Cerulean Pharma Inc.
Cerulean Pharma Inc. (Form: 10-Q, Received: 11/03/2016 16:11:53)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from                      to                      .

Commission file number 001-36395

 

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       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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       No  

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

 

Large accelerated filer

 

 

 

  

Accelerated filer

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

(Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

Number of shares of the registrant’s Common Stock, $ 0.0001 par value, outstanding on October 31, 2016: 27,435,680

 

 

 


CERULEAN PHARMA INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

 

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

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

1

 

 

 

 

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

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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

10

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4.

Controls and Procedures

21

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

22

 

 

 

Item 5.

Other Information

57

 

 

 

Item 6.

Exhibits

58

 

 

 

 

Signatures

59

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

CERULEAN PHARMA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands except share data and par value)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,058

 

 

$

75,908

 

Accounts receivable, prepaid expenses, and other current assets

 

 

1,146

 

 

 

1,394

 

Total current assets

 

 

39,204

 

 

 

77,302

 

Property and equipment, net

 

 

699

 

 

 

576

 

Other assets

 

 

230

 

 

 

347

 

Total

 

$

40,133

 

 

$

78,225

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of loan payable

 

$

8,192

 

 

$

7,652

 

Accounts payable

 

 

1,778

 

 

 

2,226

 

Accrued expenses

 

 

5,919

 

 

 

6,459

 

Total current liabilities

 

 

15,889

 

 

 

16,337

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Loan payable, net of current portion

 

 

6,550

 

 

 

12,672

 

Other long-term liabilities

 

 

1,075

 

 

 

473

 

Total long-term liabilities

 

 

7,625

 

 

 

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,

     27,384,492 and 27,346,780 shares issued and outstanding at

     September 30, 2016 and December 31, 2015, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

212,351

 

 

 

210,115

 

Accumulated deficit

 

 

(195,735

)

 

 

(161,375

)

Total stockholders’ equity

 

 

16,619

 

 

 

48,743

 

Total

 

$

40,133

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

-

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,089

 

 

 

7,092

 

 

 

24,381

 

 

 

18,791

 

General and administrative

 

 

2,374

 

 

 

2,954

 

 

 

8,265

 

 

 

8,352

 

Total operating expenses

 

 

9,463

 

 

 

10,046

 

 

 

32,646

 

 

 

27,143

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

25

 

 

 

4

 

 

 

66

 

 

 

8

 

Interest expense

 

 

(521

)

 

 

(509

)

 

 

(1,781

)

 

 

(1,743

)

Other income (expense)

 

 

 

 

 

 

 

 

1

 

 

 

(8

)

Total other expense, net

 

 

(496

)

 

 

(505

)

 

 

(1,714

)

 

 

(1,743

)

Net loss attributable to common stockholders

 

$

(9,959

)

 

$

(10,551

)

 

$

(34,360

)

 

$

(28,886

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.36

)

 

$

(0.39

)

 

$

(1.26

)

 

$

(1.17

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

27,383,376

 

 

 

27,307,103

 

 

 

27,370,044

 

 

 

24,785,833

 

See notes to unaudited condensed consolidated financial statements.

 


 

2


CERULEAN PHARMA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

 

2016

 

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(34,360

)

 

$

(28,886

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,158

 

 

 

1,731

 

Noncash rent expense

 

 

143

 

 

 

(24

)

Depreciation and amortization

 

 

195

 

 

 

129

 

Amortization of debt discount and deferred financing costs

 

 

335

 

 

 

1,020

 

Loss on disposal of property and equipment

 

 

4

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other current assets

 

 

248

 

 

 

185

 

Accounts payable

 

 

(271

)

 

 

904

 

Accrued expenses

 

 

(113

)

 

 

1,236

 

Net cash used in operating activities

 

 

(31,661

)

 

 

(23,705

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(499

)

 

 

(141

)

Decrease (increase) in restricted cash

 

 

117

 

 

 

(230

)

Net cash used in investing activities

 

 

(382

)

 

 

(371

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of common stock

 

 

78

 

 

 

2,628

 

Proceeds from public stock offering, net of issuance costs

 

 

 

 

 

37,185

 

Proceeds from issuance of loans payable

 

 

 

 

 

