NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND OPERATIONS
Nature of Business
Cerulean Pharma Inc. (the Company) was incorporated on November 28, 2005, as a Delaware
corporation and is located in Waltham, Massachusetts. The Company was formed to develop novel, nanotechnology-based therapeutics in the areas of oncology and other diseases. In 2013, the Company formed a wholly owned subsidiary, Cerulean Pharma
Australia Pty Ltd as an Australian-based proprietary limited company to perform clinical activities in Australia.
The Companys
operations have consisted primarily of raising capital, product research and development, and initial market development.
The Company has
not generated any revenue related to its primary business purpose to date and is subject to a number of risks common to other development stage life science companies, including dependence on key individuals, competition from other companies, the
need for development of commercially viable products, and the need to obtain adequate additional financing to fund the development of product candidates. The Company is also subject to a number of risks similar to other companies in the industry,
including rapid technological change, regulatory approval of products, uncertainty of market acceptance of products, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government
regulations, protection of proprietary technology, dependence on third parties, product liability and dependence on key individuals.
The
Company has an accumulated deficit of $200.7 million at December 31, 2016. The Company has financed its operations primarily through private placements of its preferred stock, proceeds from borrowings, an initial public offering completed in
2014 and a follow-on offering completed in 2015. In October 2016 the Company entered into a collaboration with Novartis Institutes for BioMedical Research, Inc. (Novartis) to develop nanoparticle-drug conjugates combining the
Companys proprietary Dynamic Tumor Targeting technology with Novartis proprietary compounds. Under this collaboration the Company received important funding to support its research program. The Company has not completed development of
any product candidate and has devoted substantially all of its financial resources and efforts to research and development, including preclinical and clinical development. Accordingly, the Company will continue to depend on its ability to raise
capital through equity and debt issuances and/or through strategic partnerships. The Company expects to continue to incur significant expenses and increasing operating losses for at least several years.
As of December 31, 2016, the Company had cash and cash equivalents of $35.0 million. The Company has no other sources of significant
liquidity in place as of December 31, 2016. The Company expects that its existing cash and cash equivalents will fund its operations into the second half of 2017 based on the Companys 2017 operating plan. The Company has undertaken a
strategic review of potential financing alternatives such as the sale of the company, a merger, a business combination, a strategic investment into the company, or a sale, license or disposition of assets of the Company. If the Company is unable to
obtain additional funding on a timely basis, it may be required to curtail or terminate research and development activities under its collaboration agreement with Novartis, or to scale back, suspend or terminate its business operations.
As more fully discussed in Note 17 Subsequent Events, pursuant to managements plans, in March 2017 the Company entered into a series of
transactions including the payoff of its note payable to Hercules Capital for $12.4 million. The Company sold and assigned all of its right, title and interest in and to its clinical product candidates CRLX101 and CRLX301 for proceeds of
$1.5 million. The Company also agreed to sell and assign to Novartis all of its right, title and interest in and to the patent rights, know-how and third-party license agreements relating to its Dynamic Tumor Targeting Platform technology for
proceeds of $6.0 million, whereby the proceeds from this asset sale are to be received upon closing of the transaction. The Company also entered into a Stock Purchase Agreement with Daré Biosciences, Inc., which if approved by the
shareholders, will be consummated by an exchange of common stock shares and no cash consideration paid or received.
With exception of the
payoff of the note payable and the sale of the clinical product candidates, these transactions are subject to certain closing conditions. There can be no assurances that these transactions will be consummated prior to the exhaustion of the
Companys cash and cash equivalent resources, if at all.
7
The foregoing matters give rise to substantial doubt about the Companys ability to continue
as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates 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 and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, the
Companys management evaluates its estimates, including estimates related to clinical trial accruals, stock-based compensation expense, and reported amounts of revenues and expenses during the reported period. The Company bases its estimates on
historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Although the Company regularly assesses these estimates, actual results could differ from those estimates.
Changes in estimates are recorded in the period in which they become known.
Principles of Consolidation
The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated.
Segment Information
Operating segments are identified as components of an enterprise about which separate 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; however,
the Company operates in two geographic regions: United States (Waltham, MA) and Australia (Sydney, NSW). There is no revenue generated or long-lived assets located within the Australian location.
Cash and Cash Equivalents
Cash equivalents include all highly liquid investments maturing within 90 days from the date of
purchase and consist primarily of money market funds.
Concentrations of Credit Risk
Financial instruments that subject the
Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. Substantially all of the Companys cash and cash equivalents are held at one financial institution that management believes to be of
high-credit quality. Deposits with this financial institution may exceed the amount of insurance provided on such deposits; however these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Restricted Cash
At December 31, 2016 and 2015, the Company had restricted cash of $230,000 and $347,000, respectively. The
restricted cash balances were used to collateralize stand-by letters of credit issued by the Company as a security deposit for its current and former facility leases. The balance at December 31, 2016, was with respect to the Companys
current facility lease which is scheduled to expire in February 2021. The balance at December 31, 2015, includes the balance for the current facility lease and the Companys former facility lease which was scheduled to expire in February
2016 but was terminated early on December 31, 2015. The restricted cash is included within other assets in the balance sheet.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the
straight-line method. Repairs and maintenance costs are expensed as incurred, whereas major improvements are capitalized as additions to property and equipment.
Depreciation is provided using the straight-line method over the following estimated useful lives:
|
|
|
Laboratory equipment
|
|
5 years
|
Computer equipment
|
|
3 years
|
Office furniture and equipment
|
|
5 years
|
Leasehold improvements
|
|
Lesser of useful life or remaining lease term
|
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If this comparison
indicates
8
that there is impairment, the amount of impairment is calculated as the difference between the carrying value and fair value. For the years ended December 31, 2016 and 2015, the Company has
not recorded an impairment charge for its long-lived assets.
Revenue Recognition
Collaborative Research and Development and Multiple-Element Arrangements
The Company has generated revenue through a research collaboration agreement for the development and commercialization of product candidates
utilizing the Companys technologies. The agreement provides for multiple deliverables by the Company (for example, license rights, research and development services and manufacturing of clinical materials) in exchange for consideration to the
Company of a combination of non-refundable upfront fees, research and development funding, contingent payments based upon achievement of clinical development or other milestones and royalties in the form of designated percentages of product net
sales. The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25,
Revenue Recognition: Multiple Element Arrangements
. Multiple-element
arrangements, such as license and development agreements, are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. When deliverables are separable, consideration
received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When the Company determines that an arrangement should be accounted for
as a single unit of accounting, it must determine the period over which the performance obligations will be performed, and revenue will be recognized over the performance period.
