UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2018

OR

For the transition period from                      to                     

Commission File Number: 001-38584

CONSTELLATION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

(617) 714-0555

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

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

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

As of July 31, 2018, the registrant had 25,718,830 shares of common stock, $0.0001 par value per share, outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plan, objectives of management and expected market growth are forward-looking statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” and include, among other things:

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We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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Constellation Pharmaceuticals, Inc.

Table of Contents

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PART I—FINANCIAL INFORMATION

CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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CONSTELLATION PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1. Nature of the Business and Basis of Presentation

Constellation Pharmaceuticals, Inc. (“Constellation” or the “Company”) is a clinical-stage biopharmaceutical company using its expertise in epigenetics to discover and develop novel therapeutics that address serious unmet medical needs in patients with cancers associated with abnormal gene expression or drug resistance. The Company was incorporated in January 2008 as EpiGenetiX, Inc. under the laws of the State of Delaware. On March 31, 2008, the Company changed its name to Constellation Pharmaceuticals, Inc.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

On July 6, 2018, the Company effected a 1-for-11.009 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s convertible preferred stock (see Note 7). Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the convertible preferred stock conversion ratios.

On July 23, 2018, the Company completed an initial public offering (“IPO”) of its common stock and issued and sold 4,000,000 shares of common stock at a public offering price of $15.00 per share, resulting in net proceeds of $55.8 million after deducting underwriting discounts and commissions but before deducting offering costs.

Upon closing of the IPO, the Company’s outstanding convertible preferred stock automatically converted into shares of common stock (see Note 7 and Note 14). Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the convertible preferred stock to common stock and additional paid-in capital.

The accompanying financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has funded its operations with the sales of convertible preferred stock, payments received in connection with collaboration agreements, borrowings under loan agreements, and most recently, with proceeds from the IPO completed in July 2018. The Company has incurred recurring losses since inception, including net losses attributable to the Company of $11.9 million and $24.0 million for the three and six months ended June 30, 2018, respectively, and $35.4 million for the year ended December 31, 2017. As of June 30, 2018, the Company had an accumulated deficit of $198.0 million. The Company expects to continue to generate operating losses in the foreseeable future. As of August 14, 2018, the issuance date of the interim financial statements, the Company expects that its cash, cash equivalents and marketable securities, including net proceeds it received from the completion of its IPO in July 2018, will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the issuance date of the interim financial statements.

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The balance sheet at December 31, 2017 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2017 included in the Company’s Registration Statement on Amendment No. 1 to Form S-1, File No. 333-225822 filed with the SEC on July 9, 2018. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2018 and results of operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017 have been made. The Company’s results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018 or any other interim period.

Concentrations of Credit Risk and of Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains most of its cash and cash equivalents at two accredited financial institutions in amounts that could exceed federally insured limits. Cash equivalents are invested in an institutional money market fund. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. 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 must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

The Company’s cash equivalents and preferred stock warrant liability are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities. The carrying value of the Company’s outstanding debt as of June 30, 2018 and December 31, 2017 (see Note 6) approximated fair value (a Level 3 measurement) based on interest rates currently available to the Company.

Revenue Recognition

On January 1, 2018, the Company adopted the new revenue standard, discussed below under the heading “Recently Adopted Accounting Pronouncements”, which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries (“ASC 606”). Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, the Company performs the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer.

The Company accounts for a contract with a customer that is within the scope of ASC 606 when all of the following criteria are met: (i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance and (v) collection of substantially all of the consideration to which the Company will be entitled in exchange for the goods or services that will be transferred to the customer is probable.

The Company estimates the transaction price based on the amount of consideration the Company expects to be received for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of the potential payments and the likelihood that the payments will be received. The Company utilizes either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price.

For arrangements that include development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue and net income (loss) in the period of adjustment.

For sales-based royalties, including milestone payments based on the level of sales, the Company determines whether the sole or predominant item to which the royalties relate is a license. When the license is the sole or predominant item to which the sales-based royalty relates, the Company recognizes revenue at the later of: (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

The Company allocates the transaction price based on the estimated standalone selling price. The Company must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts the Company would expect to receive for each performance obligation.