15,000

 

Payments on loans payable

 

 

(5,885

)

 

 

(3,921

)

Cash paid for debt issuance costs

 

 

 

 

 

(359

)

Net cash (used in) provided by financing activities

 

 

(5,807

)

 

 

50,533

 

Net (decrease) increase in cash and cash equivalents

 

 

(37,850

)

 

 

26,457

 

Cash and cash equivalents — Beginning of period

 

 

75,908

 

 

 

51,174

 

Cash and cash equivalents — End of period

 

$

38,058

 

 

$

77,631

 

Supplemental cash flow information — Interest paid

 

$

1,026

 

 

$

723

 

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 September 30, 2016 and the results of its operations for the three and nine months ended September 30, 2016 and 2015 and cash flows for the nine months ended September 30, 2016 and 2015. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 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 $195.7 million at September 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. Following a reduction in force initiated in August 2016, the Company believes its cash and cash equivalents of approximately $38.1 million at September 30, 2016, together with $1.0 million in proceeds from an initial sale of common stock to Aspire Capital Fund LLC in October 2016, and a $5.0 million upfront payment under the Company’s collaboration agreement with Novartis Institutes for BioMedical Research, Inc. received in October 2016 (see Note 8, “Subsequent Events”), are sufficient to fund its planned operations for at least twelve months following the date of this report. 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 August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 230)” (“ASU 2016-15”). ASU 2016-15 makes cash payments for debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is evaluating the impact of the new guidance.

In March 2016, the FASB issued Accounting Standards Update 2016-09, “Compensation – Stock Compensation (Topic 718)” (“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 (Topic 842)” (“ASU 2016-02”), which provides new accounting guidance on leases.  ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves

 

4


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 c urrently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued Accounting Standards Update 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40):  Disclosure of Uncertainties About an Entity’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 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 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 September 30,

 

 

 

2016

 

 

2015

 

Options to purchase common stock

 

 

4,554,153

 

 

 

2,521,772

 

Warrants to purchase common stock

 

 

300,564

 

 

 

300,564

 

4.

ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

 

As of September 30,

2016

 

 

As of December 31,

2015

 

Accrued clinical trial costs

 

$

2,834

 

 

$

2,631

 

Accrued contract manufacturing expenses

 

 

801

 

 

 

945

 

Accrued compensation and benefits

 

 

1,319

 

 

 

1,864

 

Accrued interest

 

 

92

 

 

 

136

 

Accrued legal fees

 

 

301

 

 

 

130

 

Other accrued expenses

 

 

572

 

 

 

753

 

Total accrued expenses

 

$

5,919

 

 

$

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 September 30, 2016 and December 31, 2015, the Company had $15.1 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,

 

5


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 e nd 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 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 nine months ended September 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 at January 1, 2016

 

 

3,454,926

 

 

$

5.39

 

 

 

8.9

 

 

$

 

Granted

 

 

1,570,070

 

 

$

1.88

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(470,843

)

 

$

4.27

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016

 

 

4,554,153

 

 

$

4.29

 

 

 

8.4

 

 

$

1,620

 

Options exercisable at September 30, 2016

 

 

1,453,813

 

 

$

5.66

 

 

 

6.8

 

 

$

135

 

Options vested and expected to vest at September 30, 2016

 

 

4,407,931

 

 

$

4.31

 

 

 

8.4

 

 

$

1,578

 

 

The weighted-average per share grant date fair value of options granted during the nine months ended September 30, 2016 and 2015 was $1.09 and $4.22, 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

 

6


c ontractual 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 $685,000 and $773,000 for the three months ended September 30, 2016 and 2015, respectively, and $2.1 million and $1.6 million for the nine months ended September 30, 2016 and 2015, respectively. The assumptions used in the Black-Scholes option-pricing model for stock options granted to employees and to directors in respect of board services during the three and nine months ended September 30, 2016 and 2015 are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

2016

 

2015

Expected life

 

5.4-6.0 years

 

6.0-6.1 years

 

5.4-6.1 years

 

5.4-6.1 years

Risk-free interest rate

 

1.2%-1.3%

 

1.7%

 

1.2%-1.9%

 

1.5%-2.0%

Expected volatility

 

68%

 

61%

 