Under the research collaboration agreement, the Company is entitled to receive payments contingent upon the achievement of certain
development, regulatory and sales milestones. Based on FASB ASC 605-28,
Revenue Recognition Milestone Method
, the Company evaluates contingent milestones at inception or modification of the agreement, and recognizes consideration that
is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is considered substantive in its entirety. Milestones are events which have the following
characteristics: (i) they can be achieved based in whole or in part on either the Companys performance or on the occurrence of a specific outcome resulting from the Companys performance, (ii) there was substantive uncertainty
at the date the agreement was entered into that the event would be achieved and, (iii) they would result in additional payments due to the Company. A milestone is considered substantive if the following criteria are met: (i) the
consideration is commensurate with either (1) the entitys performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entitys
performance to achieve the milestone, (ii) the consideration relates solely to past performance and, (iii) the consideration is reasonable relative to all of the other deliverables and payment terms, including other potential milestone
consideration, within the arrangement.
The Company has evaluated each milestone in the research collaboration agreement under ASC 605-28.
The Company has determined that each of the development and regulatory milestones are substantive, as they satisfy all of the criteria of ASC 605-28. As determined at the inception of the arrangement, each milestone is subject to substantive
uncertainty, as each is dependent on the successful outcome of significant scientific research and clinical development to advance the product candidates and the clinical and/or regulatory success of the product candidates. Under the agreement the
Company is entitled to receive up to $41.5 million in milestone payments for each defined program based upon achievement of specified preclinical, developmental, clinical and regulatory milestones. The Company is primarily responsible for the
research and pre-clinical development of nanoparticle drug conjugates comprised of the Companys proprietary polymer covalently linked to selected active pharmaceutical ingredients that are nominated by the Companys partner for such
development. In addition, the Company is required to assist with certain aspects of regulatory filings for marketing approval. As a result, the achievement of each development and regulatory milestone is based on a specific outcome achieved as a
result of the Companys performance. These milestone payments are non-refundable and relate solely to past performance. Furthermore, the Company considers the milestone payment amounts to be reasonable in relation to the total arrangement
consideration.
The Company may receive up to an additional $185.0 million in milestone payments based upon achievement of specified sales
milestones. Unlike the development and regulatory milestones, the commercial milestones would be achieved solely as a result of the collaboration partners performance. Because the commercial milestones are achieved after the completion of the
Companys development activities under the collaboration agreement, the Company has no required obligations for deliverables under the collaboration with respect to any commercial products and therefore the Company has no future performance
obligations related to the commercial milestones. These commercial milestones will not be treated as substantive based on the guidance in ASC 605-28-25-2, which requires substantive milestones to be based upon the Companys performance. The
Company will account for any commercial milestone payment in the same manner as royalties, with revenue recognized upon achievement of the milestone, assuming all other revenue recognition criteria are met.
As more fully discussed in Note 17 Subsequent Events, pursuant to managements plans, in March 2017 the Company agreed to sell and assign
to Novartis all of its right, title and interest in and to the patent rights, know-how and third-party license agreements relating to its Dynamic Tumor Targeting Platform technology for proceeds of $6.0 million, whereby the proceeds from this
asset sale are to be received upon closing of the transaction. The consummation of this sale, will result in the termination of the collaboration. If the Companys stockholders do not approve the Novartis transaction and it is unable to obtain
additional funding on a timely basis, it may be required to curtail or terminate research and development activities under its collaboration agreement with Novartis.
Deferred Revenue
Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated
balance sheets. Amounts not expected to be recognized within one year following the balance sheet date are classified as non-current deferred revenue.
Research and Development Costs
Research and development expenses consist of expenses incurred in performing research and
development activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses, manufacturing process-development and scale-up activities, clinical trial and
related clinical manufacturing expenses, fees paid to clinical research organizations, or CROs, and investigative sites, payments to universities under the Companys license agreements and other outside expenses. In the early phases of
development, the Companys research and development costs are often devoted to expanding its product platform and are not necessarily allocable to a specific target. Research and development costs are expensed as incurred. Nonrefundable
advanced payments, if any, for goods and services used in research and development are recognized as an expense as the related goods are delivered or services are performed.
Stock-Based Compensation
The Company accounts for stock-based awards at fair value, which is measured using the Black-Scholes
option-pricing model. The fair value measurement date for employee awards is generally the date of grant. The fair value measurement date for nonemployee awards is generally the date the performance of services is completed. Stock-based compensation
costs are recognized as an expense over the requisite service period, which is generally the vesting period, on a straight-line basis for all time-vested awards. The Company issued performance based grants where the vesting of the grant is tied to
certain milestone performance and in these cases, the compensation is recognized as expense when the probability of the milestone is met.
Stock-based awards to nonemployees are remeasured at each reporting date and recognized as services are rendered, generally on a straight-line
basis. The Company believes that the fair value of these awards is more reliably measurable than the fair value of the services rendered. Stock-based compensation is classified in the accompanying consolidated statements of operations in the
department where the related services are provided.
Net Loss per Share Attributable to Common Stockholders
Basic net loss
attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of
9
common shares outstanding for the period. During periods where the Company might earn net income, the Company would allocate participating securities a proportional share of net income determined
by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the two-class method). Participating securities have the effect of diluting both basic and
diluted earnings per share during periods of income. During periods where the Company incurred net loss, the Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. The
Company computes diluted loss per common share after giving consideration to the dilutive effect of stock options and warrants that are outstanding during the period, except where such nonparticipating securities would be antidilutive.
Income Taxes
Deferred income taxes are provided for the temporary differences arising between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes and for operating loss carryforwards and credits. Deferred tax assets and liabilities are recorded using tax rates expected to be in effect in the year in
which the differences are expected to reverse. A valuation allowance is provided for any net deferred tax assets for which management believes it is more likely than not that the net deferred tax assets will not be realized.
The Company provides liabilities for potential payment of tax to various tax authorities related to uncertain tax positions. The tax benefits
recorded are based on a determination of whether and how much of a tax benefit taken by the Company in its filings or positions is more likely than not to be realized following resolution of any uncertainty related to the tax benefit,
assuming the matter in question will be raised by the tax authorities. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense. At December 31, 2016 and 2015, the Company
had approximately $0.7 million and $0.6 million, respectively, of total unrecognized tax benefits, which would affect income tax expense if recognized, before consideration of its valuation allowance. During fiscal year 2016, the Company did not
make any payment of interest and penalties on unrecognized tax benefits. In addition, there was nothing accrued for in the consolidated balance sheets for the payment of interest and penalties at December 31, 2016.
