLX101, is in Phase 2 clinical development in patients with relapsed renal cell carcinoma, or RCC, and in relapsed ovarian cancer, and in other earlier stage clinical trials.  In April 2015, the United States Food and Drug Administration, or FDA, granted CRLX101 fast track designation in combination with Avastin in metastatic RCC, and in July 2016 the FDA granted CRLX101 fast track designation in combination with paclitaxel for the treatment of platinum-resistant ovarian carcinoma, fallopian tube or primary peritoneal cancer. In May 2015, the FDA also granted CRLX101 orphan drug designation for the treatment of ovarian cancer.  Our second platform-generated clinical candidate, CRLX301, is currently in Phase 1/2a clinical development.  We intend to generate additional candidates, alone and potentially in collaboration with partners.

We are pursuing development of CRLX101 in combination with anti-cancer therapies in multiple ongoing clinical development programs that include company-sponsored trials and investigator-sponsored trials, or ISTs.  Our two lead indications are relapsed RCC and relapsed ovarian cancer.  In relapsed RCC, we are conducting a Phase 2 randomized, controlled, company-sponsored trial comparing CRLX101 administered in combination with Avastin to investigator’s choice of standard of care in patients with RCC who have received two or three prior lines of therapy.  We refer to this trial as the RCC Trial.  We completed enrollment in October 2015 and expect to announce top-line data from the RCC Trial in the third quarter of 2016.  In July 2016, we decided to amend the primary endpoint of the RCC Trial, so that progression free survival, or PFS, is assessed by independent radiologic review. Before this amendment, the primary endpoint of the RCC Trial was PFS as assessed by investigators, according to Response Evaluation Criteria In Solid Tumors, or RECIST, version 1.1.  The amendment makes investigator-assessed PFS a secondary endpoint.

We have two ongoing trials in relapsed ovarian cancer.  We are conducting a Phase 1b/2 company-sponsored trial of CRLX101 in combination with weekly paclitaxel in patients with relapsed ovarian cancer in collaboration with the GOG Foundation, Inc. (formerly known as the Gynecologic Oncology Group), or GOG.  This Phase 1b/2 multi-center, open-label study combines CRLX101 with weekly paclitaxel in approximately 40 patients with recurrent or persistent epithelial ovarian, fallopian tube or primary peritoneal cancer. The Phase 1b portion of this clinical trial was designed to identify the maximum tolerated dose, or MTD, as well as pharmacokinetics, safety, tolerability and preliminary signals of efficacy of CRLX101 in combination with weekly paclitaxel.  In April 2016, we announced the determination of the MTD and recommended Phase 2 dose for this combination to be 15 mg/m2 for CRLX101 administered every other week and 80 mg/m2 for weekly paclitaxel administered three weeks on and one week off.  The Phase 2 expansion portion of this clinical trial is ongoing and will assess the overall response rate in patients with recurrent platinum resistant epithelial ovarian, fallopian tube or primary peritoneal cancer who previously received Avastin. We began enrolling patients into the Phase 2 expansion portion of this trial in July 2016.

 

9


A Phase 2 single-arm IST of CRLX101 as monotherapy and in combination with Avastin in patients with relapsed ovarian cancer is being conducted at Massachusetts General Hospital and affiliated H arvard University teaching hospitals. The monotherapy arm of the trial, in which 29 patients were enrolled, met its primary endpoint.  The results from the monotherapy arm led to the combination arm of this trial, which employs a two-stage design.  The fir st stage enrolled 18 patients and achieved the pre-defined criterion for advancement into the second stage, which showed improved activity relative to the monotherapy arm.  The second stage of this trial is ongoing.  

We are also evaluating the combination of CRLX101 with Poly ADP ribose polymerase inhibitors, or PARP inhibitors. PARP inhibitors, such as LYNPARZA™ (olaparib), hinder a cell’s ability to repair single-strand DNA breaks. Topo 1 inhibitors, such as CRLX101, create persistent single-strand DNA breaks, and preclinical experiments have shown that PARP inhibition potentiates the DNA damage resulting from topo 1 inhibition.  PARP-topo 1 combinations have traditionally been limited by toxicity.  However, we believe our NDC platform may enable a therapeutic PARP-topo 1 combination because NDC’s are designed to concentrate anti-cancer payloads inside tumor cells and spare healthy tissue.  Preclinical data generated by AstraZeneca AB, or AstraZeneca, with a LYNPARZA-CRLX101 combination demonstrated a synergistic anti-tumor effect from targeting two validated pathways.  Based on this data, in November 2015, we entered into a collaboration agreement with the National Cancer Institute, or the NCI, and AstraZeneca to study the LYNPARZA-CRLX101 combination in human clinical trials.

In May 2016, we announced that the first patient was dosed in an open-label, single center Phase 1/2 clinical trial of CRLX101 in combination with LYNPARZA in patients with advanced solid tumors. This trial is being conducted by the NCI.  We believe that with our NDC and the work AstraZeneca has done to define a clinical dose and schedule, we may be able to develop an effective and tolerable LYNPARZA-CRLX101 combination.  The Phase 1 portion of this clinical trial will enroll up to 30 patients with advanced solid tumors that are resistant or refractory to standard therapy. The trial is designed to identify the MTD, or recommended Phase 2 dose, of CRLX101 when combined with LYNPARZA, and to provide additional data on pharmacokinetics, pharmacodynamics and safety. The Phase 2a portion will evaluate the efficacy of this combination in relapsed small cell lung cancer patients dosed at the identified recommended Phase 2 dose and schedule.