61%-68%

 

61%-63%

Expected dividend rate

 

—%

 

—%

 

—%

 

—%

The Company recorded stock-based compensation expense related to nonemployee awards of $11,000 and $63,000 for the three months ended September 30, 2016 and 2015, respectively and $63,000 and $135,000 for the nine months ended September 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 nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

2016

 

2015

Expected life

 

5.0-6.0 years

 

10 years

 

5.0-6.0 years

 

10 years

Risk-free interest rate

 

1.1%-1.3%

 

2.1%

 

1.1%-1.3%

 

2.0%-2.1%

Expected volatility

 

68%

 

59%

 

68%

 

60%

Expected dividend rate

 

—%

 

—%

 

—%

 

—%

During the nine months ended September 30, 2016 and 2015, the Company granted nonemployee stock options to purchase 135,000 and 192,000 shares, respectively, 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 nine months ended September 30, 2016 was $1.09 per share and $0.61 per share, respectively, and for the nine months ended September 30, 2015 was $5.28 per share and $2.33 per share, respectively. On September 4, 2015, nonemployee stock options to purchase 90,000 shares of the Company’s common stock were converted to employee stock options upon the appointment of the Company’s Chief Medical Officer who had been serving as a consultant to the Company until his appointment.  The exercise price and the fair value of these stock options is $4.71 per share and $2.71 per share, respectively.

 

Employee Stock Purchase Plan

 

7


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 nine months ended September 30 , 2016, 3 7, 712 shares of common stock were purchased under the ESPP at a weighted average price of $2. 07 per share.   The stock-based compensation expense related to the ESPP f or the three and nine months ended September 30 , 2016 was $ 5 ,000 and $ 29 ,000, respectively , and was $13,000 for each of the three and nine months ended September 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.

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 observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A summary of the financial assets and liabilities that are measured on a recurring basis at fair value as of September 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)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

37,139

 

 

$

 

 

$

37,139

 

 

$

 

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.

 

8


No transfers between levels occurred during the periods presented.

8 .

RESTRUCTURING

In August 2016, the Company announced its plan to reduce its workforce by approximately 48%.  This workforce reduction is designed to reduce operating expenses while the company refocuses its clinical strategy for CRLX101.

The Company recorded approximately $300,000 of total pre-tax charges recorded to research and development expense in the quarter ended September 30, 2016 in connection with the restructuring. Of this total, $274,000 was attributed to contractual termination benefits which were provided for once it was determined that such costs were both probable and estimable in accordance with the provisions of FASB Accounting Standard Codification 712, “Compensation—Nonretirement Postemployment Benefits”, and $26,000 was charged for discretionary termination benefits upon notification of the affected employees in accordance with ASC 420, “Exit or Disposal Cost Obligations”.  Substantially all of the restructuring costs associated with the workforce reduction are expected to be paid by March 31, 2017.

9 .

SUBSEQUENT EVENTS

On October 14, 2016, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of the Company’s common stock over a term of 24 months from the execution of the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 700,000 shares of the Company’s common stock. Immediately following the execution of the Purchase Agreement, the Company made an initial sale to Aspire Capital under the Purchase Agreement of 800,000 shares of common stock at a price of $1.25 per share, for proceeds of $1.0 million.

On October 18, 2016, the Company entered into a research collaboration agreement (the “Collaboration Agreement”) with Novartis Institutes for BioMedical Research, Inc. (“Novartis”).  Under the Collaboration Agreement, the Company will create NDC candidates using its Dynamic Tumor Targeting Platform and Novartis-selected active pharmaceutical ingredients, and Novartis will be responsible for the development and commercialization of NDC products resulting from the collaborative research efforts. The initial research term of the Collaboration Agreement is two years which may be extended for up to two additional one-year terms. The Company received a $5.0 million upfront payment under the Collaboration Agreement, and is entitled to receive funding from Novartis for up to five full-time employees of the Company to be engaged in activities under the collaboration during the research term. The Company may also receive additional research, development, regulatory and sales milestone payments, as well as royalties on net sales of any NDC product commercialized by Novartis.