Guarantees and Indemnification
As permitted under Delaware law, the Company indemnifies its officers and directors
employees for certain events or occurrences while the officer or director is, or was serving at the Companys request in such a capacity. The term of the indemnification is for the officers or directors lifetime. During the
year ended December 31, 2016, the Company did not experience any losses related to these indemnification obligations. The Company does not expect significant claims related to these indemnification obligations, and consequently, has concluded
the fair value of these obligations is not material. Accordingly, as of December 31, 2016 no amounts have been accrued related to such indemnification provisions.
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (the FASB) issued
Accounting Standards Update 2016-18, Statement of Cash FlowsRestricted Cash (Topic 230). This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and
cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and required
retrospective application. The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230) (ASU
2016-15). ASU 2016-15 provides guidance to clarify how cash payments for debt prepayment or debt extinguishment costs are to be classified in the statement of cash flows. The standard is effective for financial statements issued for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation Stock Compensation (Topic 718) (ASU
2016-09). ASU 2016-09 is intended to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2016, with early adoption permitted. For amendments that are to be applied on a modified retrospective basis, a cumulative-effect adjustment will be calculated on the first day of the fiscal year of
adoption, which will be recorded in retained earnings. The Company has early adopted ASU 2016-09 for its quarter ended December 31, 2016. As a result of the Companys adoption of ASU 2016-09, it will track option deductions in its net
operating loss deferred tax asset on a modified retrospective basis, and has included the option deductions in the December 31, 2016 deferred tax assets. In addition, the Companys policy has been to estimate forfeitures as of the grant
date. The
10
Company will continue to maintain its policy to estimate forfeiture as of the grant date in the future. The gross deferred tax asset and valuation allowance as of December 31, 2016,
increased $163,000 as a result of the cumulative effect of adoption of ASU 2016-09. The adoption of ASU 2016-09 did not have a material impact on the Companys financial statements for the year ended and as of December 31, 2016.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (ASU 2016-02), which
provides new accounting guidance on leases. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in ASU 2016-02 are effective for fiscal years beginning after
December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial
application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (Subtopic
205-40): Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are
conditions or events that raise substantial doubt about the entitys ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is
not expected to have a material impact on the Companys consolidated financial statements.
In May 2014, the FASB issued Accounting
Standards Update 2014-09 (ASC 606), Revenue from Contracts with Customers (ASU 2015-09), which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer
of nonfinancial assets. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers which defers the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09, which has been
codified with the Accounting Standards Codification as Topic 606, is now effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. ASC 606 outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, ASC 606 provides guidance on
accounting for certain revenue-related costs including, but not limited to, when to capitalize costs associated with obtaining and fulfilling a contract. ASC 606 provides companies with two implementation methods. Companies can choose to apply the
standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the
annual reporting period that includes the date of initial application (modified retrospective application). Since ASU 2014-09 was issued, several additional Accounting Standards Updates have been issued and incorporated within ASC 606 to clarify
various elements of the guidance. The Company plans to adopt this guidance on January 1, 2018. The Company has not yet determined whether it will utilize the full retrospective or the modified retrospective adoption method and continues to
evaluate the impact that adoption will have on its consolidated financial statements.
3. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the
Company (in thousands, except share data and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net loss attributable to common stockholders basic and diluted
|
|
$
|
(39,305
|
)
|
|
$
|
(39,594
|
)
|
|
$
|
(23,342
|
)
|
Weighted-average number of common shares basic and diluted
|
|
|
27,710,403
|
|
|
|
25,431,332
|
|
|
|
14,548,516
|
|
Net loss per share attributable to common stockholders basic and diluted
|
|
$
|
(1.42
|
)
|
|
$
|
(1.56
|
)
|
|
$
|
(1.60
|
)
|
The Company has reported a net loss for all periods presented, therefore diluted net loss per common share is
the same as basic net loss per common share.
11
The following potentially dilutive securities outstanding have been excluded from the computation
of diluted weighted-average shares outstanding, because such securities had an antidilutive impact due to the losses reported (in common stock equivalent shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Options to purchase common stock
|
|
|
4,020,288
|
|
|
|
3,454,926
|
|
|
|
2,126,176
|
|
Warrants to purchase common stock
|
|
|
365,564
|
|
|
|
300,564
|
|
|
|
128,663
|
|
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Laboratory equipment
|
|
$
|
1,548
|
|
|
$
|
1,314
|
|
Computer equipment
|
|
|
371
|
|
|
|
350
|
|
Office furniture and equipment
|
|
|
66
|
|
|
|
25
|
|
Leasehold improvements
|
|
|
75
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,060
|
|
|
|
1,722
|
|
Less accumulated depreciation and amortization
|
|
|
(1,392
|
)
|
|
|
(1,146
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
668
|
|
|
$
|
576
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended December 31, 2016, 2015, and 2014, was
$261,000, $192,000, and $126,000, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued clinical trial costs
|
|
$
|
2,648
|
|
|
$
|
2,631
|
|
Accrued contract manufacturing expenses
|
|
|
226
|
|
|
|
945
|
|
Accrued compensation and benefits
|
|
|
1,080
|
|
|
|
1,864
|
|
Accrued interest
|
|
|
82
|
|
|
|
136
|
|
Other accrued expenses
|
|
|
575
|
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
4,611
|
|
|
$
|
6,459
|
|
|
|
|
|
|
|
|
|
|
6. LOAN AGREEMENTS
On January 8, 2015 (the Closing Date), the Company entered into a term loan facility of up to $26.0 million (the Term
Loan) with Hercules Technology Growth Capital, Inc. (Hercules). The proceeds were used to repay the Companys existing term loan facility with Lighthouse Capital Partners VI, L.P. (Lighthouse Capital) and for
general corporate and working capital purposes. At December 31, 2016, the Company had $13.1 million in principal outstanding under the Term Loan.
The Term Loan is governed by a loan and security agreement, dated January 8, 2015, between the Company and Hercules (the Hercules
Loan Agreement). The Hercules Loan Agreement provided for up to three separate borrowings, the first of which was funded in the amount of $15.0 million on the Closing Date. On November 24, 2015, the Company drew a second tranche in the
amount of $6.0 million. The Company elected not to commence a randomized Phase 2 clinical study of CRLX101 in combination with chemoradiotherapy on or prior to December 15, 2015, which was a condition of obtaining an additional tranche in an
amount of up to $5.0 million. As a result, the Company is no longer eligible to borrow this amount under the Term Loan.
