crnx-10q_20190331.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 March 31, 2019



 

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

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

Large accelerated filer                                                                                                        Accelerated filer   

Non-accelerated filer ☑                                                                                               Smaller reporting company 

Emerging growth company 

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

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

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

CRNX

 

Nasdaq Global Select Market

As of April 30, 2019, the registrant had 24,138,177 shares of common stock ($0.001 per share par value) outstanding.

 

 

 

 


CRINETICS PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2019

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements:

 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

 

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three months ended March 31, 2019 and 2018 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)

 

6

 

 

Notes to unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

18

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

 

Controls and Procedures  

 

25

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings  

 

26

Item 1A.

 

Risk Factors  

 

26

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

Item 3.

 

Defaults Upon Senior Securities

 

26

Item 4.

 

Mine Safety Disclosures

 

26

Item 5.

 

Other Information

 

26

Item 6.

 

Exhibits

 

27

 

 

 

2


PART I — FINANCIAL INFORMATION

Item 1.

Condensed Financial Statements

Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,833

 

 

$

44,973

 

Short-term investments

 

 

94,379

 

 

 

118,902

 

Prepaid expenses and other current assets

 

 

1,903

 

 

 

2,808

 

Total current assets

 

 

159,115

 

 

 

166,683

 

Property and equipment, net

 

 

4,465

 

 

 

4,232

 

Operating lease right-of-use asset

 

 

2,683

 

 

 

 

Restricted cash

 

 

500

 

 

 

500

 

Total assets

 

$

166,763

 

 

$

171,415

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,003

 

 

$

1,456

 

Accrued expenses and other current liabilities

 

 

5,304

 

 

 

4,190

 

Accrued compensation and benefits

 

 

1,511

 

 

 

2,279

 

Total current liabilities

 

 

8,818

 

 

 

7,925

 

Long-term operating lease liability

 

 

5,401

 

 

 

 

Deferred rent

 

 

 

 

 

3,063

 

Unvested stock liability

 

 

150

 

 

 

202

 

Total liabilities

 

 

14,369

 

 

 

11,190

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par, 10,000 shares authorized; no shares issued or outstanding at March 31, 2019 or at December 31, 2018

 

 

 

 

 

 

Common stock and paid-in capital, $0.001 par, 200,000 shares authorized; 24,209 and 24,115 shares issued and outstanding at March 31, 2019; 24,188 and 24,061 shares issued and outstanding at December 31, 2018

 

 

204,645

 

 

 

203,544

 

Accumulated other comprehensive income

 

 

145

 

 

 

61

 

Accumulated deficit

 

 

(52,396

)

 

 

(43,380

)

Total stockholders’ equity

 

 

152,394

 

 

 

160,225

 

Total liabilities and stockholders’ equity

 

$

166,763

 

 

$

171,415

 

 

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 March 31,

 

 

 

2019

 

 

2018

 

Grant revenues

 

$

367

 

 

$

442

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

7,255

 

 

 

4,720

 

General and administrative

 

 

3,156

 

 

 

1,248

 

Total operating expenses

 

 

10,411

 

 

 

5,968

 

Loss from operations

 

 

(10,044

)

 

 

(5,526

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

1,010

 

 

 

64

 

Other income (expense)

 

 

18

 

 

 

(2

)

Total other income (expense), net

 

 

1,028

 

 

 

62

 

Net loss

 

 

(9,016

)

 

 

(5,464

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

84

 

 

 

 

Comprehensive loss

 

$

(8,932

)

 

$

(5,464

)

Net loss per share:

 

 

 

 

 

 

 

 

Net loss per share – basic and diluted

 

$

(0.37

)

 

$

(2.92

)

Weighted-average shares outstanding – basic and diluted

 

 

24,095

 

 

 

1,870

 

 

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

 

4


Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except per share data)

(Unaudited)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Common stock

and Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at January 1, 2018

 

 

28,763

 

 

$

29,700

 

 

 

1,550

 

 

$

1,243

 

 

$

 

 

$

(16,265

)

 

$

(15,022

)

Issuance of Series B convertible

   preferred stock, net

 

 

19,641

 

 

 

63,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of founders shares and shares of common stock subject to repurchase

 

 

 

 

 

 

 

 

