News Column

CERULEAN PHARMA INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 27, 2014

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



Overview

We are a clinical-stage oncology-focused company applying our proprietary dynamic tumor targeting platform to develop differentiated therapies. Our nanopharmaceutical product candidates consist of proprietary polymers that are covalently linked to anti-cancer therapeutics, or payloads. We believe these nanopharmaceuticals dynamically target tumors by exploiting the leakiness of new blood vessels in tumors as an entry portal into tumor tissue, followed by active uptake into tumor cells and the sustained release of the anti-cancer payload inside the tumor cells. We have devoted substantially all of our resources to our drug discovery and development efforts, including conducting clinical trials for our product candidates, protecting our intellectual property and the general and administrative support of these operations. To date, we have generated no revenue from product sales. We expect that it will be several years before we commercialize a product candidate, if ever. Through March 31, 2014, we have funded our operations primarily through $84.2 million in proceeds from the sale of shares of our convertible preferred stock, $10.0 million in proceeds from borrowings under our loan and security agreement with Lighthouse Capital Partners VI, L.P., or Lighthouse Capital, and $17.3 million in proceeds from our sale of convertible promissory notes. We have never been profitable and have incurred significant operating losses since our incorporation. As of March 31, 2014, we had an accumulated deficit of $101.4 million. We incurred net losses of approximately $2.9 million for the three months ended March 31, 2014 and $5.6 million for the three months ended March 31, 2013. We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we attempt to advance our product candidates from discovery through preclinical studies and clinical trials, and as we seek regulatory approval for, and eventually commercialize our product candidates. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We will need to raise additional capital in the future to support our expenses and operating activities.



Recent Developments

On April 15, 2014 we completed the sale of 8,500,000 shares of common stock in our initial public offering or IPO at a price to the public of $7.00 per share. On May 7, 2014 we completed the sale of an additional 1,069,715 shares of common stock at a price to the public of $7.00 per share, pursuant to a partial exercise by the underwriters of their option to purchase additional shares of common stock. Estimated net proceeds from our IPO were determined as follows: Gross proceeds (including over-allotment) $



66,988,000

Underwriting discounts and commissions



(3,934,000 ) Estimated total offering costs (including costs paid as of March 31, 2014)

(2,914,000 ) Offering costs paid as of March 31, 2014



1,319,000

Estimated net proceeds to be received subsequent to March 31, 2014$ 61,459,000 10



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In addition, each of the following occurred in the second quarter of 2014 in connection with the completion of our IPO on April 15, 2014:

• the conversion of all outstanding shares of convertible preferred stock into

6,826,004 shares of our common stock;



• the conversion of $17.8 million of outstanding principal and accrued interest

on convertible notes into 2,902,233 share of our common stock; and



• the conversion of warrants to purchase 1,857,226 shares of convertible

preferred stock warrants to purchase 128,663 shares of our common stock and

our reclassification of the $0.4 million warrant liability to additional

paid-in capital.

Financial Operations Overview

Revenue

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



To date, our only revenue has consisted of a government tax credit that we received in 2010 and payments in 2011, 2012, 2013, and 2014 from four material transfer agreements and a research agreement.

Research and Development Expenses

Research and development expense consists of costs incurred in connection with the discovery and development of our nanopharmaceutical platform and our product candidates. These expenses consist primarily of:



• employee-related expenses, including salaries, benefits and stock-based

compensation expense;



• expenses incurred under agreements with contract research organizations,

investigative sites that conduct our clinical trials and consultants that

conduct a portion of our preclinical studies; • expenses relating to scientific consultants and advisors; • the cost of acquiring and manufacturing clinical trial materials;



• facilities, depreciation of fixed assets and other allocated expenses,

including direct and allocated expenses for rent and maintenance of facilities and equipment;



• lab supplies, reagents, active pharmaceutical ingredients and other direct

and indirect costs in support of our preclinical activities; • license fees related to in-licensed products and technology; and



• costs associated with non-clinical activities and regulatory approvals.