 

 

 

 

 

9


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 and lead clinical candidate, CRLX101, is in Phase 2 clinical development in patients with platinum-resistant ovarian cancer and in other earlier stage clinical trials in multiple tumor types.  In July 2016, the United States Food and Drug Administration, or 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.

CRLX101 is an NDC with a camptothecin payload.  Camptothecin is a potent topoisomerase 1, or topo 1, inhibitor that was too toxic to develop in the clinic; however, we believe that CRLX101 reduces the toxicities associated with this highly potent agent, while selectively accumulating the payload in tumors.  CRLX101 inhibits topo 1, which is involved in cellular replication, causing damage to a cancer cell’s DNA resulting in the death of the cancer cell. We are focusing the clinical development of CRLX101 on cancer indications in which we expect the durable inhibition of topo 1, in combination with other cancer treatments, will lead to differentiated efficacy.

We are pursuing development of CRLX101 in combination with anti-cancer therapies in multiple ongoing clinical trials.  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 35 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.  In July 2016 we received fast track designation for CRLX101 in combination with paclitaxel for the treatment of platinum-resistant ovarian carcinoma, fallopian tube or primary peritoneal cancer, based in part on the emerging data from this Phase 1b/2 trial.  We expect to report further data from this Phase 1b/2 clinical trial in 2017.

We are 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

 

10


CRLX101, create persistent single-stra nd 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 c ells and spare healthy tissue.   Preclinical data generated by AstraZeneca AB, or AstraZeneca, with a LYNPARZA-CRLX101 combination demonstrate d 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 combinat ion in human clinical trials.

In May 2016, 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 2 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.  We expect to report further data from this Phase 1/2 clinical trial in 2017.

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, which includes an arm exploring weekly CRLX101 in combination with a chemotherapy regimen known as FOLFOX (comprised of leucovorin calcium + fluorouracil + oxaliplatin) in solid tumor patients.

In August 2016 we announced top-line results from our Phase 2, randomized, multi-center clinical trial of CRLX101 in combination with Avastin in the treatment of patients with advanced renal cell carcinoma, or RCC. We refer to this trial as the RCC Trial.  The RCC Trial was conducted at 43 sites in the United States and South Korea, and enrolled 115 patients with RCC who progressed through two or three prior lines of therapy. Patients were randomized to receive CRLX101 in combination with Avastin or investigator’s choice standard of care, or SOC, therapy. The primary endpoint was progression free survival, or PFS, in the clear cell population assessed by independent radiological review. Secondary endpoints included overall response rate, duration of response and overall survival.  The study demonstrated no statistically significant difference in median PFS and objective response rate for the CRLX101 and Avastin combination compared to SOC. The CRLX101 and Avastin combination appeared to be safe and well-tolerated and the safety and tolerability profile of the combination was consistent with that observed in previous studies. We expect to submit the full data set from the trial for presentation at an upcoming medical conference.  Based on these top-line results, we submitted a letter to the FDA voluntarily surrendering the Fast Track Designation in metastatic RCC we received in April 2015.  We are no longer developing CRLX101 in this indication.

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 CRLX301 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.

Our Dynamic Tumor Targeting Platform has the potential to create additional NDCs for development by us or in collaboration with our partners.  For example, in October 2016 we announced a collaboration with Novartis Institutes for BioMedical Research, Inc., or Novartis, pursuant to which we will create NDC candidates using our Dynamic Tumor Targeting Platform and Novartis-selected active pharmaceutical ingredients, and Novartis will be responsible for the development and commercialization of NDC product candidates resulting from our collaborative research efforts.  The initial research term of the Collaboration Agreement is two years which may be extended for up to two additional one-year terms. The Company received a $5.0 million upfront payment under the Collaboration Agreement, and is entitled to receive funding from Novartis for up to five full-time employees of the Company to be engaged in activities under the collaboration during the research term.  The Company may also receive additional research, development, regulatory and sales milestone payments, as well as royalties on net sales of any NDC product commercialized by Novartis.

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 September 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

 

11


April 2015 in an underwritten public offering, or Secondary Offering, $17.3 million in proceeds from our sale o f 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.   In October 2016 we entered into a common stock purchase agreemen t with Aspire Capital Fund, LLC , or Aspire, for a $20.0 million firm commitment at-the-market equity facility , which we refer to as the ATM .    In connection with entry into the ATM , Aspire made an initial $1 .0 million investment . $19.0 million remains avail able under the facility , upon the terms and subject to the conditions and limitations set forth therein .   