526

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Exercise of common stock

   options

 

 

 

 

 

 

 

 

115

 

 

 

81

 

 

 

 

 

 

 

 

 

81

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

426

 

 

 

 

 

 

 

 

 

426

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,464

)

 

 

(5,464

)

Balance at March 31, 2018

 

 

48,404

 

 

$

92,975

 

 

 

2,191

 

 

$

1,753

 

 

$

 

 

$

(21,729

)

 

$

(19,976

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

 

 

 

$

 

 

 

24,061

 

 

$

203,544

 

 

$

61

 

 

$

(43,380

)

 

$

160,225

 

Vesting of shares of common

   stock subject to repurchase

 

 

 

 

 

 

 

 

33

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Exercise of common stock options

 

 

 

 

 

 

 

 

21

 

 

 

20

 

 

 

 

 

 

 

 

 

20

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

1,028

 

 

 

 

 

 

 

 

 

1,028

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

84

 

 

 

 

 

 

84

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,016

)

 

 

(9,016

)

Balance at March 31, 2019

 

 

 

 

$

 

 

 

24,115

 

 

$

204,645

 

 

$

145

 

 

$

(52,396

)

 

$

152,394

 

 

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

 

 

5


Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,016

)

 

$

(5,464

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,028

 

 

 

426

 

Depreciation and amortization

 

 

200

 

 

 

48

 

Amortization of operating lease right-of-use asset

 

 

53

 

 

 

 

Accretion of short-term investments

 

 

(400

)

 

 

 

Other

 

 

3

 

 

 

2

 

Increase (decrease) in cash resulting from changes in:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

905

 

 

 

(290

)

Accounts payable and accrued expenses

 

 

583

 

 

 

1,871

 

Operating lease liability

 

 

(115

)

 

 

 

Net cash used in operating activities

 

 

(6,759

)

 

 

(3,407

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investment securities

 

 

(31,563

)

 

 

 

Maturities of investment securities

 

 

56,570

 

 

 

 

Purchases of property and equipment

 

 

(408

)

 

 

(57

)

Net cash provided by (used in) investing activities

 

 

24,599

 

 

 

(57

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net

 

 

 

 

 

63,393

 

Proceeds from exercise of stock options

 

 

20

 

 

 

253

 

Payment of initial public offering costs

 

 

 

 

 

(134

)

Net cash provided by financing activities

 

 

20

 

 

 

63,512

 

Net change in cash, cash equivalents and restricted cash

 

 

17,860

 

 

 

60,048

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

45,473

 

 

 

14,192

 

Cash, cash equivalents and restricted cash at end of period

 

$

63,333

 

 

$

74,240

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Change in unvested stock liability

 

$

53

 

 

$

(3

)

Amounts accrued for purchases of property and equipment

 

$

27

 

 

$

67

 

Change in accrued preferred stock issuance and initial public offering costs

 

$

 

 

$

301

 

 

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

 

6


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.

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.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2019 and 2018, and the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018, 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 March 31, 2019 and the results of its operations and cash flows for the three months ended March 31, 2019 and 2018 in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

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.

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.

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.

7


As of March 31, 2019, the Company had $157.2 million in unrestricted cash, cash equivalents and short-term investments. 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 $52.4 million as of March 31, 2019. 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 potential 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 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 associated research and development expense, the assumptions underlying the determination of the estimated incremental borrowing rate for the determination of the operating lease right-of-use asset, and the assumptions underlying the determination of the fair value of equity awards for purposes of determining 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.

8


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 and money market accounts. 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.

 

Short-term Investments

All investments have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices or pricing models for similar securities at period end. Investments with contractual maturities less than 12 months at the balance sheet date are considered short-term investments. Investments with contractual maturities beyond one year are also classified as short-term due to the Company’s ability to liquidate the investment for use in operations within the next 12 months.

Unrealized gains and losses, deemed temporary in nature, are reported as a component of accumulated other comprehensive income (loss). A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The Company has not realized any significant gains or losses on sales of available-for-sale investment securities during any of the periods presented. Amortization of premiums, accretion of discounts, interest, and dividend income are included in interest income.

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.