12
The Term Loan will mature on July 1, 2018. Each advance under the Term Loan accrues interest
at a floating per annum rate equal to the greater of (i) 7.30% or (ii) the sum of 7.30% plus the prime rate minus 5.75%. The Term Loan provided for interest-only payments on a monthly basis until December 31, 2015. Thereafter,
payments are payable monthly in equal installments of principal and interest to fully amortize the outstanding principal over the remaining term of the loan, subject to recalculation upon a change in the prime rate. The Company may prepay the Term
Loan in whole or in part upon seven business days prior written notice to Hercules. Any such prepayment of the Term Loan is subject to a prepayment charge of 1.0%. Amounts outstanding during an event of default are payable upon Hercules
demand and shall accrue interest at an additional rate of 5.0% per annum of the past due amount outstanding. The minimum future principal payments are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2017
|
|
$
|
8,533
|
|
2018
|
|
|
4,544
|
|
Unamortized discount relating to warrants and deferred financing costs
|
|
|
(256
|
)
|
|
|
|
|
|
Total
|
|
|
12,821
|
|
Less current portion
|
|
|
(8,382
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
4,439
|
|
|
|
|
|
|
At the end of the loan term (whether at maturity, by prepayment in full or otherwise), the Company shall pay a
final end of term charge to Hercules in the amount of 6.7% of the aggregate original principal amount advanced by Hercules. The amount of the end of term charge is being accrued over the loan term as interest expense. As of December 31, 2016,
the Company has accrued $1.1 million related to the end of term charge, which has been classified as other long-term liabilities.
In
connection with the Hercules Loan Agreement, the Company issued to Hercules a warrant to purchase shares of the common stock of the Company at an exercise price of $6.05 per share. The warrant is exercisable for 171,901 shares of common stock. The
warrant is exercisable until January 8, 2020. The Company estimated the fair value of the warrant for shares exercisable on the issue date in January 2015 to be $824,000. The value of the warrant was recorded as a discount to the loan. The fair
value of the warrant was estimated on the date of issue for the exercisable shares at that date using the Black-Scholes option-pricing model. The following table shows the Black-Scholes assumptions used to value the warrant:
|
|
|
|
|
|
|
January 8, 2015
|
|
Contractual life
|
|
|
5 years
|
|
Volatility rate
|
|
|
61
|
%
|
Risk-free interest rate
|
|
|
1.5
|
%
|
Expected dividends
|
|
|
|
|
At December 31, 2016, the Companys balance of unamortized deferred financing costs and unamortized
debt discount were $0.1 million and $0.2 million, respectively. These costs are being amortized to interest expense using the effective interest method over the term of the loan.
In connection with the Hercules Loan Agreement, the Company entered into a stock purchase agreement with Hercules, whereby Hercules purchased
135,501 shares of common stock from the Company at a price per share of $7.38, which was equal to the closing price of the common stock on the NASDAQ Global Market on January 7, 2015, for an aggregate purchase price of approximately
$1.0 million.
In December 2011, the Company entered into a loan and security agreement with Lighthouse Capital to borrow up to
$10.0 million in one or more advances by December 31, 2012. In both March 2012 and August 2012, the Company borrowed $5.0 million under the loan and security agreement, for a total of $10.0 million. This amount was being repaid over
36 months beginning on December 1, 2012, at an interest rate of 8.25%. In addition, the Company was required to make an additional payment in the amount of $600,000 at the end of the loan term. The amount was accrued over the loan term as
interest expense. The amount accrued as of December 31, 2014 was $574,000, and it was included in accrued expense in the Companys consolidated balance sheet. In January 2015, the Company repaid in full the amount outstanding under the
Lighthouse Capital agreement, or $3.6 million, with the proceeds from the Hercules Loan Agreement.
13
In connection with the loan and security agreement with Lighthouse Capital, the Company issued
Lighthouse Capital a warrant to purchase a maximum of 66,436 shares of the Companys Series D Preferred Stock, at an exercise price of $12.04 per share and with an expiration date 10 years from the date of issue (December 2021).
The Company determined the fair value of the warrant at the end of each reporting period using the Black-Scholes option pricing model until the warrant converted to a warrant to purchase 66,436 shares of common stock upon the completion of the IPO.
The value of the warrant was recorded as a discount to the loan and was being amortized as interest expense using the effective interest method over the 36-month repayment term. The unamortized discount relating to the warrants, or $0.2 million, was
expensed as interest expense upon repayment of the loan in January 2015.
7. STOCKHOLDERS EQUITY
Common Stock
In 2015, the Company issued 6,716,000 shares of common stock in connection with an underwritten public offering and
during 2014 the Company issued 19,297,952 shares of common stock in connection with its IPO, the conversion of preferred stock and convertible notes into common stock, and the partial exercise of the underwriters overallotment option in the
IPO.
Common Stock Purchase Agreement
On October 14, 2016, the Company entered into a common stock purchase agreement
(the Purchase Agreement) with Aspire Capital Fund, LLC (Aspire Capital), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an
aggregate of $20.0 million of shares of the Companys common stock over a term of 24 months from the execution of the Purchase Agreement. Immediately following the execution of the Purchase Agreement, the Company made an initial sale to Aspire
Capital under the Purchase Agreement of 800,000 shares of common stock at a price of $1.25 per share, for gross proceeds of $1.0 million, and concurrently entered into a registration rights agreement with Aspire Capital registering the shares of the
Companys common stock that have been and may be issued to Aspire Capital under the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 700,000 shares of the Companys common
stock as a commitment fee. The net proceeds of the Aspire Capital transaction, after offering expenses, to the Company were approximately $786,000. At December 31, 2016, up to $19.0 million of the Companys common stock that may be sold at
the prevailing share price at the time of sale subject to conditions specified in the Purchase Agreement remains available.
Reserved
Shares of Common Stock
The Company has reserved the following number of shares of common stock at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Warrants to purchase common stock
|
|
|
365,564
|
|
|
|
300,564
|
|
Common stock options
|
|
|
4,020,288
|
|
|
|
3,995,876
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,385,852
|
|
|
|
4,296,440
|
|
|
|
|
|
|
|
|
|
|
8. STOCK OPTION PLANS
2007 Stock Incentive Plan
The Companys 2007 Incentive Stock Plan, or the 2007 Plan, provides for the grant of qualified
incentive stock options and nonqualified stock options or other awards to the Companys employees, officers, directors, advisors, and outside consultants to purchase up to an aggregate of 1,275,211 shares of the Companys common stock, as
amended in January 2014. The stock options generally vest over a four-year period and expire 10 years from the date of grant. Certain options provide for accelerated vesting if there is a change in control, as defined in the 2007 Plan.
Effective with the IPO, no additional grants will be issued from the 2007 Plan and all shares available for grant under the 2007 Plan were transferred to the 2014 Plan. Accordingly, at December 31, 2016 and 2015, there were no shares available
for future grant under the 2007 Plan.