For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation in order to determine whether the combined performance obligation is satisfied over time or at a point in time. The Company determines the appropriate method of measuring progress of combined performance obligations satisfied over time for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenue from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The Company receives payments from customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605-25, Multiple-Element Arrangements and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Companies have the option of applying this new guidance retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2017 and for interim periods within that reporting period. For nonpublic entities, the guidance is effective for annual reporting periods beginning after December 15, 2018. The Company early-adopted ASU 2014-09 on January 1, 2018 using the modified retrospective transition method. The adoption did not have an impact on its financial statements as the Company had met its performance obligations under its one revenue contract prior to the adoption of ASU 2014-09. The adoption of ASU 2014-09 did not have an impact on the Company’s accounting for contingent milestone or royalty payments.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. For both public and nonpublic entities, the standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2017-09 did not have a material impact the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years. For nonpublic entities, the guidance is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

accounting for these mandatorily redeemable instruments. For public entities, this guidance is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. For nonpublic entities, this guidance is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have on its financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. For public entities, ASU 2018-07 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. For non-public entities, ASU 2018-07 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities but no earlier than the Company’s adoption of ASU 2014-09. The Company is currently evaluating the impact that the adoption of ASU 2018-07 will have on its financial statements.

3. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

Money market funds were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 1 measurement within the fair value hierarchy.

The preferred stock warrant liability represents the fair values of warrants to purchase Series B convertible preferred stock. The fair values of the warrants are based on significant inputs not observable in the market, which represent a Level 3 measurement within the fair value hierarchy. The Company’s valuation of the preferred stock warrants utilized the Black-Scholes option-pricing model, which incorporates assumptions and estimates to value the preferred stock warrants. The Company assessed these assumptions and estimates on a quarterly basis as additional information impacting the assumptions was obtained.

The quantitative elements associated with the Company’s Level 3 inputs impacting the fair value measurement of the preferred stock warrant liability include the fair value per share of the underlying convertible preferred stock, the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield and expected volatility of

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

the price of the underlying convertible preferred stock. The Company determines the fair value per share of the underlying preferred stock by taking into consideration its most recent sales of its convertible preferred stock as well as additional factors that the Company deems relevant. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of a representative group of public companies in the biotechnology industry for the expected terms. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected terms. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends.

The following table provides a roll forward of the aggregate fair values of the Company’s warrants to purchase convertible preferred stock for which fair value is determined by Level 3 inputs (in thousands):

4. Accrued Expenses and Other Current Liabilities

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

5. Collaboration Agreement

The Company has a collaboration agreement (the “LLS Agreement”) with the Leukemia and Lymphoma Society, (“LLS”) pursuant to which LLS committed to provide funding to the Company for research and development services, conditional on (i) the achievement of milestones in accordance with the LLS Agreement and (ii) equal funding being provided by the Company. Through December 31, 2017 and June 30, 2018, the Company received funding totaling $7.2 million and $7.4 million, respectively, from LLS upon the achievement of specified milestones, which were recorded as a reduction of research and development expense.

The LLS Agreement requires the Company to make payments to LLS upon the Company’s achievement of specified milestones that could total up to $25.0 million in aggregate (see Note 11).

6. Debt

The Company entered into a loan and security agreement with Oxford Finance LLC and Silicon Valley Bank in April 2016 (the “2016 Loan Agreement”), pursuant to which the Company borrowed $11.8 million. The 2016 Loan Agreement obligated the Company to make monthly, interest-only payments until November 1, 2016 and, thereafter, to pay 21 consecutive, equal monthly installments of principal plus interest from November 1, 2016 through July 1, 2018. The 2016 Loan Agreement bears interest at an annual rate of 7.6%. In addition, a final payment equal to 5.0% of the original principal amount is due upon the final principal payment for the tranche, which amount is being accreted over the term of the debt, using the effective interest method. As of June 30, 2018 and December 31, 2017, the total amount accrued included in accrued expenses and other current liabilities was $0.6 million. The effective annual interest rate of the outstanding debt under the 2016 Loan Agreement is approximately 12%. Borrowings

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

under the 2016 Loan Agreement mature on July 1, 2018 and are collateralized by substantially all of the Company’s personal property, other than its intellectual property, and by a negative pledge on intellectual property. The remaining outstanding principal balance of $0.6 million as of June 30, 2018 and final payment of $0.6 million were repaid on July 3, 2018 in accordance with the repayment terms of the 2016 Loan Agreement.