In August 2016, we announced the reduction of our workforce under a plan that we expect will be substantially completed by the end of 2016. This workforce reduction is designed to reduce operating expenses while we refocus our clinical strategy for CRLX101.   We have never been profitable and have incurred significant operating losses since our incorporation. As of September 30, 2016, we had an accumulated deficit of $195.7 million. We incurred net losses of approximately $34.4 million and $28.9 million for the nine months ended September 30, 2016 and 2015, respectively.

We expect to continue to incur significant expenses and operating losses for the foreseeable future, as we advance our product candidates through 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.

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.

 

12


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 expect our research and development expenses will decline in the near future as we focus our resource s to support ongoing early stage clinical trials of CRLX101 and CRLX301 and our strategic collaboration with Novartis .  Additionally, our collaboration with Novartis requires Novartis to provide us a certain amount of reimbursement for research expenses, further decreasing our overall expected future expenses needed to support our research efforts.

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 nine months ended September 30, 2016 and 2015 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

CRLX101

 

$

5,290

 

 

$

5,114

 

 

$

17,423

 

 

$

13,486

 

CRLX301

 

 

979

 

 

 

1,075

 

 

 

4,196

 

 

 

2,790

 

Dynamic Tumor Targeting Platform

 

 

514

 

 

 

565

 

 

 

1,879

 

 

 

1,500

 

Overhead

 

 

306

 

 

 

338

 

 

 

883

 

 

 

1,015

 

Total research and development expense

 

$

7,089

 

 

$

7,092

 

 

$

24,381

 

 

$

18,791

 

The following summarizes our research and development programs.

CRLX101

Our lead product candidate, CRLX101, is an NDC in Phase 2 clinical development in our lead indication, platinum-resistant 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 GOG.  A Phase 2 single-arm investigator sponsored trial, or IST, of CRLX101 as monotherapy and in combination with Avastin in patients with relapsed ovarian cancer is also ongoing.  This IST is being conducted by Massachusetts General Hospital and affiliated Harvard University teaching hospitals.  

Additional trials involving CRLX101 are also ongoing, including a Phase 1/2 clinical trial sponsored by the NCI, evaluating the combination of CRLX101 and LYNPARZA™ (olaparib) in patients with advanced solid tumors. CRLX101 is also being evaluated in a Phase 1b company-sponsored trial exploring a dose-intensive schedule for CRLX101 in patients with solid tumors, which includes an arm exploring weekly CRLX101 in combination with a chemotherapy regimen known as FOLFOX in solid tumor patients.

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.  

In August 2016 we announced top-line results from the RCC Trial which is 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.  The results showed that the study failed to meet its primary or secondary endpoints.  We expect to continue to incur expenses associated with the RCC Trial, at least through the end of 2016, including CRO fees and expenses associated with remaining patients who continue on study.  

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.

 

13


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 CRLX301 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 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 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 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 decline in the near future as we focus on our strategic collaboration with Novartis, and as Novartis provides reimbursement for a certain amount of our research personnel. 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 our collaboration with Novartis and preclinical studies of any such NDC.

The successful development of any of our NDCs or our partners’ 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 NDC or if, when or to what extent we will generate revenues from any commercialization and sale of any of NDCs that obtain marketing approval. We or our partners may never succeed in achieving regulatory approval for any NDCs. The duration, costs and timing of development of NDCs will depend on a variety of factors, including:

 

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

 

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

 

the cost and timing 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.

 

14


regulatory authority were to require us or a partner to conduct clinical trials beyond those currently anticipat e d to be required for the marketing authorization of an NDC, or if significant delays in enrollment in any clinical trial occur , significant additional financial resources and time may be necessary 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 NDC either on our own or as part of a collaboration. 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, agreements with collaborators, and 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 any 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 expenses include patent filing, patent prosecution, professional fees for legal, insurance, consulting, information technology, auditing and tax services and facility costs not otherwise included in research and development expenses.

We expect that our general and administrative expenses will decrease in the near future as a result of our reduction in force and other cost control measures.  