Prior to the IPO, in determining the exercise prices for options granted, the Companys board
of directors considered the fair value of the common stock as of the measurement date. The fair value of the common stock was determined by the
14
board of directors at each award grant date based upon a variety of factors, including the results obtained from a common stock valuation, the Companys financial position and historical
financial performance, the status of technological developments within the Companys products, the composition and ability of the current research and management team, an evaluation or benchmark of the Companys competition, the current
business climate in the marketplace, the illiquid nature of the common stock, arms-length sales of the Companys capital stock (including redeemable convertible preferred stock), the effect of the rights and preferences of the preferred
shareholders, and the prospects of a liquidity event, among others.
2014 Stock Incentive Plan
In March 2014, the
Companys board of directors adopted and its stockholders approved the 2014 Stock Incentive Plan, or the 2014 Plan, which became effective upon the closing of the IPO. The 2014 Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. The 2014 Plan provides an annual increase in the number of shares available for grant on the first day of each calendar
year beginning with the fiscal year ended December 31, 2015 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2024, equal to the lesser of (i) 1,000,000 shares of common stock, (ii) 4%
of the number of outstanding shares of common stock on such date and (iii) an amount determined by the Companys board of directors. As of December 31, 2016, there were 924,400 shares available for future grant under the 2014 Plan.
A summary of stock option activity for employee and nonemployee awards under the 2007 Plan and the 2014 Plan during the year ended
December 31, 2016 is presented below (Aggregate Intrinsic Value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2016
|
|
|
3,454,926
|
|
|
$
|
5.39
|
|
|
|
8.9
|
|
|
$
|
|
|
Granted
|
|
|
1,597,570
|
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,032,208
|
)
|
|
|
4.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,020,288
|
|
|
$
|
4.31
|
|
|
|
8.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2016
|
|
|
1,634,944
|
|
|
$
|
5.41
|
|
|
|
7.7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at December 31, 2016
|
|
|
3,900,976
|
|
|
$
|
4.33
|
|
|
|
8.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised in the years ended December 31, 2016, 2015, and 2014
was $0, $0, and $161,000, respectively.
The weighted-average per share grant date fair value of options granted during 2016, 2015, and
2014 was $1.07, $3.22, and $3.33, respectively.
The Company has recorded stock-based compensation expense of $2.7 million, $2.4 million,
and $885,000 during the years ended December 31, 2016, 2015, and 2014, respectively, which is based on the number of awards ultimately expected to vest. As of December 31, 2016, there was $4.1 million of unrecognized compensation cost
related to unvested stock-based compensation arrangements granted under the 2007 Plan and the 2014 Plan. The compensation is expected to be recognized over a weighted-average period of 2.02 years at December 31, 2016.
Stock-based compensation expense recorded as research and development and general and administrative expenses is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Research and development
|
|
$
|
1,098
|
|
|
$
|
795
|
|
|
$
|
317
|
|
General and administrative
|
|
|
1,657
|
|
|
|
1,580
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,755
|
|
|
$
|
2,375
|
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model based on the assumptions noted in the table below. Expected volatility for the Companys common stock was determined based on an average of the historical volatility of a peer-group of similar public companies. The Company
has limited option exercise information, as such, the expected term of the options granted was calculated using the simplified method that represents the average of the contractual term of the option and the weighted-average vesting period of the
option. The assumed dividend yield is based upon the Companys expectation of not paying dividends in the foreseeable future. The risk-free rate for periods within the contractual life of the option is based upon the U.S. Treasury yield curve
in effect at the time of grant.
The assumptions used in the Black-Scholes option-pricing model for stock options granted to employees
during the years ended December 31, 2016, 2015, and 2014 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected life
|
|
|
6 years
|
|
|
|
6 years
|
|
|
|
6 years
|
|
Risk-free interest rate
|
|
|
1.20%-2.32%
|
|
|
|
1.45%-2.02%
|
|
|
|
1.71%-2.00%
|
|
Expected volatility
|
|
|
61%-68%
|
|
|
|
51%-63%
|
|
|
|
54%-60%
|
|
Expected dividend rate
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
The Company recorded stock-based compensation expense related to nonemployee awards of $77,000, $173,000, and
$56,000 for the years ended December 31, 2016, 2015, and 2014, respectively. The compensation expense related to the nonemployee awards is included in the total stock-based compensation each year and is subject to re-measurement until the
options vest. The Black-Scholes assumptions used to estimate the fair value of these awards for the years ended December 31, 2016, 2015, and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected life
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
8 years
|
|
Risk-free interest rate
|
|
|
1.56%-2.43%
|
|
|
|
2.10%-2.25%
|
|
|
|
1.86%-2.53%
|
|
Expected volatility
|
|
|
60%-61%
|
|
|
|
60%-61%
|
|
|
|
56%-62%
|
|
Expected dividend rate
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
During the year ended December 31, 2016, the Company granted nonemployee stock options to consultants for
the purchase of 140,000 shares of the Companys common stock. The weighted-average exercise price and the weighted-average fair value of nonemployee stock options granted for the year ended December 31, 2016, was $1.08 per share and $0.46
per share, respectively. The fair value of the grants is being expensed over the vesting period of the options on a straight-line basis as the services are being provided. On September 4, 2015, nonemployee stock options to purchase 90,000
shares of the Companys common stock were converted to employee stock options upon the appointment of the Companys Chief Medical Officer who had been serving as a consultant to the Company until his appointment. The exercise price and the
fair value of these stock options is $4.71 per share and $2.71 per share, respectively. The Company did not grant any nonemployee stock option grants in 2014.
In 2012, the Company granted options to purchase 60,934 common shares to an officer of the Company, now the Companys Chief Executive
Officer, that will vest upon the achievement of business milestones as defined within the stock option agreement. These awards have not vested as of December 31, 2016. Compensation expense for the awards will be recorded if and when the awards
are determined to be probable.
2014 Employee Stock Purchase Plan
In March 2014, the Companys board of directors
adopted and its stockholders approved the 2014 Employee Stock Purchase Plan (the 2014 ESPP), which became effective upon the closing of the IPO. The 2014 ESPP will be administered by the Companys board of directors or by a
committee appointed by the Companys board of directors. The 2014 ESPP initially provides participating employees with the opportunity to purchase up to an aggregate 500,000 of shares of the Companys common stock. The number of shares of
the Companys common stock reserved for issuance under the 2014 ESPP will automatically increase on the first day of each fiscal year, commencing on January 1, 2015 and ending January 1, 2024, in an amount equal to the least of
(i) 600,000 shares of the Companys common
16
stock, (ii) 1% of the total number of shares of the Companys common stock outstanding on the first day of the applicable year, or (iii) an amount determined by the Companys
board of directors. There are two six-month offerings per year. The first offering period under the 2014 ESPP began on July 1, 2015. The compensation expense related to the 2014 ESPP is included in the total stock-based compensation. The
stock-based compensation expense related to the ESPP for the year ended December 31, 2016 and 2015, was $24,000 and $27,000, respectively. There was no stock-based compensation related to the 2014 ESPP recorded for the year ended
December 31, 2014.