We expense research and development costs as incurred.

Conducting a significant amount of research and development is central to our business model. Product candidates in late stages of clinical development generally have higher development costs than those in earlier stages of clinical development primarily due to the increased size and duration of late-stage clinical trials. We plan to increase our research and development expenses for the foreseeable future as we continue multiple clinical trials of CRLX101, initiate and continue clinical testing of CRLX301 and advance our earlier-stage research and development projects. 11



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We use our employee and infrastructure resources across multiple research and development programs. We track external research and development expenses and personnel expense on a program-by-program basis and have allocated expenses such as stock-based compensation and indirect laboratory supplies and services to each program based on the personnel resources allocated to each program. Facilities, depreciation and scientific advisory board fees and expenses are not allocated to a program and are considered overhead. Expenses incurred prior to the acquisition of our cyclodextrin polymer containing nanopharmaceutical, or CDP, technology in mid-2009 have been reflected as the cost to develop our proprietary nanopharmaceutical platform in the period from November 28, 2005 (the date of our incorporation) to March 31, 2014, as these expenses were incurred prior to the establishment of the CRLX101 and CRLX301 programs. Below is an unaudited summary of our research and development expenses for the three months ended March 31, 2014 and 2013 and the period from the date of our incorporation through March 31, 2014 (in thousands). Period from Three Months Ended November 28, 2005 March 31, (Date of Incorporation) 2014 2013 to March 31, 2014 CRLX101 $ 893$ 1,677 $ 29,232 CRLX301 164 853 7,691 Nanopharmaceutical platform 280 693 26,729 Overhead 158 256 4,885



Total research and development expense $ 1,495$ 3,479

$ 68,537



The following summarizes our research and development programs.

CRLX101

We are supporting a Phase 1b/2 investigator-sponsored trial, (or an "IST"), of CRLX101 in combination with Avastinฎ (bevacizumab), in patients with relapsed renal cell carcinoma, and we intend to commence a randomized, Phase 2 clinical trial of CRLX101 in combination with Avastin in this indication in the second half of 2014. We are supporting a Phase 2 IST of CRLX101 as monotherapy in patients with relapsed ovarian cancer and a Phase 2 IST of CRLX101 in combination with Avastin in patients with relapsed platinum-resistant ovarian cancer. Assuming positive results from the IST in relapsed ovarian cancer of CRLX101 in combination with Avastin, we expect to initiate, in 2015, a pivotal randomized clinical trial of CRLX101 in combination with Avastin in this indication. We are supporting a Phase 1b/2 IST of CRLX101 in combination with chemoradiotherapy, consisting of Xeloda and radiotherapy, in patients with neoadjuvant rectal cancer, and, assuming favorable results from this trial, we expect to commence a randomized, Phase 2 clinical trial of CRLX101 in combination with chemoradiotherapy in this indication in 2015. We cannot accurately project future research and development expenses for our CRLX101 program because such expenses are dependent on a number of variables, including, among others, the cost and design of any additional clinical trials, the duration of the regulatory process and the results of any clinical trials. Under our license agreement with Calando Pharmaceuticals, Inc., or ("Calando"), pursuant to which we obtained rights to CRLX101, or the CRLX101 Agreement, we will be required to make regulatory and commercial milestone payments in an aggregate amount of up to $32.8 million to Calando upon the achievement of specified regulatory and commercial milestones. In addition, under the CRLX101 Agreement, if we, or one of our affiliates, sell CRLX101, we are required to pay tiered royalty payments ranging from low- to mid-single digits, as a percentage of worldwide net sales, depending on whether there is patent protection for CRLX101 at the time of the sale. In the event we license or sublicense the intellectual property that we purchased or licensed from Calando, we are required to pay Calando a percentage of the income we receive from the licensee or sublicensee to the extent attributable to such license or sublicense, subject to certain exceptions. The percentage of such license income that we are obligated to pay Calando ranges from the low- to mid-double digits depending on the development stage of CRLX101 at the time we first provide or receive draft terms of a license arrangement with the third party that results in a license agreement. CRLX301 We are currently conducting preclinical studies of CRLX301 and intend to commence clinical trials by the end of 2014. We cannot accurately predict future research and development expenses for our CRLX301 program because such costs are dependent on a number of variables, including, among others, the cost and design of any additional clinical trials, the duration of the regulatory process and the results of the planned Phase 1 clinical trials and any future trials. 12