Our second platform-generated NDC clinical candidate, CRLX301, is an NDC with docetaxel as its anti-cancer payload. CRLX301 is designed to concentrate in tumors and slowly release docetaxel inside tumor cells.  We are studying CRLX301 in a Phase 1/2a trial in patients with advanced solid tumor malignancies in order to evaluate the safety of the drug and establish an MTD for two dosing schedules.  In the Phase 1 stage of the clinical trial we explored tolerability of dose ranges when the drug candidate was administered once every three weeks and have determined an MTD for this dosing schedule.  We are also exploring a weekly dosing schedule as part of the Phase 1 stage to determine the MTD for that regimen.  These parallel paths will allow us to determine the recommended Phase 2 dose with the preferred dosing schedule.

In June 2016, we announced that we had dosed the first patient in the Phase 2a stage of this clinical trial, evaluating a once every three weeks dosing schedule. The Phase 2a expansion includes two stages. In Stage 1 we plan to enroll up to eight patients in each dosing schedule. This stage of the trial is designed to further establish the safety and tolerability of each dosing schedule and to provide additional data on pharmacokinetics, pharmacodynamics and antitumor activity. In Stage 2 we plan to enroll up to 36 additional patients with specific tumor types using the optimal dosing schedule.

To date, we have devoted substantially all of our resources to our drug discovery and development efforts, including conducting clinical trials of our product candidates, protecting our intellectual property and the general and administrative support of our operations. We have generated no revenue from product sales. We expect that it will be several years before we commercialize a product candidate, if ever. Through June 30, 2016, we have funded our operations primarily through $84.2 million in proceeds from the sale of shares of our convertible preferred stock in private placements, net proceeds of $59.9 million from sales of shares of our common stock in our initial public offering, or IPO, net proceeds of $37.2 million from the sale of shares of our common stock in April 2015 in an underwritten public offering, or Secondary Offering, $17.3 million in proceeds from our sale of convertible promissory notes, $10.0 million in proceeds from a loan and security agreement with Lighthouse Capital Partners VI, L.P., or Lighthouse Capital, and $21.0 million in proceeds from a loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules.  We refer to our loan and security agreements with Lighthouse Capital and Hercules as the Lighthouse Loan Agreement and the Hercules Loan Agreement, respectively.

We have never been profitable and have incurred significant operating losses since our incorporation. As of June 30, 2016, we had an accumulated deficit of $185.8 million. We incurred net losses of approximately $24.4 million and $18.3 million for the six months ended June 30, 2016 and 2015, respectively.

We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we advance our product candidates through preclinical studies and clinical trials, and as we seek regulatory approval for, and eventually commercialize, our product candidates. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We will need to raise additional capital in the future to support our expenses and operating activities.

 

10


Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the next several years, if ever. In the future, we may generate revenue from a combination of product sales, license fees, milestone and research and development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of any such payments. Our ability to generate product revenues will depend on the successful development and eventual commercialization of our product candidates. If we fail to complete the development of our product candidates in a timely manner or to obtain regulatory approval for our product candidates, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.

To date, our only revenue has consisted of a government tax credit that we received in 2010 and payments in each of the years from 2011 through 2014 from material transfer agreements and/or a research agreement.

Research and Development Expenses

Research and development expense consists of costs incurred in connection with the discovery and development of our Dynamic Tumor Targeting Platform and our NDCs. These expenses consist primarily of:

 

·

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

 

·

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

 

·

expenses relating to scientific and medical consultants and advisors;

 

·

the cost of acquiring and manufacturing clinical trial materials;

 

·

facilities, depreciation of fixed assets and other allocated expenses, including direct and allocated expenses for rent and maintenance of facilities and equipment;

 

·

lab supplies, reagents, active pharmaceutical ingredients and other direct and indirect costs in support of our preclinical and clinical activities;

 

·

license fees related to in-licensed products and technology; and

 

·

costs associated with non-clinical activities and regulatory approvals.

We expense research and development costs as incurred.

Conducting a significant amount of research and development is central to our business model. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development primarily due to the increased size and duration of late-stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we continue to support multiple clinical trials of CRLX101 and CRLX301, and advance our earlier-stage research and development projects.

We use our employee and infrastructure resources across multiple research and development programs. We track external research and development expenses and personnel expense on a program-by-program basis and have allocated expenses such as stock-based compensation and indirect laboratory supplies and services to each program based on the personnel resources allocated to each program. Facilities, depreciation and scientific advisory board fees and expenses are not allocated to a program and are considered overhead. Below is a summary of our research and development expenses for the three and six months ended June 30, 2016 and 2015 (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

CRLX101

 

$

5,378

 

 

$

5,030

 

 

$

12,133

 

 

$

8,372

 

CRLX301

 

 

1,116

 

 

 

827

 

 

 

3,217

 

 

 

1,715

 

Dynamic Tumor Targeting Platform

 

 

745

 

 

 

487

 

 

 

1,365

 

 

 

935

 

Overhead

 

 

283

 

 

 

334

 

 

 

577

 

 

 

677

 

Total research and development expense

 

$

7,522

 

 

$

6,678

 

 

$

17,292

 

 

$

11,699

 

 

11


The following summarizes our research and development programs.

