crnx-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)





 

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

 

For the quarterly period ended June 30, 2018



 

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: 001-38583

Crinetics Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-3744114

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

10222 Barnes Canyon Road, Bldg. #2,

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (858) 450-6464

 

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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   Accelerated filer   Non-accelerated filer  ☑  (Do not check if a smaller reporting company)

Smaller reporting company   Emerging growth company  

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

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

As of August 24, 2018, the registrant had 24,024,231 shares of common stock ($0.001 per share par value) outstanding.

 

 

 

 

 


CRINETICS PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2018

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements:

 

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

 

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)

 

5

 

 

Notes to unaudited Condensed Consolidated Financial Statements (unaudited)

 

6

Item 2.

 

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

 

15

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

22

Item 4.

 

Controls and Procedures

 

22

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

23

Item 1A.

 

Risk Factors

 

23

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

Item 3.

 

Defaults Upon Senior Securities

 

65

Item 4.

 

Mine Safety Disclosures

 

65

Item 5.

 

Other Information

 

65

Item 6.

 

Exhibits

 

66

 

 

 

2


PART I — FINANCIAL INFORMATION

Item 1.

Condensed Financial Statements

Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,408

 

 

$

14,192

 

Prepaid expenses and other current assets

 

 

1,536

 

 

 

973

 

Total current assets

 

 

69,944

 

 

 

15,165

 

Property and equipment, net

 

 

1,808

 

 

 

400

 

Restricted cash

 

 

500

 

 

 

 

Other long-term assets

 

 

2,451

 

 

 

33

 

Total assets

 

$

74,703

 

 

$

15,598

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,603

 

 

$

403

 

Accrued expenses

 

 

3,035

 

 

 

494

 

Total current liabilities

 

 

5,638

 

 

 

897

 

Deferred rent

 

 

1,050

 

 

 

20

 

Unvested stock liability

 

 

217

 

 

 

3

 

Total liabilities

 

 

6,905

 

 

 

920

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.001 par; 48,868,345 shares authorized, 48,404,379 shares issued and outstanding, liquidation preference of $93,500 at June 30, 2018; 38,350,914 shares authorized, 28,763,179 shares issued and outstanding, liquidation preference of $30,000 at December 31, 2017

 

 

92,975

 

 

 

29,700

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par; 65,000,000 shares authorized, 2,483,386 shares issued and 2,344,362 shares outstanding at June 30, 2018; 50,500,000 shares authorized, 2,076,171 shares issued and 1,549,575 shares outstanding at December 31, 2017

 

 

2

 

 

 

1

 

Additional paid-in capital

 

 

2,118

 

 

 

1,242

 

Accumulated deficit

 

 

(27,297

)

 

 

(16,265

)

Total stockholders’ equity (deficit)

 

 

(25,177

)

 

 

(15,022

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

74,703

 

 

$

15,598

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

 

3


Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Grant revenues

 

$

657

 

 

$

832

 

 

$

1,099

 

 

$

877

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,222

 

 

 

2,083

 

 

 

9,942

 

 

 

4,148

 

General and administrative

 

 

1,118

 

 

 

392

 

 

 

2,366

 

 

 

981

 

Total operating expenses

 

 

6,340

 

 

 

2,475

 

 

 

12,308

 

 

 

5,129

 

Loss from operations

 

 

(5,683

)

 

 

(1,643

)

 

 

(11,209

)

 

 

(4,252

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

151

 

 

 

7

 

 

 

215

 

 

 

14

 

Interest expense

 

 

 

 

 

(3

)

 

 

 

 

 

(5

)

Other income (expense)

 

 

(36

)

 

 

(9

)

 

 

(38

)

 

 

(11

)

Total other income/ (expense), net

 

 

115

 

 

 

(5

)

 

 

177

 

 

 

(2

)

Net loss

 

$

(5,568

)

 

$

(1,648

)

 

$

(11,032

)

 

$

(4,254

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share – basic and diluted

 

$

(2.41

)

 

$

(1.22

)

 

$

(5.28

)

 

$

(3.34

)

Weighted-average shares outstanding – basic and diluted

 

 

2,307

 

 

 

1,348

 

 

 

2,089

 

 

 

1,273

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

4


Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,032

)

 

$

(4,254

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

698

 

 

 

128

 

Depreciation and amortization

 

 

124

 

 

 

52

 

Increase (decrease) in cash resulting from changes in:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,275

)

 

 

(475

)

Accounts payable and accrued expenses

 

 

3,652

 

 

 

14

 

Deferred rent

 

 

76

 

 

 

10

 

Net cash used in operating activities

 

 

(7,757

)

 

 

(4,525

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(526

)

 

 

(55

)

Net cash used in investing activities

 

 

(526

)

 

 

(55

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

63,266

 

 

 

4,722

 

Proceeds from exercise of common stock options

 

 

393

 

 

 

63

 

Repayment of borrowings under long-term debt

 

 

 

 

 

(23

)

Payment of initial public offering costs

 

 

(660

)

 

 

 

Net cash provided by financing activities

 

 

62,999

 

 

 

4,762

 

Net change in cash, cash equivalents and restricted cash

 

 

54,716

 

 

 

182

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

14,192

 

 

 

12,152

 

Cash, cash equivalents and restricted cash at end of period

 

$

68,908

 

 

$

12,334

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

5

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Change in unvested stock liability

 

$

(7

)

 

$

 

Accrued but unpaid preferred stock and initial public offering costs

 

$

1,046

 

 

$

 

Accrued but unpaid property and equipment purchases

 

$

52

 

 

$

 

Tenant improvement allowance

 

$

954

 

 

$

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

 

5


Crinetics Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

Description of Business

Crinetics Pharmaceuticals, Inc. (the “Company”) is a clinical stage pharmaceutical company incorporated in Delaware on November 18, 2008 and based in San Diego, California. The Company is focused on the discovery, development and commercialization of novel therapeutics for rare endocrine diseases and endocrine-related tumors. In January 2017, the Company established a wholly-owned Australian subsidiary, Crinetics Australia Pty Ltd (“CAPL”), in order to conduct various preclinical and clinical activities for its development candidates.

Reverse Stock Split

On July 6, 2018, the Company effected a 1-for-3.29 reverse stock split of its common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The reverse stock split resulted in an adjustment to the conversion prices of the Company’s Series A and B preferred stock to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented.

Segment Reporting

Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.

Principles of Consolidation and Foreign Currency Transactions

The condensed consolidated financial statements include the accounts of the Company and CAPL. All intercompany accounts and transactions have been eliminated in consolidation. The functional currency of both the Company and CAPL is the U.S. dollar. The Company’s assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars at foreign currency exchange rates in effect at the balance sheet date except for nonmonetary assets, which are remeasured at historical foreign currency exchange rates in effect at the date of transaction. Net realized and unrealized gains and losses from foreign currency transactions and remeasurement are reported in other income (expense), in the condensed consolidated statements of operations and were not material for all periods presented.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated balance sheet as of June 30, 2018, the condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017, and the statements of cash flows for the six months ended June 30, 2018 and 2017, and the related disclosures are unaudited. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of June 30, 2018 and the results of its operations and cash flows for the three and six months ended June 30, 2018 and 2017 in accordance with U.S. GAAP. The results for the three and six months ended June 30, 2018 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

Liquidity and Going Concern

From inception, the Company has devoted substantially all of its efforts to drug discovery and development and conducting preclinical studies and clinical trials. The Company has a limited operating history and the sales and income potential of the Company’s business and market are unproven. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure.