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 September 30, 2016 and 2015 (Unaudited)

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

 

 

 

Three Months Ended September 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

Revenue

 

$

 

 

$

 

 

$

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,089

 

 

 

7,092

 

 

 

(3

)

 

 

(0

)%

General and administrative

 

 

2,374

 

 

 

2,954

 

 

 

(580

)

 

 

(20

)%

Loss from operations

 

 

(9,463

)

 

 

(10,046

)

 

 

583

 

 

 

(6

)%

Total other expense, net

 

 

(496

)

 

 

(505

)

 

 

9

 

 

 

(2

)%

Net loss

 

$

(9,959

)

 

$

(10,551

)

 

$

592

 

 

 

(6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development. Research and development expense was $7.1 million for each of the three months ended September 30, 2016 and 2015.  The following table summarizes our research and development expense by program for the three months ended September 30, 2016 and 2015, together with the change in spending by program in dollars and as a percentage (in thousands, except percentages):

 

15


 

 

 

Three Months Ended September 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

CRLX101

 

$

5,290

 

 

$

5,114

 

 

$

176

 

 

 

3

%

CRLX301

 

 

979

 

 

 

1,075

 

 

 

(96

)

 

 

-9

%

Dynamic Tumor Targeting Platform

 

 

514

 

 

 

565

 

 

 

(51

)

 

 

-9

%

Overhead

 

 

306

 

 

 

338

 

 

 

(32

)

 

 

-9

%

Total research and development expense

 

$

7,089

 

 

$

7,092

 

 

$

(3

)

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2016, CRLX101 program expenses increased by $0.2 million, or 3%, to $5.3 million compared to $5.1 million for the three months ended September 30, 2015.  The increase in CRLX101 program expenses was primarily attributable to an increase of $0.2 million in salary and benefits expenses and an increase of $0.2 million in travel and other operating costs reflecting increased headcount to support the CRLX101 program and the CRLX101 clinical trials.  These increases were partially offset by a decrease of $0.2 million in chemistry, manufacturing, and controls, or CMC, external expenses.  

For the three months ended September 30, 2016, CRLX301 program expenses decreased $0.1 million, or 9%, to $1.0 million compared to $1.1 million for the three months ended September 30, 2015.  The decrease in CRLX301 program expense was attributable to a decrease in salary and benefits expenses.   Other CRLX301 program expenses including clinical trial costs and CMC costs remained relatively unchanged for the three months ended September 30, 2016 compared to the same period last year.

Expenses associated with our Dynamic Tumor Targeting Platform were $0.5 million for the three months ended September 30, 2016, a decrease of $0.1 million, or 9%, compared to $0.6 million for the three months ended September 30, 2015.  The decrease was primarily due to decreases in consulting and external lab costs. Overhead costs decreased $32,000, or 9%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015.  The decrease was primarily attributable to a decrease in general operating costs.

General and administrative. General and administrative expense for the three months ended September 30, 2016, was $2.4 million compared to $3.0 million for the three months ended September 30, 2015, a decrease of $0.6 million, or 20%. The decrease in general and administrative costs was primarily attributable to a decrease in salary and benefits expenses of $0.3 million and a decrease in other general and administrative costs of $0.3 million reflecting a reduction in head count and general cost cutting measures taken during the quarter.     

Other expense, net. Other expense, net was $0.5 million for each of the three months ended September 30, 2016 and 2015.  For the three months ended September 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 Nine Months Ended September 30, 2016 and 2015 (Unaudited)

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

 

 

 

Nine Months Ended September 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

Revenue

 

$

 

 

$

 

 

$

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

24,381

 

 

 

18,791

 

 

 

5,590

 

 

 

30

%

General and administrative

 

 

8,265

 

 

 

8,352

 

 

 

(87

)

 

 

(1

)%

Loss from operations

 

 

(32,646

)

 

 

(27,143

)

 

 

(5,503

)

 

 

20

%

Total other expense, net

 

 

(1,714

)

 

 

(1,743

)

 

 

29

 

 

 

(2

)%

Net loss

 

$

(34,360

)

 

$

(28,886

)

 

$

(5,474

)

 

 