CRLX101

Our lead product candidate, CRLX101, is an NDC in Phase 2 clinical development in our two lead indications, relapsed RCC and relapsed ovarian cancer.  We are also pursuing development of CRLX101 in combination with anti-cancer therapies in other earlier stage clinical trials that include company-sponsored trials and ISTs.  

Our leading CRLX101 development programs are:

 

Relapsed RCC:

 

-

We are conducting a Phase 2 randomized, controlled, company-sponsored trial comparing CRLX101 administered in combination with Avastin to investigator’s choice of standard of care in patients with RCC who have received two or three prior lines of therapy.  

 

Relapsed ovarian cancer:

 

-

We are conducting a Phase 1b/2 company-sponsored trial of CRLX101 in combination with weekly paclitaxel in patients with relapsed ovarian cancer in collaboration with the GOG.

 

-

We are also conducting a Phase 2 single-arm IST of CRLX101 as monotherapy and in combination with Avastin in patients with relapsed ovarian cancer at Massachusetts General Hospital and affiliated Harvard University teaching hospitals.

Additional trials involving CRLX101 are also ongoing, including a Phase 1b company-sponsored trial exploring a dose-intensive schedule for CRLX101 in patients with solid tumors, a Phase 1/2 clinical trial sponsored by the NCI, evaluating the combination of CRLX101 and LYNPARZA™ (olaparib) in patients with advanced solid tumors, and a Phase 1b/2 IST in patients with locally advanced rectal cancer.

We cannot accurately project future research and development expenses for our CRLX101 program because such expenses are dependent on a number of variables, including, among others, the cost and design of any additional clinical trials, the duration of the regulatory process and the results of any clinical trials.  

Under our license agreement with Calando Pharmaceuticals, Inc., or Calando, pursuant to which we obtained rights to CRLX101, or the CRLX101 Agreement, we are obligated to pay milestone payments which could total, in the aggregate, $32.8 million, if we achieve certain development and sales events with CRLX101. In addition, under the CRLX101 Agreement, if we, or one of our affiliates, sell CRLX101, we are required to pay tiered royalty payments ranging from low- to mid-single digits, as a percentage of worldwide net sales, depending on whether there is patent protection for CRLX101 at the time of the sale. In the event we license or sublicense the intellectual property that we purchased or licensed from Calando, we are required to pay Calando a percentage of the income we receive from the licensee or sublicensee to the extent attributable to such license or sublicense, subject to certain exceptions. The percentage of such license income that we are obligated to pay Calando ranges from the low- to mid-double digits depending on the development stage of CRLX101 at the time we first provide or receive draft terms of a license arrangement with the third party that results in a license agreement.

CRLX301

We are studying CRLX301 in a Phase 1/2a trial in patients with advanced solid tumor malignancies in order to evaluate the safety of the drug and establish an MTD for two dosing schedules. In the Phase 1 stage of the clinical trial we explored tolerability of dose ranges when the drug candidate was administered once every three weeks and have determined an MTD for this dosing schedule. We are also exploring a weekly dosing schedule as part of the Phase 1 stage of the trial to determine the MTD for that regimen.  These parallel paths will allow us to determine the recommended Phase 2 dose with the preferred dosing schedule. The Phase 2a expansion of this clinical trial includes two stages. Stage 1 is designed to further establish the safety and tolerability of each dosing schedule and to provide additional data on pharmacokinetics, pharmacodynamics and antitumor activity. Stage 2 will enroll additional patients with specific tumor types using the optimal dosing schedule.

Under our license agreement with Calando pursuant to which we obtained rights to Calando’s cyclodextrin system for purposes of conjugating or complexing certain other therapeutic agents to the system, or the Platform Agreement, we paid a $250,000 clinical development milestone to Calando in January 2015 in connection with the initiation of our Phase 1/2a clinical trial of CRLX301 in December 2014. We are also required to make milestone payments in an aggregate amount of up to approximately $18.0 million to Calando if we achieve certain development and sales events with respect to CRLX301.  Further, under the Platform Agreement, if we, or one of our affiliates, sell CRLX301 we are required to pay tiered royalty payments ranging from low- to mid-single digits, as a

 

12


percentage of worldwide net sales, depending on whether there is patent protection at the time of the sale. In the event we license or sublicense the intellectual property t hat we purchased or licensed from Calando, we are required to pay Calando a percentage of the income we receive from the licensee or sublicensee to the extent attributable to such license or sublicense, subject to certain exceptions. The percentage of such license income that we are obligated to pay Calando is in the low-double digits.