6


As of June 30, 2018, the Company had $68.4 million in unrestricted cash and cash equivalents. Additionally, in July 2018, the Company issued 6,900,000 shares of its common stock in its initial public offering (the “IPO”) which provided net proceeds of $106.4 million. The Company believes it has sufficient cash to meet its funding requirements for at least the next 12 months. However, the Company has experienced net losses and negative cash flows from operating activities since its inception and has an accumulated deficit of $27.3 million as of June 30, 2018. The Company expects to continue to incur net losses for the foreseeable future and believes it will need to raise substantial additional capital to accomplish its business plan over the next several years. The Company plans to continue to fund its losses from operations and capital funding needs through a combination of equity offerings, debt financings or other sources, including potentially collaborations, licenses and other similar arrangements. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the Company’s condensed consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and accompanying notes. The most significant estimates in the Company’s condensed consolidated financial statements relate to revenue recognition, accrued amounts receivable under the Australian research and development tax incentive program, accrued expenses, and the fair value of stock-based compensation. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Fair Value Measurements

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The carrying amounts of the Company’s current financial assets, restricted cash and current financial liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.

As of each of June 30, 2018, and December 31, 2017, the Company had no financial assets measured at fair value on a recurring basis and none of the Company’s non-financial assets and liabilities were recorded at fair value on a non-recurring basis. No transfers between levels have occurred for the periods presented.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash in readily available checking accounts and a money market account. Restricted cash represents cash held as collateral for the Company’s facility lease and is reported as a long-term asset in the accompanying condensed consolidated balance sheets.

7


Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institution in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Revenue Recognition

The Company’s revenues are derived from Small Business Innovation Research (“SBIR”) grants from the National Institutes of Health. The Company recognizes SBIR grant revenue as reimbursable grant costs are incurred. The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying condensed consolidated statements of operations.

 

Australian Research and Development Tax Incentive

CAPL is eligible to obtain a cash refund from the Australian Taxation Office for eligible research and development expenditures under the Australian Research and Development Tax Incentive Program (the “Australian Tax Incentive”). The Australian Tax Incentive is recognized as a reduction to research and development expense when there is reasonable assurance that the Australian Tax Incentive will be received, the relevant expenditure has been incurred, and the amount can be reliably measured. The Company recognized reductions to research and development expense of $0.6 million and $0.9 million, respectively, for the three and six months ended June 30, 2018. The Company recognized a reduction to research and development expense of $23,000 for the three and six months ended June 30, 2017.

 

Research and Development Expenses

The Company’s research and development expenses consist primarily of salaries, payroll taxes, employee benefits and stock-based compensation charges for those individuals involved in research and development efforts, as well as consulting expenses, third-party research and development expenses, laboratory supplies, clinical materials and overhead, including facilities and depreciation costs, offset by the Australian Tax Incentive discussed above. Research and development expenses are charged to expense as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee awards over the requisite service period of the awards (usually the vesting period) on a straight-line basis. For stock awards for which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable, or the performance condition has been achieved. The Company accounts for awards to nonemployees using the fair value method. Awards to nonemployees are subject to periodic revaluation over their vesting terms. The Company estimates the fair value of all stock option grants using the Black-Scholes option pricing model and recognizes forfeitures as they occur.

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. There have been no items qualifying as other comprehensive loss and, therefore, for all periods presented, the Company’s comprehensive loss was the same as its reported net loss.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of convertible preferred stock, common stock subject to repurchase, and options outstanding under the Company’s stock option plan. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be antidilutive.

8


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board standard on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. This guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2017. The Company adopted ASU 2014-09 on January 1, 2018. The Company does not currently have any contracts with customers and, as such, the adoption had no material impact on its financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new accounting standard requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than twelve months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new accounting standard must be adopted using the modified retrospective approach and is effective for public entities for annual reporting periods beginning after December 15, 2018 with early adoption permitted. Although the Company is in the early stages of evaluating the impact of adoption of the ASU on its financial statements, the Company currently believes the most significant changes will be related to the recognition of lease liabilities on the Company’s consolidated balance sheets for real estate operating leases.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The adoption of this standard, in the first quarter of 2018, changed the presentation of the Company’s statement of cash flows to include its restricted cash balance with non-restricted cash balances. The new guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which supersedes most of the prior accounting guidance on nonemployee share-based payments, and instead aligns it with existing guidance on employee share-based payments in Topic 718. As a result, nonemployee share-based payment transactions will be measured by estimating the fair value of the equity instruments that an entity is obligated to issue, and the measurement date will be consistent with the measurement date for employee share-based payment awards. Probability is to be considered on nonemployee awards with performance conditions. The classification will continue to be subject to the requirements of Topic 718, although cost recognition of nonemployee awards will remain unchanged. This guidance is effective for the fiscal years and interim reporting periods beginning after December 15, 2018 with early adoption permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.

3. BALANCE SHEET DETAILS

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

June 30, 2018

 

 

December 31, 2017

 

SBIR grant receivable

 

$

657

 

 

$

231

 

Australian tax incentive receivable

 

 

566

 

 

 

503

 

Other

 

 

313

 

 

 

239

 

Total

 

$

1,536

 

 

$

973

 

9


 

Property and equipment consisted of the following (in thousands):

 

 

June 30, 2018

 

 

December 31, 2017

 

Leasehold improvements

 

$

972

 

 

$

18

 

Laboratory equipment

 

 

662

 

 

 

640

 

Office equipment

 

 

257

 

 

 

19

 

Computers and software

 

 

36

 

 

 

27

 

Construction in progress

 

 

309

 

 

 

 

Property and equipment at cost

 

 

2,236

 

 

 

704

 

Accumulated depreciation and amortization

 

 

(428

)

 

 

(304

)

Total

 

$

1,808

 

 

$

400

 

 

Other long-term assets consist of the following (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Deferred initial public offering costs

 

$

1,706

 

 

$

 

Long-term portion of Australian tax incentive receivable

 

 

734

 

 

 

 

Other

 

 

11

 

 

 

33

 

Total

 

$

2,451

 

 

$

33

 

 

Accrued expenses consist of the following (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Accrued research and development costs

 

$

1,358

 

 

$

126

 

Accrued compensation

 

 

1,006

 

 

 

315

 

Other accrued expenses

 

 

671

 

 

 

53

 

Total

 

$

3,035

 

 

$

494

 

 

4. COMMITMENTS AND CONTINGENCIES

Operating Leases

2018 Operating Lease. In February 2018, as amended in March 2018, the Company entered into a non-cancelable operating lease for its new facility in San Diego, California. The lease has an initial term of seven years and the Company has an option to extend the term of the lease for an additional five years and has a termination option subject to early termination fees. The lease is subject to base lease payments and additional charges for common area maintenance and other costs and includes certain lease incentives and tenant improvement allowances. Rent expense is being recognized on a straight-line basis over the term of the lease. Under the terms of the lease, the Company provided the lessor with an irrevocable letter of credit in the amount of $0.5 million. The lessor is entitled to draw on the letter of credit in the event of any default by the Company under the terms of the lease.