Leases

The Company determines if an arrangement is a lease at the inception of the arrangement. Leases with a term longer than 12 months that are determined to be operating leases are included in operating lease assets, accrued expenses and other current liabilities and noncurrent operating lease liabilities in the condensed consolidated balance sheets based on the present value of the minimum lease payments called for under the arrangement. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Grant Revenue Recognition

The Company’s grant 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. Earnings in excess of billings are included as a component of prepaid expenses and other current assets.

Research and Development Expenses

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

9


Costs incurred under contracts with contract research organizations (CROs) that conduct and manage the Company’s clinical trials are also included in research and development expenses. The financial terms and activities of these agreements vary from contract to contract and may result in uneven expense levels. Generally, these agreements set forth activities that drive the recording of expenses such as start-up and initiation activities, enrollment and treatment of patients, or the completion of other clinical trial activities. Expenses related to clinical trials are accrued based on estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts that the Company is obligated to pay under its clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), the Company adjusts its accruals accordingly on a prospective basis. Revisions to contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.

Australian Research and Development Tax Incentive

CAPL is eligible to obtain a cash refund from the Australian Taxation Office for eligible R&D expenditures under the Australian Research and Development Tax Incentive Program (the “Australian Tax Incentive”). The Australian Tax Incentive is recognized as a reduction to R&D 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 a reduction to R&D expense of $47,000 and $0.3 million for the three months ended March 31, 2019 and 2018, respectively.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of 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 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. Comprehensive gain (loss) consists of unrealized gains or losses on the Company’s investment securities.

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.

Recently Adopted Accounting Pronouncements

ASU 2016-02

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. ASU 2016-02 also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. On January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective transition method. Under this transition method, the Company recognized and measured leases that existed at the adoption date in the condensed consolidated balance sheet as of January 1, 2019.

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ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, discounted at the rate implicit in the lease. If the rate implicit in the lease cannot be determined, Topic 842 requires the use of the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term for a similar amount to the lease payments in a similar economic environment. The operating lease ROU asset is also adjusted for any prepaid or accrued lease payments and any lease incentives received. Operating lease terms may include options to extend or terminate the lease when it is reasonably certain that these options will be exercised. Further, the Company has elected to recognize short-term lease payments on a straight-line basis over the associated lease term and variable lease payments in the period in which the obligation for those payments is incurred. Short-term and variable lease payments were not material in the first quarter of 2019.

In connection with the adoption of ASU 2016-02, the Company elected the package of practical expedients requiring no reassessment of whether any expired or existing contracts contain leases, the lease classification of any expired or existing leases, or initial direct costs for any existing leases. The Company also made accounting policy elections not to apply the recognition requirements under ASU 2016-02 to any short-term leases and to account for each separate lease and associated non-lease components as a single lease component for all of the Company’s leases.

Adoption of ASU 2016-02 resulted in recognition of a ROU asset of $2.8 million and an operating lease liability of $6.2 million, related to the lease of office and laboratory space; and the derecognition of deferred rent of $3.4 million for certain lease incentives received previously. The comparative prior period information continues to be reported under the accounting standards in effect during those periods.

ASU 2018-07

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 was adopted by the Company on January 1, 2019 using the modified retrospective transition method with no impact on the condensed consolidated financial statements. As a result of adopting ASU 2018-07, the estimated fair value of stock awards issued to non-employees are determined at issuance and are no longer subject to revaluation over their vesting terms.  

Recent Accounting Pronouncements

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820, “Fair Value Measurements and Disclosures” and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.

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3. INVESTMENT SECURITIES

The Company reports its available-for-sale investment securities at their estimated fair values based on quoted market prices for identical or similar instruments. Following is a summary of the available-for-sale short-term investments held by the Company as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

As of March 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

35,726

 

 

$

101

 

 

$

 

 

$

35,827

 

Certificates of deposit

 

 

5,904

 

 

 

39

 

 

 

 

 

 

5,943

 

Commercial paper

 

 

30,581

 

 

 

 

 

 

 

 

 

30,581

 

Corporate debt securities

 

 

22,023

 

 

 

7

 

 

 

(2

)

 

 

22,028

 

Total

 

$

94,234

 

 

$

147

 

 

$

(2

)

 

$

94,379

 

 

 

 

As of December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Market

Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

42,193

 

 

$

72

 

 

$

(1

)

 

$

42,264

 

Certificates of deposit

 

 

5,408

 

 

 

 

 

 

 

 

 

5,408

 

Commercial paper

 

 

47,686

 

 

 

 

 

 

 

 

 

47,686

 

Corporate debt securities

 

 

23,554

 

 

 

2

 

 

 

(12

)

 

 

23,544

 

Total

 

$

118,841

 

 

$

74

 

 

$

(13

)

 

$

118,902

 

 

All available-for-sale investment securities held at March 31, 2019 and December 31, 2018, had maturity dates of less than 24 months.