Dynamic Tumor Targeting Platform

We expect that the expenses related to our NDCs and the development of our platform will continue to increase as we seek to identify additional targets for preclinical research and add personnel to these projects. We cannot accurately predict future research and development expenses for our NDCs because such costs are dependent on a number of variables, including the success of preclinical studies on any such NDC.

The successful development of any of our NDCs is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and costs of the current or future preclinical studies or clinical trials of any of our NDCs or if, when or to what extent we will generate revenues from any commercialization and sale of any of our NDCs that obtain marketing approval. We may never succeed in achieving regulatory approval for any of our NDCs. The duration, costs and timing of development of our NDCs will depend on a variety of factors, including:

 

·

the scope and rate of progress of our ongoing clinical trials;

 

·

a continued acceptable safety profile of any product candidate once approved;

 

·

the scope, progress, timing, results and costs of researching and developing our NDCs and conducting preclinical and clinical trials;

 

·

results from ongoing as well as any future clinical trials;

 

·

significant and changing government regulation in the United States and abroad;

 

·

the costs, timing and outcome of regulatory review or approval of our NDCs in the United States and abroad;

 

·

our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

 

·

our ability to raise additional capital, as and when needed;

 

·

establishment of arrangements with third party suppliers of raw materials and third party manufacturers of finished drug product;

 

·

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

 

·

the emergence of competing technologies and products and other adverse market developments; and

 

·

the cost of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims.

Any change in the outcome of any of these variables with respect to the development of an NDC could mean a significant change in the cost and timing associated with the development of that NDC. For example, if the FDA, or a comparable non-U.S. regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the marketing authorization of an NDC, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time to obtain marketing authorization.

As a result of the uncertainties discussed above, we are unable to determine when, or to what extent, we will generate revenues from the commercialization and sale of any of our NDCs. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical data with respect to each NDC, our current financial condition, as well as our ongoing assessment of the NDCs’ commercial potential. We will need to raise additional capital in the future in order to complete the development and commercialization of CRLX101 and CRLX301 and to fund the development of our other NDCs, if any.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in our executive, finance, business development, marketing, legal, information technology and human resources functions. Other general and administrative

 

13


expenses include patent filing, patent prosecution, professional fees for legal, insurance, consulting, information technology, a uditing and tax services and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future for, among others, the following reasons:

 

we expect to incur increased general and administrative expenses to support our research and development activities, which we expect to expand as we continue to pursue the development of our NDCs;

 

we expect our general and administrative expenses will continue to increase as a result of increased payroll, expanded infrastructure, higher consulting, legal, accounting and investor relations costs, director compensation and director and officer insurance premiums associated with being a public company; and

 

we may begin to incur expenses related to sales and marketing of our NDCs in anticipation of commercial launch before we receive regulatory approval of an NDC.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is capital preservation.

Interest Expense

Interest expense consists primarily of interest, amortization of debt discount and amortization of deferred financing costs associated with the Hercules Loan Agreement.  Interest expense in 2015 also included the write off of debt discount and deferred financing costs associated with the repayment of the debt incurred under the Lighthouse Loan Agreement.

Results of Operations

Comparison of Three Months Ended June 30, 2016 and 2015 (Unaudited)

The following table summarizes our consolidated results of operations for the three months ended June 30, 2016 and 2015, together with the changes in those items in dollars and as a percentage (in thousands, except percentages):

 

 

 

Three Months Ended June 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

Revenue

 

$

 

 

$

 

 

$

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,522

 

 

 

6,678

 

 

 

844

 

 

 

13

%

General and administrative

 

 

2,773

 

 

 

2,717

 

 

 

56

 

 

 

2

%

Loss from operations

 

 

(10,295

)

 

 

(9,395

)

 

 

(900

)

 

 

10

%

Total other expense, net

 

 

(564

)

 

 

(512

)

 

 

(52

)

 

 

10

%

Net loss

 

$

(10,859

)

 

$

(9,907

)

 

$

(952

)

 

 

10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development. Research and development expense for the three months ended June 30, 2016, was $7.5 million compared to $6.7 million for the three months ended June 30, 2015, an increase of $0.8 million, or 13%.  The following table summarizes our research and development expense by program for the three months ended June 30, 2016 and 2015, together with the change in spending by program in dollars and as a percentage (in thousands, except percentages):

 

 

 

Three Months Ended June 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

CRLX101

 

$

5,378

 

 

$

5,030

 

 

$

348

 

 

 

7

%

CRLX301

 

 

1,116

 

 

 

827

 

 

 

289

 

 

 

35

%

Dynamic Tumor Targeting Platform

 

 

745

 

 

 

487

 

 

 

258

 

 

 

53

%

Overhead

 

 

283

 

 

 

334

 

 

 

(51

)

 

 

-15

%

Total research and development expense

 

$

7,522

 

 

$

6,678

 

 

$

844

 

 

 

13

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


For the three months ended June 30, 2016, CRLX101 program expenses increased by $0. 4 million, or 7%, to $5.4 million compared to $5.0 million for the three months ended June 30, 2015 .  The increase in CRLX101 program expenses was primarily attributable to chemistry, manufacturing, and controls, or CMC, for which costs increased $1.2 million, reflecting increased production and activity to support current and future clinical developmen t of CRLX101.  Salary and benefits expenses also increased $0.5 million, reflecting increased headcount , and consulting and other operating costs increased $0.2 million to support the CRLX101 program and the CRLX101 clinical trials.  These increases were p artially offset by a decrease of $1. 6 million in clinical trial expenses, reflecting lower CRO fees, investigator fees and costs associated with clinical sites and laboratories primarily attributable to our RCC Trial.