9. FAIR VALUE MEASUREMENTS
The Companys financial instruments consist of cash equivalents, accounts payable, accrued expenses, debt obligations, and preferred stock
warrants. The carrying amount of accounts payable and accrued expenses are considered a reasonable estimate of their fair value, due to the short-term maturity of these instruments. The carrying amount of debt is also considered to be a reasonable
estimate of the fair value based on the short-term nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics. If recorded at fair value, Level 2 measurements, as defined below,
would have been used to estimate the fair value. Included in cash and cash equivalents as of December 31, 2016 and 2015, are money market fund investments of $35.0 million and $75.3 million, respectively, which are reported at fair value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value are performed in a manner to maximize the use of
observable inputs and minimize the use of unobservable inputs.
The accounting standard describes a fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
Level 1
Quoted prices (unadjusted) in active markets that are accessible at the market date for identical unrestricted
assets or liabilities.
Level 2
Inputs other than Level 1 that are observable, either directly or indirectly, such
as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs for which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
A summary of the financial assets and liabilities that are measured on a
recurring basis at fair value as of December 31, 2016 and 2015, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
34,950
|
|
|
$
|
|
|
|
$
|
34,950
|
|
|
$
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
75,325
|
|
|
$
|
|
|
|
$
|
75,325
|
|
|
$
|
|
|
The Companys money market funds have been valued on the basis of valuations provided by third-party
pricing services, as derived from such services pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar
characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to
determine the valuation for a security. The Company is ultimately responsible for the consolidated financial statements and underlying estimates. Accordingly, the Company assesses the reasonableness of the valuations provided by the third-party
pricing services by reviewing actual trade data, broker/dealer quotes and other similar data, which are obtained from quoted market prices or other sources.
17
For the years ended December 31, 2016 and 2015, there have been no transfers between levels.
10. INCOME TAXES
Significant
components of the Companys deferred taxes at December 31, 2016, and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Net operating loss carryforwards
|
|
$
|
42,211
|
|
|
$
|
35,797
|
|
Research and development credit carryforwards
|
|
|
2,486
|
|
|
|
2,066
|
|
Capitalized costs
|
|
|
4,453
|
|
|
|
3,977
|
|
Capitalized research and development costs
|
|
|
24,923
|
|
|
|
17,715
|
|
Other
|
|
|
1,878
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
75,951
|
|
|
|
60,458
|
|
Valuation allowance
|
|
|
(75,951
|
)
|
|
|
(60,458
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company has provided a valuation allowance for the full amount of deferred tax assets as the realization
of the deferred tax assets is not determined to be more-likely-than-not. The valuation allowance increased in 2016 and 2015 by approximately $15.5 million and $15.6 million, respectively, due to the increases in the deferred tax assets by the
same amounts. The increases are mainly attributable to operating losses generated in the period.
A reconciliation of income tax expense
computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal income tax expense at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income tax, net of federal benefit
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Permanent differences
|
|
|
(0.6
|
%)
|
|
|
(0.5
|
%)
|
Research and development credit
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
Stock compensation
|
|
|
(0.5
|
%)
|
|
|
(0.7
|
%)
|
Other
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
Change in valuation allowance
|
|
|
(39.2
|
%)
|
|
|
(39.1
|
%)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, the Company has approximately $109.7 million of federal and $90.2 million of state
net operating loss carryforwards that expire at various dates through 2036. At December 31, 2016, the Company has approximately $1.7 million of federal and $1.1 million of state research and development credit carryforwards that expire at
various dates through 2036 for federal credits and 2031 for state credits.
At December 31, 2015, the Company has approximately $93.7
million of federal and $74.1 million of state net operating loss carryforwards that expire at various dates through 2035. At December 31, 2015, the Company has approximately $1.4 million of federal and $0.9 million of state research and
development credit carryforwards that expire at various dates through 2035 for federal credits and 2030 for state credits.
The Company
has early adopted the provisions of ASU 2016-09, Compensation Stock Compensation (Topic 718 Improvements to Employee Share-Based Payment Accounting), for its quarter ended December 31, 2016. ASU 2016-09 requires companies to include the
benefit of an option deduction in its net operating loss carryforward deferred tax asset. Prior to its adoption of ASU 2016-09, the Companys excess tax benefits associated with option deductions were maintained in the Companys APIC pool
of windfall tax benefits, which was tracked off balance sheet and not included in its deferred tax assets. As a result of the Companys adoption of ASU 2016-09, it will track option deductions in its net operating loss
18
deferred tax asset on a modified retrospective basis, and has included the option deductions in the December 31, 2016 deferred tax assets. The gross deferred tax asset and valuation
allowance as of December 31, 2016 increased $163,000 as a result of the cumulative effect of adoption of ASU 2016-09. The Company has not recast its December 31, 2015 and December 31, 2014 deferred tax assets or its rate
reconciliation, and therefore the option deductions in 2015 and 2014 are not included in the net operating loss deferred tax asset as originally reported. Since the Company has historically maintained a full valuation allowance on its net worldwide
deferred tax asset, there is no net impact to retained earnings from the adoption of ASU 2016-09.
Realization of the future tax benefits
is dependent on many factors, including the Companys ability to generate taxable income within the net operating loss carryforward period. The future realization of the net operating loss carryforwards may also be limited by the change of
ownership rules of the Internal Revenue Service under Section 382 and 383 of the Internal Revenue Code. If substantial changes in ownership should occur, there could be annual limitations on the amount of carryforwards that can be realized in
future periods. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed
numerous financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.
The Company files income tax returns in the United States, the Commonwealth of Massachusetts, and Australia. The tax years 2008 through 2016
remain open to examination by these taxing jurisdictions, as carryforwards attributes generated in past years may be adjusted in a future period. The Company is currently not under examination by the Internal Revenue Service or any other
jurisdictions for any tax years. At December 31, 2016 and 2015, the Company had approximately $0.7 million and $0.6 million, respectively, of total unrecognized tax benefits, which would affect income tax expense if recognized, before
consideration of the Companys valuation allowance. During fiscal year 2016, the Company did not make any payment of interest and penalties on unrecognized tax benefits. In addition, there was nothing accrued for in the consolidated balance
sheets for the payment of interest and penalties at December 31, 2016.