2013 Operating Lease. In July 2013, as amended in 2015 and March 2017, the Company entered into a non-cancelable operating lease for laboratory facilities and office space in San Diego, California. The lease expires in April 2020 and is subject to charges for common area maintenance and other costs. The Company has an early termination option subject to at least five months prior written notice and a termination fee of two months base rent and the unamortized portion of any leasing costs, abated rent and any other lease concessions. In addition, the Company has an option to extend the term of the lease for two years. Rent expense is being recognized on a straight-line basis over the term of the lease.

10


Future Minimum Payments. As of June 30, 2018, future minimum payments under the non-cancellable operating leases were as follows (in thousands):

Year ending December 31,

 

Minimum

Principal

Payments

 

2018 (6 months)

 

$

286

 

2019

 

 

1,189

 

2020

 

 

1,170

 

2021

 

 

1,173

 

2022

 

 

1,208

 

Thereafter

 

 

3,395

 

Total

 

$

8,421

 

Litigation

From time to time, the Company may be subject to various claims and suits arising in the ordinary course of business. The Company does not expect that the resolution of these matters will have a material adverse effect on its financial position or results of operations.

5. CONVERTIBLE PREFERRED STOCK

The authorized, issued and outstanding shares of convertible preferred stock as of June 30, 2018 consisted of the following (in thousands, except share amounts):

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Issued and

 

 

Liquidation

 

 

Carrying

 

 

 

Authorized

 

 

Outstanding

 

 

Preference

 

 

Value

 

Series A

 

 

28,763,179

 

 

 

28,763,179

 

 

$

30,000

 

 

$

29,700

 

Series B

 

 

20,105,166

 

 

 

19,641,200

 

 

 

63,500

 

 

 

63,275

 

Total

 

 

48,868,345

 

 

 

48,404,379

 

 

$

93,500

 

 

$

92,975

 

The authorized, issued and outstanding shares of convertible preferred stock as of December 31, 2017 consisted of the following (in thousands, except share amounts):

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Issued and

 

 

Liquidation

 

 

Carrying

 

 

 

Authorized

 

 

Outstanding

 

 

Preference

 

 

Value

 

Series A

 

 

38,350,914

 

 

 

28,763,179

 

 

$

30,000

 

 

$

29,700

 

Convertible Preferred Stock Transactions

In February and March 2018, pursuant to a Series B stock purchase agreement entered into in February 2018 which called for an initial closing and a subsequent closing, the Company issued an aggregate of 19,641,200 shares of its Series B convertible preferred stock at a purchase price of $3.233 per share, for aggregate gross proceeds of $63.5 million. The Company incurred $0.2 million of issuance costs in connection with the Series B financing (see Note 9).

6. STOCKHOLDERS’ EQUITY

Shares of Common Stock Subject to Repurchase

In October 2015, in connection with the issuance of the Company’s Series A convertible preferred stock, certain of the Company’s founders entered into stock restriction agreements, whereby 1,914,893 of previously unrestricted shares of common stock became subject to repurchase by the Company upon the stockholder’s termination of employment or service to the Company. The Company’s repurchase rights lapsed as to 765,957 shares of common stock in October 2015, with the remainder scheduled to lapse at the rate of 23,936 shares monthly thereafter such that the shares of common stock would have been fully vested in October 2019. Under the terms of the stock restriction agreements, the shares of common stock were also subject to accelerated vesting upon certain events, such that all such restricted shares became fully vested upon the closing of the Company’s Series B preferred stock financing in February 2018 (see Note 5). The stock restriction agreements resulted in the deemed cancellation and reissuance of shares of common stock and therefore, for accounting purposes, the shares subject to repurchase were not considered to be outstanding until vested. The fair value of these shares of $1.4 million as of October 2015 was recognized as compensation expense over the vesting period.

11


For the three and six months ended June 30, 2018, the Company recognized stock-based compensation for these awards of zero and $0.4 million, respectively. For the three and six months ended June 30, 2017, the Company recognized stock-based compensation for these awards of $51,000 and $0.1 million, respectively.

7. EQUITY INCENTIVE PLAN

In February 2015, the Company adopted the Crinetics Pharmaceuticals, Inc. 2015 Stock Incentive Plan (the “Plan”), which provides for the issuance of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards and other stock awards to its employees, members of its board of directors and consultants. The Plan expires in February 2025 and, in general, the options issued under the Plan expire ten years from the date of grant and vest over a four-year period. In May 2018, the shares reserved for issuance under the 2015 Stock Incentive Plan were increased by 729,484 shares to a total of 3,142,857 shares. As of June 30, 2018, 391,637 shares remained available for future issuance under the Plan.

The Plan allows for early exercise of stock options, and early-exercised options and restricted stock awards may be subject to repurchase by the Company until they become fully vested. As of June 30, 2018, there were 139,025 shares issued and subject to repurchase as a result of the early exercise of stock options, resulting in an unvested stock liability of $0.2 million.

A summary of the Company’s 2018 option activity (and other related information) is as follows:

 

 

 

 

 

 

 

Weighted-

 

 

Weighted-

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Intrinsic

 

 

 

Options

 

 

Exercise

 

 

Remaining

 

 

Value

 

 

 

Outstanding

 

 

Price

 

 

Term

 

 

(000’s)

 

Balance at December 31, 2017

 

 

838,276

 

 

$

0.80

 

 

 

 

 

 

 

 

 

Granted

 

 

1,866,094

 

 

$

6.22

 

 

 

 

 

 

 

 

 

Exercised

 

 

(407,218

)

 

$

0.97

 

 

 

 

 

 

 

 

 

Forfeited and expired

 

 

(22,164

)

 

$

0.91

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

2,274,988

 

 

$

5.21

 

 

 

9.4

 

 

$

15,227

 

Exercisable at June 30, 2018

 

 

379,534

 

 

$

1.25

 

 

 

8.7

 

 

$

4,082

 

Fair Value of Equity Awards

The Company utilized the Black-Scholes option pricing model to value its equity awards granted to employees during the first six months of each of 2018 and 2017 using the following weighted-average assumptions:

 

 

2018

 

 

2017

 

Expected life of option

 

6.0 years

 

 

6.1 years

 

Volatility

 

70%

 

 

66%

 

Risk free interest rate

 

2.8%

 

 

1.9%

 

Dividend yield

 

—%

 

 

—%

 

The weighted-average fair value of options granted to employees during the first six months of each of 2018 and 2017 was $4.02 and $0.44 per share, respectively.

Stock-Based Compensation Expense

The assumptions used in the Black-Scholes option pricing model to determine the fair value of employee stock option grants were as follows:

 

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities equal to the expected term of the awards.

 

Expected volatility. Since the Company does not have a significant trading history for its common stock, the expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available

12


 

Expected term. The expected term represents the period that options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected life assumption using the simplified method, for employees, which is an average of the contractual term of the option and its vesting period.