For the three months ended June 30, 2016, CRLX301 program expenses increased $0.3 million, or 35%, to $1.1 million compared to $0.8 million for the three months ended June 30, 2015.  The increase in CRLX301 program expense was primarily attributable to an increase of $0.2 million in CMC costs to support current and future clinical development of CRLX301and an increase of $0.1 million in salary and benefits expenses reflecting increased headcount to support the CRLX301 program and the CRLX301 clinical trials.

Expenses associated with our Dynamic Tumor Targeting Platform were $0.7 million for the three months ended June 30, 2016, an increase of $0.2 million, or 53%, compared to $0.5 million for the three months ended June 30, 2015.  The increase was primarily due to increased salary and benefits expenses combined with increases in consulting and external lab costs. Overhead costs decreased $51,000, or 15%, to $0.3 million for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.  The decrease was primarily attributable to a decrease in facility costs.

General and administrative. General and administrative expense for the three months ended June 30, 2016, was $2.8 million compared to $2.7 million for the three months ended June 30, 2015, an increase of $0.1 million, or 2%. The increase in general and administrative costs was primarily attributable to an increase in salary and benefits expenses of $0.2 million, partially offset by a decrease of $0.1 million in facility costs and other general and administrative costs.     

Other expense, net. Other expense, net for the three months ended June 30, 2016, was $0.6 million, an increase of $0.1 million, or 10%, compared to $0.5 million for the three months ended June 30, 2015.  For the three months ended June 30, 2016 and 2015, other expense, net, was primarily interest expense associated with the Hercules Loan Agreement, including $0.1 million for the amortization of debt discount and deferred financing costs.  

Comparison of Six Months Ended June 30, 2016 and 2015 (Unaudited)

The following table summarizes our consolidated results of operations for the six months ended June 30, 2016 and 2015, together with the changes in those items in dollars and as a percentage (in thousands, except percentages):

 

 

 

Six Months Ended June 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

Revenue

 

$

 

 

$

 

 

$

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

17,292

 

 

 

11,699

 

 

 

5,593

 

 

 

48

%

General and administrative

 

 

5,891

 

 

 

5,398

 

 

 

493

 

 

 

9

%

Loss from operations

 

 

(23,183

)

 

 

(17,097

)

 

 

(6,086

)

 

 

36

%

Total other expense, net

 

 

(1,218

)

 

 

(1,238

)

 

 

20

 

 

 

(2

)%

Net loss

 

$

(24,401

)

 

$

(18,335

)

 

$

(6,066

)

 

 

33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development. Research and development expense for the six months ended June 30, 2016, was $17.3 million compared to $11.7 million for the six months ended June 30, 2015, an increase of $5.6 million, or 48%.  The increase was primarily attributable to an increase in costs associated with the CRLX101 program.  The following table summarizes our research and development expense by program for the six months ended June 30, 2016 and 2015, together with the change in spending by program in dollars and as a percentage (in thousands, except percentages):

 

15


 

 

 

Six Months Ended June 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

CRLX101

 

$

12,133

 

 

$

8,372

 

 

$

3,761

 

 

 

45

%

CRLX301

 

 

3,217

 

 

 

1,715

 

 

 

1,502

 

 

 

88

%

Dynamic Tumor Targeting Platform

 

 

1,365

 

 

 

935

 

 

 

430

 

 

 

46

%

Overhead

 

 

577

 

 

 

677

 

 

 

(100

)

 

 

(15

)%

Total research and development expense

 

$

17,292

 

 

$

11,699

 

 

$

5,593

 

 

 

48

%

For the six months ended June 30, 2016, CRLX101 program expenses increased by $3.7 million, or 45%, to $12.1 million compared to $8.4 million for the six months ended June 30, 2015.  The increase in CRLX101 program expenses was primarily attributable to CMC, for which costs increased $3.2 million, reflecting increased production and activity to support current and future clinical development of CRLX101.  Salary and benefits expenses also increased $0.6 million, reflecting increased headcount to support the CRLX101 program and the CRLX101 clinical trials.  These increases were partially offset by a decrease of $0.3 million in clinical trial expenses, reflecting a decrease in CRO fees, investigator fees and costs associated with clinical sites and laboratories.

For the six months ended June 30, 2016, CRLX301 program expenses increased $1.5 million, or 88%, to $3.2 million compared to $1.7 million for the six months ended June 30, 2015.  The increase in CRLX301 program expense was attributable to an increase of $0.7 million in salary and benefits expenses reflecting increased headcount to support the CRLX301 program and the CRLX301 clinical trials, an increase of $0.4 million in CMC costs to support current and future clinical development of CRLX301 and an increase of $0.2 million in clinical trial expenses, consisting primarily of increases in CRO and laboratory costs.