19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development. Research and development expense for the nine months ended September 30, 2016, was $24.4 million compared to $18.8 million for the nine months ended September 30, 2015, an increase of $5.6 million, or 30%.  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 nine months ended September 30, 2016 and 2015, together with the change in spending by program in dollars and as a percentage (in thousands, except percentages):

 

16


 

 

 

Nine Months Ended September 30,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Dollar

 

 

%

 

CRLX101

 

$

17,423

 

 

$

13,486

 

 

$

3,937

 

 

 

29

%

CRLX301

 

 

4,196

 

 

 

2,790

 

 

 

1,406

 

 

 

50

%

Dynamic Tumor Targeting Platform

 

 

1,879

 

 

 

1,500

 

 

 

379

 

 

 

25

%

Overhead

 

 

883

 

 

 

1,015

 

 

 

(132

)

 

 

(13

)%

Total research and development expense

 

$

24,381

 

 

$

18,791

 

 

$

5,590

 

 

 

30

%

For the nine months ended September 30, 2016, CRLX101 program expenses increased by $3.9 million, or 29%, to $17.4 million compared to $13.5 million for the nine months ended September 30, 2015.  The increase in CRLX101 program expenses was primarily attributable to CMC, for which costs increased $3.0 million, reflecting increased production and activity to support current and future clinical development of CRLX101.  Salary and benefits expenses also increased $0.8 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 nine months ended September 30, 2016, CRLX301 program expenses increased $1.4 million, or 50%, to $4.2 million compared to $2.8 million for the nine months ended September 30, 2015.  The increase in CRLX301 program expense was attributable to an increase of $0.6 million in salary and benefits expenses reflecting increased headcount to support the CRLX301 program and the CRLX301 clinical trials, an increase of $0.5 million in clinical trial expenses, consisting primarily of increases in CRO and laboratory costs, and an increase of $0.3 million in CMC costs to support current and future clinical development of CRLX301.

Expenses associated with our Dynamic Tumor Targeting Platform were $1.9 million for the nine months ended September 30, 2016, an increase of $0.4 million, or 25%, compared to $1.5 million for the nine months ended September 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 13%, to $0.9 million for the nine months ended September 30, 2016 compared to $1.0 million for the nine months ended September 30, 2015.  The decrease was primarily attributable to a decrease in facility costs.

General and administrative. General and administrative expense for the nine months ended September 30, 2016, was $8.3 million compared to $8.4 million for the nine months ended September 30, 2015, a decrease of $0.1 million, or 1%. The decrease in general and administrative costs was primarily due to reduced headcount and cost control measures taken in the third quarter.  For the nine months ended September 30, 2016 other general and administrative costs remained relatively unchanged compared to the same period last year.

Other expense, net. Other expense, net, was $1.7 million for each of the nine months ended September 30, 2016 and 2015.  For the nine months ended September 30, 2016 and 2015, other expense, net, was primarily interest expense associated with the Hercules Loan Agreement, including $0.4 million in each period for the amortization of debt discount and deferred financing costs.  For the nine months ended September 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 September 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 September 30, 2016, we had cash and cash equivalents of approximately $38.1 million. In October 2016 we entered into the $20 million firm commitment at-the-market equity facility with Aspire.  Upon entering into the ATM, Aspire made and initial $1.0 million investment.  $19.0 million remains available under the facility, upon the terms and subject to the conditions and limitations set forth therein.  Also in October 2016, we entered into the Collaboration Agreement with Novartis, pursuant to which Novartis paid us $5.0 million upfront and is obligated to fund up to five of our full-time employees engaged in activities under the collaboration during the research term.

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.

 

17


The Hercules Loan Agreement provide d f or 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 electe d not to commence a randomized P hase 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 un der 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.

Following a reduction in force initiated in August 2016, we believe our cash and cash equivalents of approximately $38.1 million at September 30, 2016, together with the $1.0 million in proceeds from the initial sale of common stock to Aspire in October 2016, and the $5.0 million upfront payment under our collaboration agreement with Novartis received in October 2016 are sufficient to fund our planned operations for at least twelve months following the date of this report.  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.