7. Convertible Preferred Stock

As of June 30, 2018, the Company had issued Series A, Series B, Series D, Series E, Series E-1 and Series F convertible preferred stock (collectively the “Preferred Stock”). The Preferred Stock is classified outside of stockholders’ deficit because the shares contain redemption features that are not solely within the control of the Company.

In March 2018, the Company issued and sold an aggregate of 68,500,000 shares of Series F convertible preferred stock (the “Series F Preferred Stock”), at a price of $1.00 per share, for proceeds of $68.4 million, net of issuance costs of $0.1 million. In April 2018, the Company issued and sold an aggregate of 31,250,000 shares of Series F Preferred Stock in two additional closings, at a price of $1.00 per share for proceeds of $31.2 million, net of issuance costs of less than $0.1 million. In connection with the issuance of the Series F Preferred Stock, the holders of the previously outstanding Preferred Stock agreed to remove their cumulative dividend rights and waive certain anti-dilution rights. The Company assessed whether this change to the previously outstanding shares of Series A, B, D, E and E-1 Preferred Stock was an extinguishment or modification. Based on qualitative analysis, there were no substantive changes in cash flows to the previously issued securities as a result of the additional issuance and therefore the change was accounted for as a modification. This modification did not have any impact on the Company’s financial statements.

As of each balance sheet date, the Preferred Stock consisted of the following (in thousands, except share amounts):

On July 23, 2018, upon the closing of the Company’s IPO, all outstanding convertible preferred stock automatically converted into shares of common stock (see Note 14).

Prior to the closing of the IPO, the holders of the Preferred Stock had the following rights and preferences:

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Voting

The holders of Preferred Stock are entitled to vote, together with the holders of common stock, on matters submitted to stockholders for a vote. The holders of Preferred Stock are entitled to the number of votes equal to the number of shares of common stock into which each such share of Preferred Stock could then convert.

Conversion

Each share of Preferred Stock is convertible at the option of the holder at any time after the date of issuance. Each share of Preferred Stock will be automatically converted into shares of common stock at the applicable conversion ratio then in effect (i) upon the closing of a firm commitment public offering with at least $35 million of gross proceeds to the Company, and at a price of at least $1.00 per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization, or, (ii) upon the written consent of at least a majority of the holders of the then-outstanding shares of Preferred Stock voting together as a single class on an as-converted basis. The conversion ratio of each series of Preferred Stock is determined by dividing the Original Issue Price of each series by the Conversion Price of each series. The Original Issue Price is $1.00 per share for Series A convertible preferred stock, (“Series A”), $1.20 per share for Series B convertible preferred stock (“Series B”), $1.60 per share for Series D convertible preferred stock (“Series D”), $2.25 per share for Series E convertible preferred stock (“Series E”), $1.75 per share for Series E-1 convertible preferred stock and $1.00 per share for Series F convertible preferred stock (“Series F”). The Conversion Price, as adjusted for Series E in 2016 as a result of the issuance of Series E-1 preferred stock at a price per share of less than the conversion price of Series E preferred stock, is $11.01 per share for Series A, $13.21 per share for Series B, $17.61 per share for Series D, $19.27 per share for Series E, $19.27 per share for Series E-1 and $11.01 per share for Series F, subject, in each case, to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization and other adjustments as set forth in the Company’s certificate of incorporation, as amended and restated.