Expenses associated with our Dynamic Tumor Targeting Platform were $1.4 million for the six months ended June 30, 2016, an increase of $0.5 million, or 46%, compared to $0.9 million for the six months ended June 30, 2015.  The increase was primarily due to increased salary and benefits expenses combined with increases in consulting and external lab costs. Overhead costs decreased $0.1 million, or 15%, to $0.6 million for the six months ended June 30, 2016 compared to $0.7 million for the six months ended June 30, 2015.  The decrease was primarily attributable to a decrease in facility costs.

General and administrative. General and administrative expense for the six months ended June 30, 2016, was $5.9 million compared to $5.4 million for the six months ended June 30, 2015, an increase of $0.5 million, or 9%. The increase in general and administrative costs was primarily due to the growth in our corporate infrastructure to support a larger public company.  Salaries and benefits, including stock-based compensation, increased $0.4 million for the six months ended June 30, 2016, reflecting increases in finance and accounting, legal, information technology and corporate communications.  Professional and consulting fees increased $0.2 million and facility and other general and administrative expenses decreased $0.1 million for the six months ended June 30, 2016, compared to the prior year.   

Other expense, net. Other expense, net was $1.2 million for each of the six months ended June 30, 2016 and 2015.  For the six months ended June 30, 2016 and 2015, other expense, net, was primarily interest expense associated with the Hercules Loan Agreement, including $0.3 million in each period for the amortization of debt discount and deferred financing costs.  For the six months ended June 30, 2015, interest expense included $0.2 million for the write off of debt discount and deferred financing costs associated with the repayment of the Lighthouse Loan Agreement.  

Liquidity and Capital Resources

From our incorporation through June 30, 2016, we raised an aggregate of $230.6 million to fund our operations, of which $84.2 million was from the sale of preferred stock in private placements, $59.9 million was from the IPO, $37.2 million was from the Secondary Offering, $17.3 million was from the sale of convertible promissory notes, $31.0 million was from borrowings under loan and security agreements and $1.0 million was from the private placement of our common stock to Hercules. As of June 30, 2016, we had cash and cash equivalents of approximately $47.2 million.

Indebtedness

On January 8, 2015, we entered into the Hercules Loan Agreement and borrowed $15.0 million from Hercules. We used a portion of those proceeds to repay our outstanding indebtedness under the Lighthouse Loan Agreement.

The Hercules Loan Agreement provided for up to three separate tranches of borrowings, the first of which was funded in the amount of $15.0 million on January 8, 2015.  On November 24, 2015, we drew a second tranche in the amount of $6.0 million. We elected not to commence a randomized Phase 2 clinical trial of CRLX101 in combination with chemoradiotherapy on or prior to

 

16


December 15, 20 15, which was a condition of obtaining an additional tranche in an amount of up to $5.0 million .  As a result, we are no longer eligible to borrow this amount under the Hercules Loan Agreement.   

Our indebtedness under the Hercules Loan Agreement will mature on July 1, 2018. Each advance under the Hercules Loan Agreement accrues interest at a floating per annum rate equal to the greater of (i) 7.30% or (ii) the sum of 7.30% plus the prime rate minus 5.75%. The Hercules Loan Agreement provided for interest-only payments on a monthly basis until December 31, 2015. Thereafter, payments are payable monthly in equal installments of principal and interest to fully amortize the outstanding principal over the remaining term of the loan, subject to recalculation upon a change in the prime rate. We may prepay the indebtedness under the Hercules Loan Agreement in whole or in part upon seven business days’ prior written notice to Hercules. Any such prepayment is subject to a prepayment charge of 2.0% if such prepayment occurs after January 8, 2016, but on or before January 8, 2017, or 1.0% if such prepayment occurs after January 8, 2017. Amounts outstanding during an event of default are payable upon Hercules’ demand and shall accrue interest at an additional rate of 5.0% per annum of the past due amount outstanding. At the end of the loan term (whether at maturity, by prepayment in full or otherwise), we shall pay a final end of term charge to Hercules in the amount of 6.7% of the aggregate original principal amount advanced by Hercules.

The Hercules Loan Agreement is secured by substantially all of our assets other than our intellectual property. We have also granted Hercules a negative pledge with respect to our intellectual property, which, among other things, restricts our ability to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in or otherwise encumber our intellectual property, subject to certain exceptions. The Hercules Loan Agreement includes restrictive covenants that may restrict our ability to obtain further debt or equity financing.

Lighthouse Loan Agreement.   In 2011, we entered into the Lighthouse Loan Agreement which permitted us to borrow up to an aggregate principal amount of $10.0 million. We borrowed $5.0 million in March 2012 and an additional $5.0 million in August 2012.  Interest accrued under the Lighthouse Loan Agreement at an annual rate of 8.25%.  We repaid in full our outstanding indebtedness under the Lighthouse Loan Agreement and terminated the agreement on January 8, 2015. There were no prepayment charges associated with the early repayment of the loan.

Plan of Operations and Future Funding Requirements

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical trial costs, contract manufacturing services, third-party clinical research and development services, laboratory and related supplies, legal and other regulatory expenses and general overhead costs, as well as debt service requirements.