 

Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends, therefore, the Company used an expected dividend yield of zero.

Stock-based compensation expense recognized for all equity awards has been reported in the condensed consolidated statements of operations as follows (in thousands):

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Included in research and development

 

$

130

 

 

$

34

 

 

$

291

 

 

$

60

 

Included in general and administrative

 

 

141

 

 

 

39

 

 

 

407

 

 

 

68

 

Total

 

$

271

 

 

$

73

 

 

$

698

 

 

$

128

 

As of June 30, 2018, unrecognized stock-based compensation costs related to employee awards was $7.1 million, which is expected to be recognized over a remaining weighted-average period of approximately 3.8 years.

8. NET LOSS PER SHARE

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

Three and Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock outstanding

 

 

14,712,571

 

 

 

6,629,808

 

Common stock options

 

 

2,274,988

 

 

 

724,200

 

Unvested common stock subject to repurchase

 

 

139,025

 

 

 

670,213

 

 

 

 

17,126,584

 

 

 

8,024,221

 

 

9. SUBSEQUENT EVENTS

Initial Public Offering

On July 20, 2018, the Company completed its initial public offering (“IPO”) whereby it sold 6,900,000 shares of common stock at a price to the public of $17.00 per share.  Proceeds from the IPO were approximately $106.4 million, net of underwriting discounts and commissions and offering costs.  In connection with the IPO, the outstanding shares of the Company’s convertible preferred stock automatically converted into 14,712,571 shares of common stock.  In addition, an amended and restated certificate of incorporation was filed by the Company on July 20, 2018, authorizing 200,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock.

Equity Plans

Approval of the 2018 Equity Incentive Award Plan.     In July 2018, the Company’s board of directors and stockholders approved and adopted the 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan became effective on the day prior to the effectiveness of the IPO. Under the 2018 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock or cash-based awards to individuals who are then employees, officers, directors or consultants of the Company, and employees and consultants of the Company’s subsidiaries. A total of 1,600,000 shares of common stock were approved to be initially reserved for issuance under the 2018 Plan. The number of shares reserved that were remaining under the 2015 Plan as of the effective date of the 2018 Plan were added to the shares initially reserved under the 2018 Plan upon its effectiveness. In addition, the number of shares of common stock available for issuance under the 2018 Plan will be automatically increased on the first day of each calendar year during the ten-year term of the 2018 Plan, beginning with January 1, 2019, by an amount equal to 5% of the outstanding number of shares of the Company’s common stock on December 31 of the preceding calendar year or such lesser amount as determined by the Company’s board of directors.

13


Approval of the 2018 Employee Stock Purchase Plan.     In July 2018, the Company’s board of directors and stockholders approved and adopted the 2018 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective on the day prior to the effectiveness of the IPO. The ESPP permits participants to purchase common stock through payroll deductions of up to 20% of their eligible compensation. A total of 250,000 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be automatically increased on the first day of each calendar year during the ten-year term of the ESPP, beginning with January 1, 2019, by an amount equal to 1% of the outstanding number of shares of the Company’s common stock on December 31 of the preceding calendar year or such lesser amount as determined by the Company’s board of directors.

14


Item 2.

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

You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2017 included in our Prospectus dated July 17, 2018 filed pursuant to Rule 424(b) under the Securities Act with the Securities and Exchange Commission on July 18, 2018, or the Prospectus.

Forward Looking Statements

The following discussion and other parts of this quarterly report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Overview

We are a clinical stage pharmaceutical company focused on the discovery, development and commercialization of novel therapeutics for rare endocrine diseases and endocrine-related tumors. Endocrine pathways function to maintain homeostasis and commonly use peptide hormones acting through G-protein-coupled receptors (“GPCRs”) to regulate many aspects of physiology including growth, energy, metabolism, gastrointestinal function and stress responses. We have assembled a seasoned team with extensive expertise in drug discovery and development in endocrine GPCRs and built a highly productive drug discovery organization. We have discovered a pipeline of oral nonpeptide (small molecule) new chemical entities that target peptide GPCRs to treat a variety of rare endocrine diseases where treatment options have significant efficacy, safety and/or tolerability limitations. Our lead product candidate, CRN00808, is currently in clinical development for the treatment of acromegaly, and we are advancing additional product candidates through preclinical studies in parallel. Our vision is to build the leading endocrine company which consistently pioneers new therapeutics to help patients better control their disease and improve their daily lives.

We focus on the discovery and development of oral nonpeptide therapeutics that target peptide GPCRs with well understood biological functions, validated biomarkers and the potential to substantially improve the treatment of endocrine diseases and/or endocrine-related tumors. Our pipeline consists of the following three product candidates and discovery program:

 

CRN00808, our lead product candidate, establishes a new class of oral selective nonpeptide somatostatin receptor 2 (“sst2”) biased agonists designed for the treatment of acromegaly and is the first agent in its class with reported clinical results. In March 2018, we reported initial results from a Phase 1, double-blind, randomized, placebo-controlled, single- and multiple-ascending dose trial to evaluate the safety, pharmacokinetics and pharmacodynamics of CRN00808 in 99 healthy volunteers. CRN00808 demonstrated clinical proof-of-concept by potently suppressing stimulated GH and baseline IGF-1 in these subjects. We plan to submit an Investigational New Drug (“IND”) application to the Food and Drug Administration (“FDA “) in the second half of 2018 and, if accepted, plan to initiate two Phase 2 clinical trials of CRN00808 in acromegaly patients in early 2019, including those who are not adequately controlled with existing therapy

15


 

CRN02481 represents a new class of oral selective nonpeptide somatostatin receptor 5 (“sst5”) agonists designed to treat congenital hyperinsulinism. CRN02481 is currently in first-in-human enabling studies, and we expect to initiate a Phase 1 human proof-of-concept clinical trial in the first half of 2019. We expect results from this trial in 2019.

 

CRN01941 is an oral nonpeptide sst2 biased agonist designed for the treatment of neuroendocrine tumors, that originate from neuroendocrine cells commonly found in the gut, lung or pancreas. CRN01941 is currently in first-in-human enabling studies, and we expect to initiate a Phase 1 human proof-of-concept clinical trial in the first half of 2019. We expect results from this trial in late 2019/early 2020.

 

We have an ongoing discovery effort to identify and advance into development the first nonpeptide product candidate to antagonize ACTH, designed for the treatment of Cushing’s disease. Our goal is to select a product candidate for preclinical development in 2019.

To date, we have devoted substantially all of our resources to drug discovery, conducting preclinical studies and clinical trials, obtaining and maintaining patents related to our product candidates, and the provision of general and administrative support for these operations. We recognize revenues from various research and development grants, but do not have any products approved for sale and have not generated any product sales. We have funded our operations primarily through the private placement of preferred stock and grant revenues. Through June 30, 2018, we have raised gross proceeds of approximately $93.5 million to fund our operations from the issuance of convertible preferred stock. As of June 30, 2018, we had cash and cash equivalents of $68.4 million. Additionally, in July 2018, we issued 6,900,000 shares of our common stock in our initial public offering for gross proceeds of $117.3 million.