Dividends

As of December 31, 2017, the holders of Series E and Series E-1 Preferred Stock were entitled to receive, prior to or simultaneously with the holders of Series A, Series B and Series D Preferred Stock, cumulative dividends at the rate of eight percent (8%), compounded quarterly, of the Series E and Series E-1 Original Issue Price, as applicable, per annum on each then-outstanding share of Series E and Series E-1 Preferred Stock. The holders of Series A, Series B and Series D Preferred Stock were entitled to receive dividends at the rate of eight percent (8%), compounded quarterly, of the Original Issue Price, as applicable, per annum on each then-outstanding share, subject to the rights of the Series E and Series E-1 described above. Holders of Series A, Series B, Series D, Series E and Series E-1 Preferred Stock were entitled to receive dividends only when, as, and if declared by the Company’s board of directors. The Company could not declare, pay or set aside any dividends on shares of any other series of capital stock of the Company, other than dividends on common stock payable in common stock, unless the holders of the Preferred Stock first received, or simultaneously received, a dividend on each outstanding share of Preferred Stock in an amount at least equal to the greater of (i) 8% per share, as compounded quarterly, on a calendar-year basis, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to such shares, and (ii) the amount of dividend payable on the Preferred Stock calculated as if all shares of Preferred Stock had been converted to common stock. No dividends were declared or paid during 2017. As of December 31, 2017, cumulative undeclared and unpaid dividends totaled $76.6 million.

As of June 30, 2018, the holders of Preferred Stock are no longer entitled to cumulative dividends. The holders of Series E, Series E-1 and Series F Preferred Stock are entitled to receive, prior to or simultaneously with the holders of Series A, Series B and Series D Preferred Stock, non-cumulative dividends at the rate of eight percent (8%) per annum, of the Series E, Series E-1 and Series F Original Issue Price, as applicable, per annum on each then-outstanding share of Series E, Series E-1 and Series F Preferred Stock. The holders of Series A, Series B and Series D Preferred Stock will be entitled to receive non-cumulative dividends at the rate of eight percent (8%) per annum, of the Original Issue Price, as applicable, per annum on each then-outstanding share, subject to the rights of the Series E, Series E-1 and Series F described above. Holders of Series A, Series B, Series D, Series E, Series E-1 and Series F Preferred Stock are entitled to receive dividends only when, as, and if declared by the Company’s board of directors. The Company may not declare, pay or set aside any dividends on shares of any other series of capital stock of the Company, other than dividends on common stock payable in common stock, unless the holders of the Preferred Stock first receive, or simultaneously receive, a dividend on each outstanding share of Preferred Stock in an amount at least equal to the greater of (i) 8% per share, on a calendar-year basis, subject to appropriate

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to such shares, and (ii) the amount of dividend payable on the Preferred Stock calculated as if all shares of Preferred Stock had been converted to common stock. As of June 30, 2018, no dividends have been declared or paid.

Liquidation

In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company or Liquidating Event (as described below), the holders of shares of Series E, Series E-1 and Series F Preferred Stock will receive, in preference to the holders of the Series A, Series B and Series D Preferred Stock or common stock, an amount equal to the Original Issue Price per share of the respective share of Preferred Stock, plus all dividends declared but unpaid, or other dividends required to be paid, on such shares. In the event that the assets available for distribution to the Company’s stockholders are not sufficient to permit payment to the holders of Series E, Series E-1 and Series F Preferred Stock in the full amount to which they are entitled, the assets available for distribution will be distributed on a pro rata basis among the holders of the Series E, Series E-1 and Series F Preferred Stock.

After the payment of the full liquidation amounts to the holders of the Series E, Series E-1 and Series F Preferred Stock, but before any distribution or payment to holders of common stock, the holders of Series A, Series B and Series D Preferred Stock will receive an amount equal to the Original Issue Price per share of the respective share of Preferred Stock, plus all dividends declared but unpaid, or other dividends required to be paid, on such shares. In the event that the assets available for distribution to the Company’s stockholders are not sufficient to permit payment to the holders of Series A, Series B, Series D, Series E, Series E-1 and Series F Preferred Stock in the full amount to which they are entitled, then, after the payment of any preferential amounts required to be paid to the Series E, Series E-1 and Series F Preferred Stock, the assets available for distribution will be distributed on a pro rata basis among the holders of the Series A, Series B and Series D Preferred Stock. After the payment of all preferential amounts to the holders of the Preferred Stock then, to the extent available, the remaining assets available for distribution shall be distributed among the holders of common stock, pro rata based on the number of shares held by each such holder.

Unless the holders of a majority of the then-outstanding shares of Series A, Series B and Series D Preferred Stock, voting together as a single class on an as-converted to common stock basis and a majority of the outstanding shares of Series E, Series E-1 and Series F Preferred Stock voting together as a single class on an as-converted basis, elect otherwise, a Liquidating Event includes a merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.