We believe our cash and cash equivalents of approximately $47.2 million at June 30, 2016, are sufficient to fund our planned operations into the second quarter of 2017 and that we have the ability to reduce or defer operating expenses as may be needed to fund our operations into the third quarter of 2017.  We will need to raise additional capital to continue to fund our long-term operations.  Should our operating plan change further, or prove to be inaccurate, then we will be required to reassess our operating capital needs.  However, there can be no assurance that we will have the cash resources to fund our operating plan or that additional funding will be available on terms acceptable to us, or at all.

 

17


Our future capital requirements will depend on many factors, including:

 

·

the number and development requirements of the NDCs we pursue;

 

·

the scope, progress, timing, results and costs of researching and developing our NDCs, and conducting preclinical studies and clinical trials;

 

·

the costs, timing and outcome of regulatory review of our NDCs;

 

·

the cost and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our NDCs for which we receive marketing approval;

 

·

the revenue, if any, received from commercial sales of any NDCs for which we receive marketing approval;

 

·

our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

 

·

the scope, costs and timing of the manufacture, supply and distribution of our drug candidates for preclinical studies and clinical trials;

 

·

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

 

·

the extent to which we acquire or in-license other medicines and technology;

 

·

our headcount growth and associated costs; and

 

·

the costs of operating as a public company.

Identifying potential NDCs and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our NDCs, if approved, may not achieve commercial success. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and revenue from collaboration arrangements. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams 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 when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves.

Cash Flows

The following table sets forth the primary sources and uses of cash for each period set forth below (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Net cash used in operating activities

 

$

(24,501

)

 

$

(15,738

)

Net cash used in investing activities

 

 

(355

)

 

 

(337

)

Net cash (used in) provided by financing activities

 

 

(3,859

)

 

 

50,377

 

Net (decrease) increase in cash and cash equivalents

 

$

(28,715

)

 

$

34,302

 

 

Net Cash Used in Operating Activities

The net use of cash in each period resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.

Net cash used in operating activities was $24.5 million for the six months ended June 30, 2016, compared to $15.7 million for the six months ended June 30, 2015, an increase of $8.8 million, or 56%. The increase in net cash used in operating activities resulted primarily from an increase in operating expenses of $6.1 million, an increase in cash paid for interest of $0.3 million and components of working capital of $3.1 million, partially offset by an increase in stock compensation expense of $0.6 million and an increase in deferred rent of $0.1 million.

 

18


Net Cash Used in Investing Activities

Net cash used in investing activities was $0.4 million for the six months ended June 30, 2016, compared to $0.3 million for the six months ended June 30, 2015. For the six months ended June 30, 2016, cash used in investing activities included $0.5 million for purchases of property and equipment, primarily lab equipment, partially offset by a $0.1 million decrease in restricted cash used to collateralize a stand-by letter of credit issued as a security deposit on our former facility lease.  Cash used in investing activities for the six months ended June 30, 2015, included $0.1 million for purchases of property and equipment and a $0.2 million increase in restricted cash used to collateralize a stand-by letter of credit issued as a security deposit on our new facility lease.  

Net Cash Used in (Provided by) Financing Activities

Net cash used in financing activities was $3.9 million for the six months ended June 30, 2016, compared to net cash provided by financing activities of $50.4 million for the six months ended June 30, 2015. Net cash used in financing activities for the six months ended June 30, 2016 was due to the principal payments of $3.9 million under the Hercules Loan Agreement.  Net cash provided by financing activities for the six months ended June 30, 2015, was primarily due to net proceeds of $37.2 million from our Secondary Offering, proceeds of $15.0 million from our initial borrowing under the Hercules Loan Agreement, proceeds of $1.0 million from the sale of our common stock in a private placement to Hercules and proceeds of $1.5 million from the exercise of stock options.  Net cash provided by financing activities for the six months ended June 30, 2015, was reduced by $3.9 million paid to repay in full the Lighthouse Loan Agreement and cash paid for debt issuance costs of $0.4 million.

Contractual Obligations and Contingent Liabilities

As of June 30, 2016, there were no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board, or FASB issued Accounting Standards Update 2016-09, “Improvements to Employee Share-Based Payment Accounting” or, ASU 2016-09. ASU 2016-09 is intended to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases” or, ASU 2016-02, which provides new accounting guidance on leases.  ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. We are currently evaluating the effect this standard will have on our consolidated financial statements and related disclosures.

In August 2014, the FASB issued Accounting Standards Update 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern”, or ASU 2014-15. ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on our consolidated financial statements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to changes in interest rates. As of June 30, 2016, we had cash and cash equivalents, including restricted cash, of approximately $47.4 million, consisting primarily of investments in money market funds and certificates of deposit. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates, particularly because our investments are in cash and cash equivalents. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material

 

19


effect on the fair market value of our investment portfolio. As of June 30 , 2016 , we were also subject to in terest rate risk from our indebtedness under the Hercules Loan Agreement that accrues interest at a floating per annum rate equal to the greater of (i) 7.30% or (ii) the sum of 7.30% plus the prime rate minus 5.75%.    A 10% increase in interest rates at Jun e 30 , 2016 , would not have a material effect on our annual interest expense.