We have incurred cumulative net losses since our inception and, as of June 30, 2018, we had an accumulated deficit of $27.3 million. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies and clinical trials and our expenditures on other research and development activities. We expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned clinical trials, continue our research and development activities and conduct preclinical studies, hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company, including audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission (“SEC”) requirements, director and officer insurance premiums, and investor relations costs.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, scale back or discontinue the development of our existing product candidates or our efforts to expand our product pipeline.

Australian operations

In January 2017, we established Crinetics Australia Pty Ltd, or CAPL, a wholly-owned subsidiary which was formed to conduct various preclinical and clinical activities for our product and development candidates. We believe CAPL will be eligible for certain financial incentives made available by the Australian government for research and development expenses. Specifically, the Australian Taxation Office provides for a refundable tax credit in the form of a cash refund equal to 43.5% of qualified research and development expenditures under the Australian Research and Development Tax Incentive Program, or the Australian Tax Incentive, to Australian companies that operate the majority of their research and development activities associated with such projects in Australia. A wholly-owned Australian subsidiary of a non-Australian parent company is eligible to receive the refundable tax credit, provided that the Australian subsidiary retains the rights to the data and intellectual property generated in Australia, and provided that the total revenues of the parent company and its consolidated subsidiaries during the period for which the refundable tax credit is claimed are less than $20.0 million Australian dollars. If we lose our ability to operate CAPL in Australia, or if we are ineligible or unable to receive the research and development tax credit, or the Australian government significantly reduces or eliminates the tax credit, the actual refund amounts we receive may differ from our estimates.

16


Financial operations overview

Grant revenues

To date, we have not generated any revenues from the commercial sale of approved products, and we do not expect to generate revenues from the commercial sale of our product candidates for at least the foreseeable future, if ever. Revenues for 2017 and 2018 were derived from Small Business Innovation Research (“SBIR”) Grants awarded to us by the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health. We do not currently expect future grant revenues to be a material source of funding.

Research and development

To date, our research and development expenses have related primarily to discovery efforts and preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

Research and development expenses include:

 

salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals involved in research and development efforts;

 

external research and development expenses incurred under agreements with contract research organizations, or CROs, investigative sites and consultants to conduct our clinical trials and preclinical and non-clinical studies;

 

laboratory supplies;

 

costs related to manufacturing our product candidates for clinical trials and preclinical studies, including fees paid to third-party manufacturers;

 

costs related to compliance with regulatory requirements; and

 

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance, equipment and other supplies.

We recognize the Australian Tax Incentive as a reduction of research and development expense. The amounts are determined based on eligible research and development expenditures. The Australian Tax Incentive is recognized when there is reasonable assurance that the Australian Tax Incentive will be received, the relevant expenditure has been incurred, and the amount of the Australian Tax Incentive can be reliably measured.

Our direct research and development expenses consist principally of external costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. The majority of our third-party expenses during fiscal 2018 and 2017 related to the research and development of CRN00808. We deploy our personnel and facility related resources across all of our research and development activities.

Our clinical development costs may vary significantly based on factors such as:

 

per patient trial costs;

 

the number of trials required for approval;

 

the number of sites included in the trials;

 

the countries in which the trials are conducted;

 

the length of time required to enroll eligible patients;

 

the number of patients that participate in the trials;

 

number of doses that patients receive;

 

drop-out or discontinuation rates of patients

 

potential additional safety monitoring requested by regulatory agencies;

17


 

the duration of patient participation in the trials and follow-up;

 

the cost and timing of manufacturing our product candidates; the phase of development of our product candidates; and

 

the efficacy and safety profile of our product candidates.

We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of our product candidates and discovery of new product candidates. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and administrative

General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and insurance costs. We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities and, if any of our product candidates receive marketing approval, commercialization activities. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which we have prepared in accordance with United States generally accepted accounting principles. The preparation of these condensed financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the reporting periods. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances at the time the estimates are made, the results of which form the basis for making judgments about the book values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We periodically evaluate our estimates and judgments, including those described in greater detail below, in light of changes in circumstances, facts and experience.

Our critical accounting policies are those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. For a description of our critical accounting policies, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” contained in the Prospectus. There have not been any material changes to our critical accounting policies during the quarter ended June 30, 2018 from those discussed in the Prospectus.

18


Results of Operations

Comparison of the three months ended June 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017:

 

 

Three months ended June 30,

 

 

Dollar

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant revenues

 

$

657

 

 

$

832

 

 

$

(175

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,222

 

 

 

2,083

 

 

 

3,139

 

General and administrative

 

 

1,118

 

 

 

392

 

 

 

726

 

Total operating expenses

 

 

6,340

 

 

 

2,475

 

 

 

3,865

 

Loss from operations

 

 

(5,683

)

 

 

(1,643

)

 

 

(4,040

)

Other income (expense), net

 

 

115

 

 

 

(5

)

 

 

120

 

Net loss

 

$

(5,568

)

 

$

(1,648

)

 

$

(3,920

)

Grant revenues.     Grant revenues were $0.7 million and $0.8 million for the three months ended June 30, 2018 and 2017, respectively. The decrease resulted from lower reimbursable research and development costs in the second quarter of 2018 versus the comparable period in 2017 due to the difference in timing of the receipt of SBIR Grant notices during the periods.

Research and development expenses.     Research and development expenses were $5.2 million and $2.1 million for the three months ended June 30, 2018 and 2017, respectively. The increase was primarily due to increased manufacturing and development activities associated with our clinical and pre-clinical programs, an increase in personnel related costs due to the hiring of additional development personnel, including $0.1 million of additional stock compensation, and increased facility costs due to the expansion of our leased facilities.

General and administrative expenses.     General and administrative expenses were $1.1 million and $0.4 million for the three months ended June 30, 2018 and 2017, respectively. The increase was primarily due to an increase in spending on pre-commercialization activities and corporate legal services, and an increase in personnel related costs, including $0.1 million of additional stock compensation costs.

Comparison of the six months ended June 30, 2018 and 2017

The following table summarizes our results of operations for the six months ended June 30, 2018 and 2017:

 

 

Six months ended June 30,

 

 

Dollar

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant revenues

 

$

1,099

 

 

$

877

 

 

$

222

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,942

 

 

 

4,148

 

 

 

5,794

 

General and administrative

 

 

2,366

 

 

 

981

 

 

 

1,385

 

Total operating expenses

 

 

12,308

 

 

 

5,129

 

 

 

7,179

 

Loss from operations

 

 

(11,209

)

 

 

(4,252

)

 

 

(6,957

)

Other income (expense), net

 

 

177

 

 

 

(2

)

 

 

179

 

Net loss

 

$

(11,032

)

 

$

(4,254

)

 

$

(6,778

)

Grant revenues.     Grant revenues were $1.1 million and $0.9 million for the six months ended June 30, 2018 and 2017, respectively. The increase was primarily due to increased research and development activities related to our SBIR Grants.