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Under our license agreement with Calando pursuant to which we obtained rights to Calando's cyclodextrin system for purposes of conjugating or complexing certain other therapeutic agents to the system, or the ("Platform Agreement"), we will be required to pay a $250,000 clinical development milestone to Calando when we initiate our Phase 1 clinical trial of CRLX301. We intend to initiate the Phase 1 clinical trial and pay this milestone by the end of 2014. We may also be required to make regulatory and commercial milestone payments in an aggregate amount of up to $17.8 million to Calando upon the achievement of specified regulatory and commercial milestones. Further, under the Platform Agreement, if we, or one of our affiliates, sell CRLX301, we are required to pay tiered royalty payments ranging from low- to mid-single digits, as a percentage of worldwide net sales, depending on whether there is patent protection for CRLX301 at the time of the sale. In the event we license or sublicense the intellectual property that we purchased or licensed from Calando, we are required to pay Calando a percentage of the income we receive from the licensee or sublicensee to the extent attributable to such license or sublicense, subject to certain exceptions. The percentage of such license income that we are obligated to pay Calando is in the low double digits.



Nanopharmaceutical Pipeline

We expect that the expenses related to our nanopharmaceutical pipeline will continue to increase as we seek to identify additional targets for preclinical research and add personnel to these projects. We cannot accurately predict future research and development expenses for our nanopharmaceutical pipeline because such costs are dependent on a number of variables, including the success of preclinical studies on any such nanopharmaceuticals. The successful development of any of our product candidates is highly uncertain. As such, at this time, we cannot reasonably predict with certainty the duration and costs of the current or future clinical trials of any of our product candidates or if, when or to what extent we will generate revenues from any commercialization and sale of any of our product candidates that obtain marketing approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:



• the scope and rate of progress of our ongoing as well as any additional

clinical trials;



• the scope, progress, results and costs of preclinical development,

laboratory testing and other research and development activities; • results from ongoing as well as any additional clinical trials; • significant and changing government regulation;



• the costs, timing and outcome of regulatory review of our product

candidates; • our ability to establish and maintain strategic partnerships, and the



terms and success of those partnerships, if any, including the timing and

amount of payments that we might receive from potential strategic partners;



• our ability to manufacture, market, commercialize and achieve market

acceptance for any of our product candidates that we are developing or may

develop in the future; • the emergence of competing technologies and products and other adverse

market developments; and



• the cost of preparing, filing and prosecuting patent applications and

maintaining, enforcing and defending intellectual property-related claims.

Any change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the cost and timing associated with the development of that product candidate. For example, if the U. S. Food and Drug Administration, or the FDA or a comparable non-U.S. regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. As a result of the uncertainties discussed above, we are unable to determine when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing 13



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basis in response to the scientific and clinical success of each product candidate, as well as our ongoing assessment of the product candidate's commercial potential. We will need to raise additional capital in the future in order to complete the development and commercialization of CRLX101 and CRLX301 and to fund the development of our other product candidates.



General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in our executive, finance, business development, marketing, legal and human resources functions. Other general and administrative expenses include patent filing, patent prosecution, professional fees for legal, insurance, consulting, information technology, auditing and tax services and facility costs not otherwise included in research and development expenses.