11. COMMITMENTS
Facility Lease
On July 9, 2015, the Company entered into a noncancelable operating lease with a third party for office,
laboratory and vivarium space that is scheduled to expire in February 2021, subject to a three-year renewal option. The lease agreement includes base rent escalation over the lease term which will be amortized on a straight-line basis over the lease
term with the resulting deferred liability recorded in other current and long-term liabilities. The resulting deferred liability recorded in other current and long-term liabilities as of December 31, 2016 was $153,000. The lease requires the
Company to share in prorated expenses and property taxes based upon actual amounts incurred; those amounts are not fixed for future periods and, therefore, not included in the future minimum obligations listed below. Rent expense under this lease
was $728,000 for the year ended December 31, 2016.
The Company amended the lease, effective March 29, 2017, to remove 1,753
square feet from the lease, which space was previously used for vivarium and vivarium support purposes. The Companys base rent and share in expenses and property taxes have been reduced based on the revised pro-rata allocation of the premises.
Future minimum lease payments under the non-cancelable operating lease are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
Operating
Leases
|
|
2017
|
|
$
|
690
|
|
2018
|
|
|
738
|
|
2019
|
|
|
786
|
|
2020
|
|
|
830
|
|
2021
|
|
|
140
|
|
|
|
|
|
|
Total
|
|
$
|
3,184
|
|
|
|
|
|
|
Potential Payments upon Termination or Change in Control
On March 19, 2017, the Company
entered into retention agreements with certain executive officers. These retention agreements supersede the provisions of such executive
19
officers employment agreements and retention letters with the Company providing for post-separation benefits, and provide for certain lump sum payments ranging from 6 to 18 months of
salary, plus health and dental insurance coverage, while also providing the covered executives with a cash bonus upon completion of a change in control. Under the terms of the retention agreements, the Company may be required to pay up to
approximately $1.8 million.
12. LICENSING AGREEMENTS
Calando License
The Company has a product license agreement and a platform license agreement with Calando Pharmaceuticals,
Inc. (Calando). Under the product license agreement, the Company may be required to pay Calando up to $32.8 million upon the achievement of specified regulatory and commercial milestones and pay tiered royalty payment ranging from
low-to mid-single digits on commercial sales.
Under the platform license agreement, the Company paid Calando a $250,000 clinical
development milestone which was recorded in December 2014 upon initiation of the Phase 1/2a clinical trial for CRLX301. The Company may be required to make additional milestone payments to Calando of up to $17.8 million, in the aggregate, upon
the achievement of specified regulatory and commercial milestones and pay royalty payments ranging from low-to mid-single digits on commercial sales.
In March 2014, Calando entered Chapter 7 bankruptcy in the District of Delaware and, as a result, the intellectual property rights the Company
has obtained from Calando are subject to potential risks that may arise in connection with bankruptcy. For instance, while the Companys ability to develop and/or commercialize its current product candidates and its ability to utilize its
platform are not dependent on the rights that it licenses from Calando, its license agreements with Calando could be rejected in connection with Calandos bankruptcy, in which case, the Company could, subject to elections and other rights and
defenses that may be available to it, lose certain rights granted to it under such licenses. On March 3, 2015, Calandos bankruptcy trustee submitted an application with the bankruptcy court seeking authority to retain a broker to sell
Calandos rights in certain assets including its rights in the license agreements with the Company, the Company has reserved its rights with respect to any such sale. The trustees last deadline was February 7, 2017. To our knowledge,
no sale of such rights was ever consummated.
SUNY License
The Company is party to a license agreement with The
Research Foundation of State University of New York (SUNY) for certain intellectual property. The agreement as amended requires the Company to pay nonrefundable annual license maintenance fees each year until the date of first commercial
sale of a licensed product pursuant to the license agreement, as amended. The annual license fee is not material in any individual year. In the event of future partner collaborations or product sales incorporating technology covered by this license
agreement, the Company may be required to pay milestone payments and/or product royalties. In connection with this agreement, the Company recorded research and development expense of $30,000, $30,000, and $25,000 for the years ended
December 31, 2016, 2015, and 2014, respectively.
Massachusetts Institute of Technology License
The Company
delivered a notice of termination which became effective on November 1, 2015, with respect to the Companys license agreement with the Massachusetts Institute of Technology (MIT). The agreement as amended required the Company
to pay MIT nonrefundable annual license maintenance fees that increased each year beginning in 2015. In connection with this agreement, the Company recorded research and development expense for annual maintenance fees of $50,000 for the year ended
December 31, 2015, and $10,000 in the year ended December 31, 2014.
13. RETIREMENT PLANS
The Company has a 401(k) retirement and profit-sharing plan (the 401(k) Plan) covering all qualified employees. The
401(k) Plan allows each participant to contribute a portion of their base wages up to an amount not to exceed an annual statutory maximum. Effective January 1, 2010, the Company adopted a Safe Harbor Plan that provides a Company match up
to 4% of salary. The Company contributed a match of $292,000, $264,000, and $163,000 to the 401(k) Plan for the years ended December 31, 2016, 2015, and 2014, respectively.
14. RELATED PARTY TRANSACTIONS
In April
2013, the Company entered into a laboratory, equipment sharing, services and license agreement with an entity affiliated with one of the Companys directors. Fees recorded offsetting research and development expenses under this agreement and
paid in the year ended December 31, 2014, were $39,000. On April 1, 2014, the Company sold used equipment to this entity and recorded proceeds from the sale of $30,000. The agreement was terminated on April 1, 2014.
20
15. REVENUE
In October 2016, the Company entered into a research collaboration agreement with Novartis pursuant to which the Company granted to Novartis
certain exclusive, world-wide licenses to the Companys intellectual property relating to its platform technology and know-how. Under the collaboration, the Company and Novartis agreed to collaborate, over an initial research term of two years,
with respect to the pre-clinical development of nanoparticle drug conjugates comprised of the Companys proprietary polymer covalently linked to Novartis-selected active pharmaceutical ingredients for up to five targets to be agreed upon by the
Company and Novartis. Novartis may extend the initial research term by up to two additional one-year periods. In October 2016, the Company received a $5.0 million upfront payment under the collaboration which it will recognize on a straight-line
basis over the initial term of the collaboration. The Company will also receive funding from Novartis for up to five full-time employees of the Company to be engaged in activities under the collaboration during the research term. For the year ended
December 31, 2016, the Company recognized revenue of $507,000 in connection with the upfront fee and $259,000 in connection with the funding for activities performed under the collaboration during the research term.