None of the Company’s available-for-sale investment securities were in a material unrealized loss position at March 31, 2019 or December 31, 2018. The Company reviewed its investment holdings as of March 31, 2019 and determined that its unrealized losses were not considered to be other-than-temporarily impaired based upon (i) the financial strength of the issuing institution and (ii) the fact that no securities have been in an unrealized loss position for twelve months or more. As such, the Company has not recognized any impairment in its financial statements related to its available-for-sale investment securities.

4. FAIR VALUE MEASUREMENTS

The Company holds investment securities that consist of highly liquid, investment grade debt securities. The Company determines the fair value of its investment securities based upon one or more valuations reported by its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curves, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, and broker and dealer quotes, as well as other relevant economic measures.

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Financial assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 were as follows (in thousands):

 

 

 

As of March 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

25,789

 

 

$

10,038

 

 

$

 

 

$

35,827

 

Certificates of deposit

 

 

 

 

 

5,943

 

 

 

 

 

 

5,943

 

Commercial paper

 

 

 

 

 

30,581

 

 

 

 

 

 

30,581

 

Corporate debt securities

 

 

 

 

 

22,028

 

 

 

 

 

 

22,028

 

Total assets measured at fair value

 

$

25,789

 

 

$

68,590

 

 

$

 

 

$

94,379

 

 

 

 

As of December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

22,275

 

 

$

19,989

 

 

$

 

 

$

42,264

 

Certificates of deposit

 

 

 

 

 

5,408

 

 

 

 

 

 

5,408

 

Commercial paper

 

 

 

 

 

47,686

 

 

 

 

 

 

47,686

 

Corporate debt securities

 

 

 

 

 

23,544

 

 

 

 

 

 

23,544

 

Total assets measured at fair value

 

$

22,275

 

 

$

96,627

 

 

$

 

 

$

118,902

 

 

The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 3 during the three months ended March 31, 2019.

5. BALANCE SHEET DETAILS

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

 

 

 

March 31,

2019

 

 

December 31,

2018

 

SBIR grant receivable

 

$

415

 

 

$

568

 

Interest receivable

 

 

381

 

 

 

340

 

Australian tax incentive receivable

 

 

44

 

 

 

1,016

 

Prepaid expenses and other assets

 

 

1,063

 

 

 

884

 

Total

 

$

1,903

 

 

$

2,808

 

 

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

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Leasehold improvements

 

$

3,494

 

 

$

3,494

 

Lab equipment

 

 

1,345

 

 

 

915

 

Office equipment

 

 

523

 

 

 

523

 

Computers and software

 

 

41

 

 

 

41

 

Property and equipment at cost

 

 

5,403

 

 

 

4,973

 

Accumulated depreciation and amortization

 

 

(938

)

 

 

(741

)

Total

 

$

4,465

 

 

$

4,232

 

  

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Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Accrued research and development costs

 

$

4,140

 

 

$

3,634

 

Short-term operating lease liability

 

 

665

 

 

 

 

Other accrued expenses

 

 

499

 

 

 

556

 

Total

 

$

5,304

 

 

$

4,190

 

 

6. LEASES

2018 Operating Lease. In February 2018, as amended in March 2018, the Company entered into a non-cancelable operating lease for a new facility in San Diego, California. The lease has an initial term of seven years which expires in August 2025, 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. The Company’s incremental borrowing rate of 8.0% was used in its present value calculation as the facility lease does not have a stated implicit rate.

Rent expense was $0.2 million and $44,000 for the three months ended March 31, 2019 and 2018, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating cash flow from operating leases was $0.1 million for the three months ended March 31, 2019.

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.