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

• we expect to incur increased general and administrative expenses to



support our research and development activities, which we expect to expand

as we continue to pursue the development of our product candidates;

• we expect our general and administrative expenses to increase as a result

of increased payroll, expanded infrastructure, higher consulting, legal, accounting and investor relations costs, director compensation and director and officer insurance premiums associated with being a public company; and

• we may begin to incur expenses related to sales and marketing of our



product candidates in anticipation of commercial launch before we receive

regulatory approval of a product candidate.

Interest Income

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

Interest Expense

Interest expense consists primarily of interest, amortization of debt discount and amortization of deferred financing costs associated with our debt facility with Lighthouse Capital and interest expense on our convertible notes.



Change in Fair Value of Preferred Stock Warrant Liability

The preferred stock warrant liability is associated with warrants to purchase shares of our preferred stock issued to lenders and investors. The change in fair value consists of the calculated change in value based upon the fair value of the underlying security at the end of each reporting period as calculated using the Black-Scholes option-pricing model. The preferred stock warrants were automatically adjusted on the date of the closing of the IPO, April 15, 2014 to provide for the issuance of shares of common stock upon their exercise. The preferred stock warrant liability has been eliminated as of April 15, 2014.



Results of Operations

Comparison of Three Months Ended March 31, 2014 and 2013 (Unaudited)

The following table summarizes our consolidated results of operations for the three months ended March 31, 2014 and 2013, together with the changes in those items in dollars and as a percentage (in thousands, except percentages): Three Months Ended March 31, Change 2014 2013 Dollar % Revenue $ 47 $ - $ 47 * Operating expenses: Research and development 1,495 3,479 (1,984 ) (57 )% General and administrative 1,510 1,972 (462 ) (23 )% Loss from operations (2,958 ) (5,451 ) 2,493 46 % Other income/(expense), net 44 (121 ) 165 * Net loss $ (2,914 )$ (5,572 )$ 2,658 48 % * Not meaningful 14



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Revenue. Revenue for the three months ended March 31, 2014 was $47,000 compared to no revenue for the three months ended March 31, 2013. We recorded revenue in 2014 in connection with two material transfer agreements. Pursuant to the agreements, we received payments in exchange for providing research services utilizing our proprietary technology for research purposes. 15



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Research and development. The following table summarizes our research and development expense by program for the three months ended March 31, 2014 and 2013, together with the change in spending by program in dollars and as a percentage (in thousands, except percentages):

Three Months Ended March 31, Change 2014 2013 Dollar % CRLX101 $ 893 $ 1,677$ (784 ) (47 %) CRLX301 164 853 (689 ) (81 %) Nanopharmaceutical platform 280 693 (413 ) (60 %) Overhead 158 256 (98 ) (38 %)



Total research and development expense $ 1,495$ 3,479$ (1,984 ) (57 %)

Research and development expense for the three months ended March 31, 2014 was $1.5 million compared to $3.5 million for the three months ended March 31, 2013, a decrease of $2.0 million, or 57%. The decrease was reflected across all programs. The $0.8 million decrease in CRLX101 expense was primarily the result of winding down our Phase 2 clinical trial of CRLX101 as monotherapy in patients with advanced small cell lung cancer, or the NSCLC clinical trial, which was substantially completed in March 2013. Clinical trial expense decreased $0.3 million, contract manufacturing expense for clinical trial material decreased by $0.4 million and preclinical expense decreased by $0.1 million. The decrease in spending on the CRLX301 program in the three months ended March 31, 2014 from the three months ended March 31, 2013 was the result of our completion of development activities, such as investigational new drug, or IND, enabling studies and process development, early in 2013. We intend to advance CRLX301 into a Phase 1 clinical trial by the end of 2014. Expenses associated with our nanopharmaceutical platform decreased $0.4 million, mainly as a result of reduced staff in new discovery research as our primary emphasis shifted to the development of our existing product candidates. The $0.1 million decrease in overhead expense was due mainly to a reduction in retainer-based advisory agreements and reduced depreciation expense. General and administrative. General and administrative expense for the three months ended March 31, 2014 was $1.5 million compared to $2.0 million for the three months ended March 31, 2013, a decrease of $0.5 million, or 25%. The decrease was the result of a $0.6 million decrease in outside corporate and intellectual property legal expense, offset by a $0.1 million increase in personnel costs and consulting expense. Other income (expense), net. Other income (expense), net for the three months ended March 31, 2014 was $44,000 net income compared to ($0.1) million net expense for the three months ended March 31, 2013, a decrease of expense of $0.1 million. The decrease in net expense primarily resulted from the adjustment to the fair value of our outstanding preferred stock warrant liability of $0.2 million. This adjustment was offset by an increase in recorded interest expense of $0.1 million. We recorded $0.2 million interest expense on our convertible promissory notes in 2014, which were not outstanding as of March 31, 2013 and we paid $0.1 million less in interest expense in 2014 compared with 2013, related to the loan and security agreement with Lighthouse Capital.