Research and development expenses.     Research and development expenses were $9.9 million and $4.1 million for the six months ended June 30, 2018 and 2017, respectively, respectively. The increase was primarily due to increased manufacturing and development spending associated with our clinical and pre-clinical programs, an increase in personnel related costs due to the hiring of additional development personnel, including $0.2 million of additional stock compensation, and increased facilities costs of due to the expansion of our leased facilities space.

19


General and administrative expenses.     General and administrative expenses were $2.4 million and $1.0 million for the six months ended June 30, 2018 and 2017, respectively, respectively. The increase was primarily due to an increase in spending on pre-commercialization activities and legal services, and an increase in personnel related costs, including $0.3 million of additional stock compensation.

Cash Flows

We have incurred cumulative net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. As of June 30, 2018, we had an accumulated deficit of $27.3 million. As of June 30, 2018, we had unrestricted cash and cash equivalents of $68.4 million. Additionally, in July 2018, we issued 6.9 million shares of our common stock in an initial public offering raising gross proceeds of $117.3 million.

The following table provides information regarding our cash flows during the six months ended June 30, 2018 and 2017 (in thousands):

 

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

Net cash used in operating activities

 

$

(7,757

)

 

$

(4,525

)

Net cash used in investing activities

 

 

(526

)

 

 

(55

)

Net cash provided by financing activities

 

 

62,999

 

 

 

4,762

 

Net increase in cash, cash equivalents and restricted cash

 

$

54,716

 

 

$

182

 

Operating Activities.     Net cash used in operating activities was $7.8 million and $4.5 million for the six months ended June 30, 2018 and 2017, respectively. The net cash used in operating activities during the first six months of fiscal 2018 was primarily due to our net loss of $11.0 million, adjusted for $0.8 million of noncash charges related to depreciation and stock-based compensation and a $2.5 million change in operating assets and liabilities, primarily due to increased accounts payable and accrued expenses in support of our increased operating expenses and our initial public offering related activities. The net cash used in operating activities during the first six months of fiscal 2017 was primarily due to our net loss of $4.3 million, adjusted for $0.2 million of noncash charges related to depreciation and stock-based compensation, and a $0.5 million change in operating assets and liabilities.

Investing activities.     Net cash used in investing activities during both the first six months of fiscal 2018 and 2017 was due to property and equipment purchases in each period.

Financing activities.     Net cash provided by financing activities was $63.0 million and $4.8 million for the six months ended June 30, 2018 and 2017, respectively. Net cash provided by financing activities during the first six months of fiscal 2018 was primarily due to $63.3 million of net proceeds from the issuance of Series B convertible preferred stock and $0.4 million of proceeds from the exercise of stock options, offset by payment of $0.7 million of costs related to our proposed initial public offering. Net cash provided by financing activities during the first six months of fiscal 2017 was primarily due to proceeds received from the sale of Series A convertible preferred stock.

Liquidity and Capital Resources

We believe that our existing cash and cash equivalents, and the net proceeds of approximately $106.4 million from our initial public offering which was completed in July 2018, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. In particular, we expect these funds will allow us to complete our planned Phase 2 clinical trials for CRN00808 and our planned Phase 1 clinical trials for CRN02481 and CRN01941. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

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

 

the type, number, scope, progress, expansions, results, costs and timing of, our preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future;

 

the costs and timing of manufacturing for our product candidates, including commercial manufacturing if any product candidate is approved;

 

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

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the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;

 

our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;

 

the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase; 

 

the timing and the extent of any Australian Tax Incentive refund and future grant revenues, if any, that we receive;

 

the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;

 

our ability to achieve sufficient market acceptance, adequate coverage and reimbursement from third-party payors and adequate market share and revenue for any approved products;

 

the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; and

 

costs associated with any products or technologies that we may in-license or acquire.

Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. 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 our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

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.

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Fluctuation Risk

Our cash and cash equivalents consist of cash and a money market account. We do not hold any short-term investments. As a result, the fair value of our portfolio is moderately insensitive to interest rate changes.

Foreign Currency Exchange Risk

In January 2017, we formed a wholly-owned subsidiary in Australia, which exposes us to foreign currency exchange rate risk. The functional currency of CAPL is the United States dollar. Assets and liabilities of our foreign subsidiary that are not denominated in the functional currency are remeasured into U.S. dollars at foreign currency exchange rates in effect at the balance sheet date except for nonmonetary assets and capital accounts, which are remeasured at historical foreign currency exchange rates in effect at the date of transaction. Expenses are generally remeasured at foreign currency exchange rates which approximate average rates in effect during each period. Net realized and unrealized gains and losses from foreign currency transactions and remeasurement are reported in other income (expense), net, in the consolidated statements of operations. As of June 30, 2018, the impact of a theoretical 10% change in the exchange rate of the Australian dollar would not result in a material gain or loss. To date, we have not hedged exposures denominated in foreign currencies

Inflation Risk

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our business, financial condition or results of operations during  the six months ended June 30, 2018 or 2017.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2018 at the reasonable assurance level.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

We are currently not a party to any material legal proceedings. From time to time, we may be involved in legal proceedings or subject to claims incident to the ordinary course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information included in this Quarterly Report on Form 10-Q and in our Prospectus dated July 17, 2018 filed pursuant to Rule 424(b) under the Securities Act with the SEC on July 18, 2018, including our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of operations,” before making an investment decision to purchase or sell shares of our common stock. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment. The risks described below are not the only ones that we may face, and additional risks or uncertainties not known to us or that we currently deem immaterial may also impair our business and future prospects.    

Risks related to our limited operating history, financial position and capital requirements

We have a limited operating history, have incurred significant operating losses since our inception and expect to incur significant losses for the foreseeable future. We may never generate any revenue or become profitable or, if we achieve profitability, we may not be able to sustain it.

Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We are a clinical stage pharmaceutical company with a limited operating history upon which you can evaluate our business and prospects. We commenced operations in 2010, and to date, we have focused primarily on organizing and staffing our company, business planning, raising capital, discovering potential product candidates and conducting preclinical studies and clinical trials. Our approach to the discovery and development of product candidates is unproven, and we do not know whether we will be able to develop any products of commercial value. In addition, only one of our product candidates, CRN00808, is in early clinical development, while our other development programs remain in the preclinical or discovery stages. We have not yet demonstrated an ability to successfully complete any clinical trials beyond Phase 1, obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

We have incurred significant operating losses since our inception. If our product candidates are not successfully developed and approved, we may never generate any revenue. We have incurred cumulative net losses since our inception and, as of June 30, 2018, we had an accumulated deficit of $27.3 million. Substantially all of our losses have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. All of our product candidates will require substantial additional development time and resources before we would be able to apply for or receive regulatory approvals and begin generating revenue from product sales. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase substantially as we continue our development of, seek regulatory approval for and potentially commercialize any approved products.

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability. In addition, we have not yet demonstrated an ability to successfully

23


overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product candidates or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.