Item 4.

Controls and Procedures.

Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quart erly Report on Form 10-Q.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are desi gned to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumula ted and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2016.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 


 

20


PART II. OTHER INFORMATION

Item 1A.

Risk Factors.

Our business is subject to numerous risks. The following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Quarterly Report on Form 10-Q and other filings with the Securities and Exchange Commission, or SEC, press releases, communications with investors and oral statements. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Risks Related to Our Financial Position and Need for Additional Capital

We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

We will need to raise additional capital to fund any Phase 3 clinical trial of CRLX101 or other clinical trials of CRLX301.  We also expect that our expenses will increase in connection with our ongoing activities, particularly as we advance the clinical development of CRLX101 and CRLX301 and continue research and development and initiate additional clinical trials of, and seek regulatory approval for, these and other future product candidates. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In particular, the costs that may be required for the manufacture of any product candidate that receives marketing approval may be substantial, and manufacturing our nanoparticle-drug conjugates, or NDCs, for commercial sale will require expensive and specialized facilities, processes and materials. Furthermore, relative to previous years when we operated as a private company, we expect to incur significant additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding to advance the development of our product candidates and to fund our continuing operations. We may be unable to raise capital when needed or on attractive terms, and if so we could be forced to delay, reduce or eliminate our ongoing research and development programs, including CRLX101 and CRLX301, or any future commercialization efforts.

We plan to use our current cash and cash equivalents to fund our ongoing research and development efforts. We will be required to expend significant funds in order to advance development of CRLX101, CRLX301 and our other potential product candidates. Our existing cash and cash equivalents will not be sufficient to fund all of the efforts that we plan to undertake, such as additional randomized trials of CRLX101 or CRLX301. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations or licensing arrangements or other sources. Adequate and additional funding may not be available to us on acceptable terms or at all.

On January 8, 2015 we entered into a loan and security agreement, which we refer to as the Hercules Loan Agreement, with Hercules Technology Growth Capital, Inc., or Hercules, and drew the first tranche of $15.0 million under the Hercules Loan Agreement. On November 24, 2015, we drew a second tranche of $6.0 million under the Hercules Loan Agreement. We elected not to commence a randomized Phase 2 clinical trial of CRLX101 in combination with chemoradiotherapy on or prior to December 15, 2015, which was a condition of obtaining an additional tranche in an amount of up to $5.0 million. As a result, we are no longer eligible to borrow this amount under the Hercules Loan Agreement.

If we elect to obtain any additional debt financing, our ability to do so may be limited by covenants we have made under the Hercules Loan Agreement and our pledge to Hercules of substantially all of our assets, other than our intellectual property, as collateral. We have also granted Hercules a negative pledge with respect to our intellectual property, which, among other things, prohibits us from selling, transferring, assigning, mortgaging, pledging, leasing, granting a security interest in or otherwise encumbering our intellectual property. This negative pledge could further limit our ability to obtain additional debt financing. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

On April 10, 2015 we closed an underwritten public offering, or the Secondary Offering, of 6,716,000 shares of common stock, including 876,000 shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $6.00 per share. The gross proceeds to us from the Secondary Offering were approximately $40.3 million, before deducting underwriting discounts and commissions and offering expenses payable by us.

 

21


We believe our cash and cash equivalents of approximately $47.2 million at June 30, 20 16, are sufficient to fund our planned operations into the second quarter of 2017 and that we have the ability to reduce or defer operating expenses as may be needed to fund our operations into the third quarter of 2017.  We will need to raise additional c apital to continue to fund our long-term operations.  Should our operating plan change further, or prove to be inaccurate, then we will be required to reassess our operating capital needs.  However, there can be no assurance that we will have the cash reso urces to fund our operating plan or that additional funding will be available on terms acceptable to us, or at all.

Our future capital requirements will depend on many factors, including:

 

·

the number and development requirements of the product candidates we pursue;

 

·

the scope, progress, timing, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;

 

·

the costs, timing and outcome of regulatory review of our product candidates;

 

·

the cost and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;

 

·

the revenue, if any, received from commercial sales of any product candidates for which we receive marketing approval;

 

·

our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

 

·

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

 

·

the extent to which we acquire or in-license other medicines and technology;

 

·

our headcount growth and associated costs; and

 

·

the costs of operating as a public company.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, license and development agreements with collaboration partners or other sources. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, additional debt financing would result in increased fixed payment obligations.

If we raise funds through collaborations, strategic partnerships 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 product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our existing and any future indebtedness could adversely affect our ability to operate our business.

On January 8, 2015, we entered into the Hercules Loan Agreement and drew the first tranche of $15.0 million. We used $3.6 million of the proceeds from our draw under the Hercules Loan Agreement to repay in full our outstanding indebtedness under our loan and security agreement with Lighthouse Capital Partners VI, L.P.  On November 24, 2015 we drew an additional tranche of $6.0

 

22


million under the Hercules Loan Agreement. As of June 30 , 2016, we had approximately $ 18