In 2013, the Company entered into material transfer agreements with two separate biopharmaceutical companies to conduct feasibility studies
using the Companys proprietary technology. The Company recognized revenue of $80,000 for the year ended December 31, 2014, in connection with these material transfer agreements. The Company had no revenue for the years ended
December 31, 2016 and 2015 related to these agreements.
21
16. QUARTERLY FINANCIAL DATA (unaudited)
The following table summarizes the unaudited quarterly financial data for the last two fiscal years:
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
First Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,770
|
|
|
|
7,522
|
|
|
|
7,089
|
|
|
|
3,184
|
|
General and administrative
|
|
|
3,118
|
|
|
|
2,773
|
|
|
|
2,374
|
|
|
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,888
|
|
|
|
10,295
|
|
|
|
9,463
|
|
|
|
5,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16
|
|
|
|
25
|
|
|
|
25
|
|
|
|
20
|
|
Interest expense
|
|
|
(670
|
)
|
|
|
(589
|
)
|
|
|
(521
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) net
|
|
|
(654
|
)
|
|
|
(564
|
)
|
|
|
(496
|
)
|
|
|
(437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(13,542
|
)
|
|
$
|
(10,859
|
)
|
|
$
|
(9,959
|
)
|
|
$
|
(4,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
27,362,643
|
|
|
|
27,363,965
|
|
|
|
27,383,376
|
|
|
|
28,724,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
First Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,021
|
|
|
|
6,678
|
|
|
|
7,092
|
|
|
|
7,157
|
|
General and administrative
|
|
|
2,681
|
|
|
|
2,717
|
|
|
|
2,954
|
|
|
|
2,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,702
|
|
|
|
9,395
|
|
|
|
10,046
|
|
|
|
10,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3
|
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
Interest expense
|
|
|
(721
|
)
|
|
|
(513
|
)
|
|
|
(509
|
)
|
|
|
(689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) net
|
|
|
(718
|
)
|
|
|
(512
|
)
|
|
|
(505
|
)
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(8,420
|
)
|
|
$
|
(9,907
|
)
|
|
$
|
(10,551
|
)
|
|
$
|
(10,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
20,350,557
|
|
|
|
26,690,673
|
|
|
|
27,307,103
|
|
|
|
27,346,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. SUBSEQUENT EVENTS
In February 2017, the Company announced that its board of directors initiated a review of strategic alternatives that could result in changes
to the Companys business strategy and future operations. As part of this process, the board determined to review alternatives with the goal of maximizing stockholder value, including a potential sale of the Company, a reverse merger, a
business combination or a sale, license or other disposition of company assets.
22
The Company entered into a payoff letter dated as of March 17, 2017 with Hercules pursuant
to which the Company agreed to pay off and thereby terminate the Hercules Loan Agreement. Pursuant to the payoff letter, the Company paid, on March 20, 2017, a total of $12.4 million to Hercules, representing the principal, accrued and unpaid
interest, fees, costs and expenses outstanding under the Hercules Loan Agreement in repayment of its outstanding obligations under the Hercules Loan Agreement. This payoff amount included a final end of term charge to Hercules in the amount of $1.4
million, representing 6.7% of the aggregate original principal amount advanced by Hercules. As of December 31, 2016, the Company has accrued $1.1 million of the end of term charge. Upon the payment of the $12.4 million pursuant to the payoff
letter, all outstanding indebtedness and obligations owed to Hercules under the Loan Agreement were deemed paid in full, and the Loan Agreement was terminated.
On March 19, 2017, the Company entered into an asset purchase agreement (the Novartis Asset Purchase Agreement) with
Novartis. Under the Novartis Asset Purchase Agreement the Company agreed to sell and assign to Novartis all of the Companys right, title and interest in and to the patent rights, know-how and third-party license agreements relating to the
Companys proprietary Dynamic Tumor Targeting Platform (the Platform). At the closing of the Novartis transaction, Novartis will be obligated to pay a purchase price of $6.0 million. Consummation of the Novartis transaction is
subject to certain closing conditions, including, among other things, approval by the Companys stockholders.
On March 19,
2017, the Company also entered into an asset purchase agreement (the BlueLink Asset Purchase Agreement) with BlueLink Pharmaceuticals, Inc. (BlueLink). Under the BlueLink Asset Purchase Agreement the Company sold and assigned to
BlueLink all of the Companys right, title and interest in and to its clinical product candidates CRLX101 and CRLX301 (the Products). The Company also transferred and assigned to BlueLink the accompanying intellectual property
rights and know-how to the Products. On March 21, 2017, BlueLink paid the purchase price of $1.5 million. Also in connection with the BlueLink Asset Purchase Agreement, the Company and BlueLink entered into a license agreement in favor of
BlueLink, pursuant to which the Company agreed to grant to BlueLink an exclusive, worldwide, perpetual, sublicensable right and license, under the Platform, to research, develop and commercialize the Products. Pursuant to the Novartis Asset Purchase
Agreement between the Company and Novartis, Novartis will assume the BlueLink License upon the closing of the Novartis transaction.
On
March 19, 2017, the Company also entered into a stock purchase agreement (the Stock Purchase Agreement) with Daré Bioscience, Inc. (Daré), and the holders of capital stock and securities convertible into
capital stock of Daré named therein (Selling Stockholders), pursuant to which, among other things, the Selling Stockholders agreed to sell to the Company, and the Company agreed to purchase from the Selling Stockholders, all of
the outstanding shares of capital stock, including those issuable upon conversion of convertible securities, of Daré (the Daré Transaction). Immediately following the closing of the Daré Transaction, the Selling
Stockholders are expected to own between approximately 51% and 70% (depending on the net cash positions of the Company and Daré at closing) of the outstanding equity securities of Cerulean Pharma Inc. Consummation of the Daré
Transaction is subject to certain closing conditions, including, among other things, approval by the Companys stockholders. The exchange ratio, and therefore fair value of exchange consideration, are indeterminable at this time, and as such
the full disclosures required under Accounting Standards Codification 805, Business Combinations, are impracticable. The Stock Purchase Agreement contains certain termination rights for both the Company and Daré, and further provides that,
upon termination of the Stock Purchase Agreement under specified circumstances, the Company may be required to pay Daré a termination fee of $0.3 million, or Daré may be required to pay the Company a termination fee of $0.45 million.
There can be no assurances that the Daré Transaction will be consummated.
On March 20, 2017, the Company announced a
restructuring including the elimination of approximately 58% of its workforce, to a total of eight full-time equivalent employees, under a plan expected to be completed during the second quarter of 2017.
23