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

 

the number and development requirements of the NDCs we or our partners pursue;

 

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

 

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

 

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

 

the revenue, if any, received from commercial sales of any NDCs for which we or our partners 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 NDCs for preclinical studies and clinical trials;

 

18


 

the costs and timing of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending 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):

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Net cash used in operating activities

 

$

(31,661

)

 

$

(23,705

)

Net cash used in investing activities

 

 

(382

)

 

 

(371

)

Net cash (used in) provided by financing activities

 

 

(5,807

)

 

 

50,533

 

Net (decrease) increase in cash and cash equivalents

 

$

(37,850

)

 

$

26,457

 

 

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 $31.7 million for the nine months ended September 30, 2016, compared to $23.7 million for the nine months ended September 30, 2015, an increase of $8.0 million, or 33.6%. The increase in net cash used in operating activities resulted primarily from an increase in operating expenses of $5.5 million, an increase in cash paid for interest of $0.3 million and components of working capital of $2.8 million, partially offset by an increase in stock compensation expense of $0.4 million and an increase in deferred rent of $0.2 million.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0.4 million for each of the nine months ended September 30, 2016 and 2015. For the nine months ended September 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 nine months ended September 30, 2015, included $0.2 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 $5.8 million for the nine months ended September 30, 2016, compared to net cash provided by financing activities of $50.5 million for the nine months ended September 30, 2015. Net cash used in financing activities for the nine months ended September 30, 2016 was due to the principal payments of $5.9 million under the Hercules Loan Agreement.  Net cash provided by financing activities for the nine months ended September 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

 

19


exercise of stock options.  Net cash provided by financing activities for the n ine months ended September 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 September 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 August 2016, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 230)”, or ASU 2016-15.  ASU 2016-15 makes cash payments for debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are evaluating the impact of the new guidance.

In March 2016, the FASB issued Accounting Standards Update 2016-09, “Compensation – Stock Compensation (Topic 718)” 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 (Topic 842)” 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, “Presentation of Financial Statements – Going Concern (Subtopic 205-40):  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 September 30, 2016, we had cash and cash equivalents, including restricted cash, of approximately $38.1 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 effect on the fair market value of our investment portfolio. As of September 30, 2016, we were also subject to interest 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 September 30, 2016, would not have a material effect on our annual interest expense.

 

20


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 September 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 September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 


 

21


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 clinical trials of CRLX101 and CRLX301.  As a result of our reduction in force and other cost control measures, we expect our expenses to decrease in the short term.  In the future, however, we expect that our expenses may increase in connection with our ongoing activities, particularly as we continue research and development and initiate additional clinical trials of, and seek regulatory approval for CRLX101, CRLX301 and other potential 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 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.

In October 2016, we entered into a common stock purchase agreement with Aspire Capital Fund, LLC, or Aspire, pursuant to which Cerulean has the right to sell certain amounts of its common stock, up to an aggregate total of $20.0 million of our common stock, over a 24-month period, at prices based on a formula linked to current market prices at the time of each sale.  We refer to this as the ATM.  In connection with entry into the ATM, we issued 700,000 shares of our common stock to Aspire as a commitment fee, and sold 800,000 shares of our common stock at $1.25 per share, for an initial amount of $1.0 million.  $19.0 million remains available under the ATM, upon the terms and subject to the conditions and limitations set forth therein.  While we have the right to determine the amounts and timing of sales of common stock to Aspire under the ATM, these rights are subject to certain limits and restrictions. These limits and restrictions include limits on the number of shares we can sell to Aspire on any one trading day, as well as stock price trading price restrictions, which prohibit us from making certain sales to Aspire on any trading day on which the closing sale price of

 

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our common stock is below $0.50 per share and from making any sales to Aspire on any trading on which the closing sale price is less tha n $0.25 per share .   Accordingly , we may not be able to sell shares under the agreement at prices that we deem acceptable, and there can be no assurance that we will be able to sell the remaining $19.0 million of common stock contemplated under the ATM.

Following a reduction in force initiated in August 2016, we believe our cash and cash equivalents of approximately $38.1 million at September 30, 2016, together with the $1.0 million in proceeds from the initial sale of common stock to Aspire in October 2016 and the $5.0 million upfront payment under our collaboration agreement with Novartis Institutes of BioMedical Research, Inc., or Novartis, received in October 2016, are sufficient to fund our planned operations for at least twelve months following the date of this report.  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.

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