Future Minimum Payments. As of March 31, 2019, future minimum payments under non-cancellable operating leases were as follows (in thousands):

 

Year ending December 31,

 

Minimum

Payments

 

2019 (9 months)

 

$

828

 

2020

 

 

1,123

 

2021

 

 

1,173

 

2022

 

 

1,208

 

2023

 

 

1,244

 

Thereafter

 

 

2,151

 

Total future minimum lease payments

 

 

7,727

 

Less imputed interest

 

 

1,661

 

Total operating lease liabilities

 

 

6,066

 

Less current operating lease liabilities

 

 

665

 

Long-term operating lease liabilities

 

$

5,401

 

 

7. COMMITMENTS AND CONTINGENCIES

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.

 

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8. CONVERTIBLE PREFERRED STOCK

As of January 1, 2018, the Company had 28,763,179 shares of Series A convertible preferred stock outstanding. In February and March 2018, the Company issued an aggregate of 19,641,200 shares of its Series B convertible preferred stock for total proceeds of $63.5 million, net of issuance costs of $0.2 million. The holders of the Company’s Series A and B convertible preferred stock were entitled to certain customary preferences, such as dividend and liquidation priority in relationship to the common shareholders, and certain anti-dilution protection. The convertible preferred stock was classified outside of stockholders’ equity (deficit) because the shares contained certain redemption features that were not solely within the control of the Company.

In connection with the Company’s initial public offering in July 2018, all of these shares of convertible preferred stock automatically converted into 14,712,571 shares of common stock.

9. EQUITY INCENTIVE PLANS

2018 Incentive Award Plan

In July 2018, the Company adopted the 2018 Incentive Award Plan (the “2018 Plan”). Under the 2018 Plan, which expires in July 2028, the Company may grant equity-based awards to individuals who are employees, officers, directors or consultants of the Company. Options issued under the 2018 Plan, will generally expire ten years from the date of grant and vest over a four-year period. As of March 31, 2019, 2,463,924 shares were available for future issuance under the 2018 Plan.

The 2018 Plan contains a provision that allows annual increases in the number of shares available for issuance on the first day of each calendar year through January 1, 2028 in an amount equal to the lesser of: (i) 5% of the aggregate number of shares of the Company’s common stock outstanding on December 31of the immediately preceding calendar year, or (ii) such lesser amount determined by the Company.

2015 Stock Incentive Plan

In February 2015, the Company adopted the Crinetics Pharmaceuticals, Inc. 2015 Stock Incentive Plan (the “2015 Plan”), which provided for the issuance of equity awards to the Company’s employees, members of its board of directors and consultants. In general, options issued under this plan vest over four years and expire after 10 years. Subsequent to the adoption of the 2018 Plan, no additional equity awards can be made under the 2015 Plan.

Certain awards under the 2015 Plan allowed for exercise prior to vesting. Shares issued under such early-exercise provisions are subject to repurchase by the Company until they become fully vested. As of March 31, 2019, 93,386 unvested shares issued under early-exercise provisions were subject to repurchase by the Company. The condensed consolidated balance sheet reflects an unvested stock liability of $0.2 million as of March 31, 2019.

2018 Employee Stock Purchase Plan

In July 2018, the Company adopted the 2018 Employee Stock Purchase Plan (the “ESPP”). The ESPP permits participants to purchase common stock through payroll deductions of up to 20% of their eligible compensation. As of March 31, 2019, an aggregate of 472,336 shares of common stock were available for issuance under the ESPP.

The ESPP contains a provision that allows annual increases in the number of shares available for issuance on the first day of each calendar year through January 1, 2028 in an amount equal to the lesser of: (i) 1% of the aggregate number of shares of the Company’s common stock outstanding on December 31of the immediately preceding calendar year, or (ii) such lesser amount determined by the Company.