Liquidity and Capital Resources

From our incorporation through March 31, 2014, we have raised an aggregate of $111.5 million to fund our operations, of which $84.2 million was from the sale of preferred stock, $10.0 million was from borrowings under our loan and security agreement with Lighthouse Capital and $17.3 million was from the sale of convertible promissory notes. As of March 31, 2014, we had cash and cash equivalents of approximately $8.5 million. As discussed above, our IPO, including the exercise of the over-allotment option and related transactions resulted in net proceeds of $61.5 million subsequent to March 31, 2014.



Indebtedness

In 2011, we entered into a loan and security agreement, or the ("loan agreement"), with Lighthouse Capital. The loan agreement permitted us to borrow up to an aggregate principal amount of $10.0 million. We borrowed $5.0 million in March 2012 and an additional $5.0 million in August 2012. The loan agreement is secured by substantially all of our assets other than our intellectual property. We have also granted Lighthouse Capital a negative pledge with respect to our intellectual property, which, among other things, prohibits us from selling, transferring, assigning, mortgaging, pledging, leasing, granting a security interest in or otherwise encumbering our intellectual property. The loan agreement includes restrictive covenants that may restrict our ability to obtain further debt or equity financing. The aggregate principal amount outstanding 16



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under the loan agreement accrues interest at an annual rate of 8.25% and is payable over 36 monthly payments beginning on December 1, 2012, with a one-time final payment of 6% of the original principal amount due on December 1, 2015. As of March 31, 2014, there was $5.9 million in principal amount outstanding under the loan agreement. In 2013, we issued and sold convertible promissory notes, or our 2013 convertible notes, in an aggregate principal amount of $8.8 million to certain of our stockholders. Our 2013 convertible notes bear interest at an annual rate of 7%. In connection with the completion of our IPO on April 15, 2014, all principal and accrued interest under our 2013 convertible notes converted into an aggregate of 1,319,302 shares of our common stock, at the IPO price of $7.00 per share. In 2014, we issued and sold convertible promissory notes, or our 2014 convertible notes, in an aggregate principal amount of $8.5 million to certain of our stockholders and one additional purchaser. The 2014 convertible notes bear interest at an annual rate of 7%. In connection with the completion our IPO on April 15, 2014, all principal and accrued interest under our 2014 convertible notes converted into an aggregate of 1,582,931 shares of our common stock, at 77.5% of the IPO per share price, or $5.43 per share.