The development of biopharmaceutical product candidates is capital-intensive. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct our ongoing and planned clinical trials of CRN00808, continue research and development and initiate clinical trials of CRN02481 and CRN01941, and seek regulatory approval for our current product candidates and any future product candidates, including product candidates that we may develop for our Cushing’s disease development program. 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. Because the outcome of any preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

We believe that our existing cash and cash equivalents, including the proceeds from our IPO, will enable us to fund our operations for at least the next 12 months. In particular, we expect that these funds will allow us to complete our planned Phase 2 clinical trials for CRN00808 and our planned Phase 1 clinical trials for CRN02481 and CRN01941. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our operating plans and other demands on our cash resources may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. We do not currently expect future grant revenues to be a material source of revenue. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Attempting to secure additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop our product candidates.

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

the type, number, scope, progress, expansions, results, costs and timing of, our preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future;

the costs and timing of manufacturing for our product candidates, including commercial manufacturing if any product candidate is approved;

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

 

the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;

our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;

the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;

the timing and the extent of any Australian Tax Incentive refunds and future grant revenues, if any, that we receive;

the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;

24


our ability to achieve sufficient market acceptance, adequate coverage and reimbursement from third-party payors and adequate market share and revenue for any approved products;

the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; and

costs associated with any products or technologies that we may in-license or acquire.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time- consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all.

Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.

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

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through future collaborations, licenses and other similar arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or that may reduce the value of our common stock.

 

Risks related to the discovery and development and regulatory approval of our product candidates

We are early in our development efforts and have only one product candidate in clinical development. All of our other research programs are still in the preclinical or discovery stage. If we are unable to successfully develop product candidates or experience significant delays in doing so, our business will be materially harmed.

We are in the early stages of our development efforts and have only one product candidate, CRN00808, in early clinical development. All of our other development programs, including CRN02481 and CRN01941, are still in the preclinical or drug discovery stage. We have invested substantially all of our efforts and financial resources in developing our current product candidates, potential product candidates and conducting preclinical studies and clinical trials. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates. The success of our product candidates will depend on several factors, including the following:

completion of preclinical studies and clinical trials with favorable results;

acceptance of INDs by the FDA or similar regulatory filing by comparable foreign regulatory authorities for the conduct of clinical trials of our product candidates and our proposed design of future clinical trials;

receipt of marketing approvals from applicable regulatory authorities, including new drug applications, or NDAs, from the FDA and maintaining such approvals;

making arrangements with our third-party manufacturers for, or establishing, commercial manufacturing capabilities;

maintaining an acceptable safety profile of our products following approval; and

maintaining and growing an organization of scientists and business people who can develop our products and technology.

25


The success of our business, including our ability to finance our company and generate any revenue in the future, will primarily depend on the successful development, regulatory approval and commercialization of CRN00808, as well as our other product candidates, which may never occur. In the future, we may also become dependent on other product candidates that we may develop or acquire; however, given our early stage of development, it may be several years, if at all, before we have demonstrated the safety and efficacy of a treatment sufficient to warrant approval for commercialization. If we are unable to develop, or obtain regulatory approval for, or, if approved, successfully commercialize our product candidates, we may not be able to generate sufficient revenue to continue our business.

We cannot assure you that we will be able to successfully develop any product candidates.

The success of our business depends primarily upon our ability to discover, develop and commercialize products created with our internal capabilities, including the experience of our scientists and drug development staff. While we believe we have a highly productive drug discovery and development organization, we have not yet succeeded and may not succeed in demonstrating efficacy and safety for any product candidates in clinical trials or in obtaining marketing approval thereafter. We may be unsuccessful in moving our other product candidates from preclinical studies into clinical development, discovering additional product candidates, including for our program for Cushing’s disease, and any product candidates that we are currently developing may be shown to have harmful side effects or may have other characteristics that may necessitate additional clinical testing or make the product candidates unmarketable or unlikely to receive marketing approval. If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations.

Preclinical and clinical drug development involves a lengthy and expensive process with an uncertain outcome, and the results of preclinical studies and early clinical trials are not necessarily predictive of future results. Our product candidates may not have favorable results in later clinical trials, if any, or receive regulatory approval.

Preclinical and clinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the preclinical study or clinical trial process. Despite promising preclinical or clinical results, any product candidate can unexpectedly fail at any stage of preclinical or clinical development. The historical failure rate for product candidates in our industry is high.

The results from preclinical studies or early clinical trials of a product candidate may not predict the results of later clinical trials of the product candidate, and interim results of a clinical trial are not necessarily indicative of final results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy characteristics despite having progressed through preclinical studies and initial clinical trials. In particular, while we have conducted preclinical studies and have interim Phase 1 results for CRN00808, we do not know how CRN00808 will perform in future clinical trials, including as a result of any differences resulting from the use of new formulations that we may use in subsequent clinical trials of CRN00808. It is not uncommon to observe results in clinical trials that are unexpected based on preclinical studies and early clinical trials, and many product candidates fail in clinical trials despite very promising early results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical development even after achieving promising results in earlier studies. In addition, interim results from our Phase 1 clinical trial for CRN00808 showed that the current capsule formulation exhibited an approximately 85% reduction in plasma concentrations when administered with a high fat breakfast, and, as a result, our planned protocol for our Phase 2 trials will require that patients fast prior to drug therapy. This may introduce variability into our Phase 2 results due to patient compliance. We expect to conduct additional activities to improve the capsule formulation but cannot provide any assurance we will be successful in doing so. Furthermore, although our product candidates all target endocrine diseases and/or endocrine-related tumors, we cannot assure you that our preclinical programs will be able to progress from candidate identification to Phase 1 clinical proof-of-concept in healthy volunteers at the same rate as our lead product candidate, CRN00808.

For the foregoing reasons, we cannot be certain that our ongoing and planned clinical trials and preclinical studies will be successful. Any safety concerns observed in any one of our clinical trials in our targeted indications could limit the prospects for regulatory approval of our product candidates in those and other indications, which could have a material adverse effect on our business, financial condition and results of operations.

26


Any delays in the commencement or completion, or termination or suspension, of our clinical trials could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.

Before we can initiate clinical trials for our product candidates, we must submit the results of preclinical studies to the FDA or comparable foreign regulatory authorities along with other information, including information about product candidate chemistry, manufacturing and controls and our proposed clinical trial protocol, as part of an IND application or similar regulatory filing.

Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical studies to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive, time consuming and uncertain as to outcome. In addition, we may rely in part on preclinical, clinical and quality data generated by clinical research organizations, or CROs, and other third parties for regulatory submissions for our product candidates. While we have or will have agreements governing these third parties’ services, we have limited influence over their actual performance. If these third parties do not make data available to us, or, if applicable, make regulatory submissions in a timely manner, in each case pursuant to our agreements with them, our development programs may be significantly delayed and we may need to conduct additional studies or collect additional data independently. In either case, our development costs would increase. We conducted our Phase 1 clinical trial of CRN00808 in Australia, and we will need to submit an IND for acceptance by the FDA and comparable foreign regulatory authorities prior to initiating our planned Phase 2 clinical trials. We may conduct our future Phase 1 clinical trials for our other product candidates outside the United States. The FDA or comparable foreign regulatory authorities may require us to conduct additional preclinical studies for any product candidate before it allows us to initiate clinical trials under any IND or similar regulatory filing, which may lead to additional delays and increase the costs of our preclinical development programs. Any such delays in the commencement or completion of our ongoing and planned clinical trials for our product candidates could significantly affect our product development costs.