15


Stock Options

Stock option activity during the three months ended March 31, 2019 under both of the 2015 Plan and the 2018 Plan is as follows:

 

 

 

 

 

 

 

Weighted-

 

 

Weighted-

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Intrinsic

 

 

 

Options

 

 

Exercise

 

 

Remaining

 

 

Value

 

 

 

Outstanding

 

 

Price

 

 

Term

 

 

(000’s)

 

Balance at December 31, 2018

 

 

2,339,157

 

 

$

6.40

 

 

 

 

 

 

 

 

 

Granted

 

 

600,850

 

 

$

25.18

 

 

 

 

 

 

 

 

 

Exercised

 

 

(21,215

)

 

$

0.96

 

 

 

 

 

 

$

506

 

Balance at March 31, 2019

 

 

2,918,792

 

 

$

10.30

 

 

 

9.0

 

 

$

38,226

 

Exercisable at March 31, 2019

 

 

682,503

 

 

$

3.14

 

 

 

8.3

 

 

$

13,390

 

 

Fair Value of Stock Option Awards

The Company utilizes the Black-Scholes option pricing model to value awards under its equity plans. The following table summarizes the weighted average assumptions used to estimate the fair value of stock options granted to employees under the Company’s stock option plans and the shares purchasable under the ESPP during the periods presented:

 

Stock Option Plans

 

2019

 

 

2018

 

Expected life of option

 

6.0 years

 

 

6.0 years

 

Volatility

 

78%

 

 

70%

 

Risk free interest rate

 

2.4%

 

 

2.7%

 

Dividend yield

 

—%

 

 

—%

 

 

Employee Stock Purchase Plan

 

2019

 

 

2018

Expected life of option

 

1.1 years

 

 

N/A

Volatility

 

66%

 

 

N/A

Risk free interest rate

 

2.4%

 

 

N/A

Dividend yield

 

—%

 

 

N/A

 

The key assumptions used in determining the fair value of equity awards, and the Company’s rationale, were as follows: (i) Expected term - the expected term represents the period that options are expected to be outstanding and has been estimated using the simplified method, which is an average of the contractual option term and its vesting period; (ii) Expected volatility - the expected volatility assumption is based on volatilities of a peer group of similar companies in the biotechnology industry whose share prices are publicly available; (iii) 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 that approximate the expected terms of awards; and (iv) Expected dividend yield - the expected dividend yield assumption is zero as the Company has never paid cash dividends and has no present intention to do so in the near future.

The weighted-average fair value of stock options granted to employees during the first quarter of 2019 and 2018 was $17.31 and $1.17 per share, respectively.

16


Stock-Based Compensation Expense

Stock-based compensation expense for the equity awards issued by the Company to employees and non-employees for the periods presented below was as follows (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Included in research and development

 

$

539

 

 

$

161

 

Included in general and administrative

 

 

489

 

 

 

265

 

Total

 

$

1,028

 

 

$

426

 

 

Unrecognized stock-based compensation cost related to employee awards was $19.3 million as of March 31, 2019, which is expected to be recognized over a remaining weighted-average period of approximately 3.1 years.

Unrecognized stock-based compensation cost related to the ESPP was $0.5 million as of March 31, 2019, which is expected to be recognized over a remaining period of approximately 1.2 years.

10. 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 months ended March 31,

 

 

 

2019

 

 

2018

 

Convertible preferred stock outstanding

 

 

 

 

 

14,713

 

Common stock options

 

 

2,919

 

 

 

1,458

 

Unvested common stock subject to repurchase

 

 

93

 

 

 

104

 

 

 

 

3,012

 

 

 

16,275

 

 

 

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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 included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 (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 two product candidates and preclinical programs:

 

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. We have initiated two global Phase 2 clinical trials of CRN00808 in acromegaly patients, the ACROBAT EVOLVE (“EVOLVE”) and ACROBAT EDGE (“EDGE”) studies. The EVOLVE trial is a double-blind, placebo-controlled, randomized withdrawal study designed to evaluate the safety, efficacy and pharmacokinetics of CRN00808, in subjects with acromegaly that respond to octreotide LAR or lanreotide depot monotherapy. The EDGE trial is an open label exploratory study designed to evaluate the safety, efficacy and pharmacokinetics of CRN00808 in subjects with acromegaly that are treated with somatostatin analog based treatment regimens but do not respond completely to monotherapy. The EVOLVE and EDGE studies are being conducted at centers in the United States and in certain European countries. In March 2019, we dosed the first patients in the EVOLVE and EDGE studies.

18


 

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. We expect to initiate a Phase 1 human proof-of-concept clinical trial in the first half of 2019 and expect results from this trial in late 2019/early 2020.