Plan of Operations and Future Funding Requirements

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, contract manufacturing services, laboratory and related supplies, clinical trial costs, legal and other regulatory expenses and general overhead costs. We believe that the net proceeds from our IPO, together with approximately $8.5 million of cash and cash equivalents as of March 31, 2014, will fund our operating expenses, debt service and capital expenditure requirements for at least the next twelve months, which we expect will enable us to fund our planned randomized Phase 2 clinical trial of CRLX101 in combination with Avastin in relapsed renal cell carcinoma, to support the ongoing CRLX101 ISTs and to fund our planned Phase 1 clinical trial of CRLX301. We have based these estimates on assumptions that may prove to be wrong, and we may exhaust our capital resources sooner than we currently expect. If we achieve positive results from our ISTs in relapsed ovarian cancer and/or neoadjuvant rectal cancer, sufficient to initiate randomized Phase 2 clinical trials, we will need to raise additional capital to complete those clinical trials . In addition, the process of testing product candidates in clinical trials is costly, and the timing of progress in clinical trials is uncertain. Because our drug candidates are in various stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. Our future capital requirements will depend on many factors, including: • the progress and results of our clinical trials of CRLX101; • the progress and results of our clinical trials of CRLX301;



• our ability to manufacture sufficient supply of our product candidates and

costs thereof;



• the scope, progress, results and costs of preclinical development,

laboratory testing and clinical trials for our other drug candidates;

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

• the costs and timing of future commercialization activities, including



product manufacturing, marketing, sales and distribution for any of our

drug candidates for which we receive marketing approval;



• the number and development requirements of other drug candidates we pursue;

• our ability to enter into collaborative agreements and achieve milestones

under those agreements;



• the revenue, if any, received from commercial sales of our drug candidates

for which we receive marketing approval; • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and • the extent to which we acquire or in-license other products and technologies. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and revenue from collaboration arrangements. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted, and the 17



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terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market drug candidates that we would otherwise prefer to develop and market ourselves.



Cash Flows

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

Period from November 28, 2005 (Date of Three Months Ended March 31, Incorporation) to March 31, 2014 2013 2014 Net cash (used in) operating activities $ (3,666 )$ (4,602 ) $ (94,318 ) Net cash (used in) investing activities (4 ) (2 ) (2,337 ) Net cash provided by (used in) financing activities 6,650 (732 ) 105,123 Net increase (decrease) in cash and cash equivalents $ 2,980$ (5,336 ) $ 8,468



Net Cash Used in Operating Activities

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

Net cash used in operating activities was $3.7 million for the three months ended March 31, 2014 compared with $4.6 million for the three months ended March 31, 2013, a decrease of $0.9 million. The decrease primarily resulted from a $2.0 million decrease in research and development expense and $0.5 million decrease in general and administrative expense. These decreases were offset by an increase of $1.6 million resulting from net changes in the components of working capital primarily associated with a decrease in accrued expenses in the amount of $0.8 million, a decrease in the preferred stock warrant liability in the amount of $0.5 million and an increase in prepaid deferred financing costs associated with the IPO and the issue of convertible notes in the amount of $0.4 million.



Net Cash Used in Investing Activities

Net cash used in investing activities was $4,000 for the three months ended March 31, 2014 compared to $2,000 for the three months ended March 31, 2013. The increase was primarily the result of additional research laboratory equipment and employee computers purchased in the three months ended March 31, 2014 compared to similar purchases in the three months ended March 31, 2013.



Net Cash Provided by Financing Activities

Net cash provided by financing activities was $6.7 million during the three months ended March 31, 2014 compared to net cash used in financing activities of $0.7 million during the three months ended March 31, 2013. During the three months ended March 31, 2014, we sold $8.5 million in convertible promissory notes, repaid indebtedness under the loan agreement with Lighthouse Capital in the amount of $0.8 million and we paid $1.1 million of deferred financing costs related to the IPO and the convertible note issuance. In comparison, we repaid indebtedness under the loan agreement with Lighthouse Capital in the amount of $0.7 million, in the three months ended March 31, 2013. 18



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Contractual Obligations and Contingent Liabilities

During the three months ended March 31, 2014, there were no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed in our prospectus filed with the SEC pursuant to Rule 424(b)(4) on April 14, 2014.



Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

From time to time, new pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on our accounting and reporting. We believe that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on our accounting or reporting or that such impact will not be material to our financial position, results of operations, and cash flows when implemented. 19



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