We do not know whether our planned trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical studies;

obtaining regulatory authorizations to commence a trial or reaching a consensus with regulatory authorities on trial design;

any failure or delay in reaching an agreement with CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

obtaining approval from one or more institutional review boards, or IRBs;

IRBs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing their approval of the trial;

changes to clinical trial protocol;

clinical sites deviating from trial protocol or dropping out of a trial;

manufacturing sufficient quantities of product candidate or obtaining sufficient quantities of combination therapies for use in clinical trials;

subjects failing to enroll or remain in our trial at the rate we expect, or failing to return for post- treatment follow-up;

subjects choosing an alternative treatment for the indication for which we are developing our product candidates, or participating in competing clinical trials;

lack of adequate funding to continue the clinical trial;

subjects experiencing severe or unexpected drug-related adverse effects;

occurrence of serious adverse events in trials of the same class of agents conducted by other companies;

 

27


selection of clinical end points that require prolonged periods of clinical observation or analysis of the resulting data;

a facility manufacturing our product candidates or any of their components being ordered by the FDA or comparable foreign regulatory authorities to temporarily or permanently shut down due to violations of current good manufacturing practice, or cGMP, regulations or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;

any changes to our manufacturing process that may be necessary or desired;

third-party clinical investigators losing the licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or GCP, or other regulatory requirements;

third-party contractors not performing data collection or analysis in a timely or accurate manner; or

third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by a Data Safety Monitoring Board for such trial or by the FDA or comparable foreign regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, changes in regulatory requirements and policies may occur, and we may need to amend clinical trial protocols to comply with these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial.

Further, conducting clinical trials in foreign countries, as we may do for our product candidates, presents additional risks that may delay completion of our clinical trials. These risks include the failure of enrolled patients in foreign countries to adhere to clinical protocol as a result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory schemes, as well as political and economic risks relevant to such foreign countries.

Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA or comparable foreign regulatory authorities. The FDA or comparable foreign regulatory authority may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or comparable foreign regulatory authority may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA or comparable foreign regulatory authority, as the case may be, and may ultimately lead to the denial of marketing approval of one or more of our product candidates.

If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. Moreover, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues.

In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. We may make formulation or manufacturing changes to our product candidates, in which case we may need to conduct additional preclinical studies to bridge our modified product candidates to earlier versions. Any delays to our clinical trials that occur as a result could shorten any period during which we may have the exclusive right to commercialize our product candidates and our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced. Any of these occurrences may harm our business, financial condition and prospects significantly.

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We may find it difficult to enroll patients in our clinical trials given the limited number of patients who have the diseases for which our product candidates are being developed. If we encounter difficulties enrolling subjects in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

Subject enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility and exclusion criteria for the trial, the design of the clinical trial, the risk that enrolled patients will not complete a clinical trial, our ability to recruit clinical trial investigators with the appropriate competencies and experience, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages and risks of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating as well as any drugs under development. We will be required to identify and enroll a sufficient number of subjects for each of our clinical trials. Potential subjects for any planned clinical trials may not be adequately diagnosed or identified with the diseases which we are targeting or may not meet the entry criteria for such trials. For example, each of our target indications is an orphan indication and, in particular, our lead product candidate, CRN00808, targets acromegaly, a condition which currently affects approximately 25,000 people in the United States. We also may encounter difficulties in identifying and enrolling subjects with a stage of disease appropriate for our planned clinical trials and monitoring such subjects adequately during and after treatment. We may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible subjects to participate in the clinical trials required by the FDA or comparable foreign regulatory authorities. In addition, the process of finding and diagnosing subjects may prove costly.

We plan to submit an IND to the FDA in the second half of 2018, which must go into effect before we can proceed with clinical studies. Pending FDA authorization to proceed, we plan to initiate two Phase 2 clinical trials of CRN00808 in acromegaly patients, including those who are not adequately controlled with existing therapy, in early 2019. Additionally, we plan to initiate Phase 1 clinical trials for each of CRN02481 for CHI and CRN01941 for NETs in the first half of 2019. The timing of our clinical trials depends, in part, on the speed at which we can recruit patients to participate in our trials, as well as completion of required follow-up periods. The conditions for which we currently plan to evaluate our product candidates are orphan or rare diseases with limited patient pools from which to draw for clinical trials. The eligibility criteria of our clinical trials, once established, will further limit the pool of available trial participants. If patients are unwilling to participate in our trials for any reason, including the existence of concurrent clinical trials for similar patient populations, if they are unwilling to enroll in a clinical trial with a placebo-controlled design or the availability of approved therapies, or we otherwise have difficulty enrolling a sufficient number of patients, the timeline for recruiting subjects, conducting studies and obtaining regulatory approval of our product candidates may be delayed. Our inability to enroll a sufficient number of subjects for any of our future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. In addition, we expect to rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials and, while we intend to enter into agreements governing their services, we will have limited influence over their actual performance.

We cannot assure you that our assumptions used in determining expected clinical trial timelines are correct or that we will not experience delays in enrollment, which would result in the delay of completion of such trials beyond our expected timelines.

Use of our product candidates could be associated with side effects or adverse events, which could severely harm our business, prospects, operating results and financial condition.

As is the case with pharmaceuticals generally, it is likely that there may be side effects and adverse events associated with our product candidates’ use. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

Moreover, if our product candidates are associated with undesirable side effects in clinical trials or have characteristics that are unexpected, we may elect to abandon their development or limit their development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective, which may limit the commercial expectations for the

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product candidate if approved. We may also be required to modify our study plans based on findings in our ongoing clinical trials. The safety and tolerability of CRN00808 observed in our Phase 1 clinical trial was generally consistent with that of approved peptide somatostatin analogs. The most common adverse events were mild gastrointestinal disorders occurring in approximately 30% of subjects (such as abdominal pain, flatulence, abdominal distension, and diarrhea) and mild elevations of pancreatic enzymes occurring in approximately 10% of subjects. One subject experienced moderate abdominal pain after a single 40 mg dose. Additional adverse events included headache, dizziness and cardiac rhythm abnormalities (including non-sustained ventricular tachycardia, or NSVT), which were not dose dependent and also observed in placebo subjects and/or prior to dosing. One serious adverse event of moderate NSVT was observed following a single 1.25 mg dose and was considered by the investigator unlikely to be related to CRN00808. Further analysis may reveal adverse events inconsistent with the safety profile observed to date. Additionally, while we have not yet initiated clinical trials for any of our other product candidates, it is likely that there may be side effects associated with their use. Many compounds that initially showed promise in early stage testing have later been found to cause side effects that prevented further development of the compound. In addition, regulatory authorities may draw different conclusions or require additional testing to confirm these determinations.

It is possible that as we test our product candidates in larger, longer and more extensive clinical trials, including with different dosing regimens, or as the use of these product candidates becomes more widespread if they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by subjects. If such side effects become known later in development or upon approval, if any, such findings may harm our business, financial condition and prospects significantly.

In addition, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

regulatory authorities may withdraw approvals of such product;

 

we may be required to recall a product or change the way such product is administered to patients;