8. Warrants to Purchase Convertible Preferred Stock

The Company has outstanding exercisable warrants, issued in 2013 and 2014, for the purchase of 375,000 shares of Series B Preferred Stock. The Company is required to remeasure the fair value of the liability for these preferred stock warrants at each reporting date since their grant date, with any adjustments recorded in interest expense. The warrants outstanding at each reporting date were remeasured using the Black-Scholes option-pricing model, and the resulting change in fair value was recorded in interest expense in the Company’s statements of operations and comprehensive loss.

The following table summarizes the Company’s outstanding preferred stock warrants as of June 30, 2018 (in thousands, except share and per share amounts):

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

The following table summarizes the Company’s outstanding preferred stock warrants as of December 31, 2017 (in thousands, except share and per share amounts):

Upon closing of the IPO, the Company’s outstanding warrants to purchase convertible preferred stock automatically converted into warrants to purchase 34,062 shares of common stock (see Note 14).

9. Equity

Common Stock

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the Company’s board of directors and subsequent to payment of all accrued unpaid dividends on Preferred Stock. No dividends have been declared or paid by the Company since its inception.

Warrants to Purchase Common Stock

As of June 30, 2018 and December 31, 2017, the Company has outstanding warrants to purchase 112,900 shares of common stock with an exercise price of $1.55 per share. The warrants were immediately exercisable and expire in May 2021.

10. Stock-Based Compensation

2008 Stock Incentive Plan

The Company’s 2008 Stock Incentive Plan (the “2008 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock, restricted stock units and other equity awards to employees, directors, consultants and advisors of the Company. The 2008 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The board of directors may also delegate to one or more officers of the Company the power to grant awards to employees and certain officers of the Company. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated. Stock options granted under the 2008 Plan with service-based vesting conditions generally vest over four years and expire after ten years.

The total number of shares of common stock that may be issued under the 2008 Plan is 4,039,829 shares. As of June 30, 2018, 245,557 shares remained available for issuance under the 2008 Plan. Upon effectiveness of the Company’s 2018 Equity Incentive Plan, the (“2018 Plan”) in July 2018 (see Note 14), the remaining shares available under the 2008 Plan became available for issuance under the 2018 Plan and no future issuance will be made under the 2008 Plan. Additionally, outstanding options under the 2008 Plan that expired, terminated, are surrendered or canceled without having been fully exercised will be available for future awards under the 2018 Plan.

The exercise price for stock options granted is not less than the fair value of common shares as determined by the board of directors as of the date of grant. The Company’s board of directors values the Company’s common stock, taking into consideration its most recently available valuation of common stock performed by third parties as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant.

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Stock Option Issuances

During the six months ended June 30, 2018, the Company granted options to employees, consultants and directors for the purchase of 965,559 shares of common stock with a weighted average exercise price of $7.81 per share and a weighted average grant-date fair value of $5.56 per share.

Stock-Based Compensation

The Company recorded stock-based compensation expense in the following expense categories of its statements of operations and comprehensive loss (in thousands):

As of June 30, 2018, total unrecognized compensation cost related to the unvested stock-based awards was $9.4 million, which is expected to be recognized over a weighted average period of 3.3 years.

11. Commitments and Contingencies

Operating Leases

The Company leases its facility under a non-cancellable operating lease that expires in June 2020. Under the terms of the lease, the Company maintains a $0.2 million letter of credit as security for its leased facility. The underlying cash securing this letter of credit has been classified as non-current restricted cash in the accompanying balance sheets. The lease includes annual rent escalations and rent holidays, which are accrued, such that rent expense is recognized on a straight-line basis over the terms of occupancy.

The following table summarizes the future minimum payments due under the operating leases as of June 30, 2018 (in thousands):

Rent expense for each of the three months ended June 30, 2018 and 2017 was $0.6 million. Rent expense for each of the six months ended June 30, 2018 and 2017 was $1.1 million.

Research Agreements

The LLS Agreement requires the Company to make certain milestone payments to LLS, that could total up to $25.0 million in the aggregate, upon the receipt of payments by the Company associated with the licensing or transfer of rights to the related compound (or a product) to a third party, upon first regulatory approval of a product in the U.S., or upon the first regulatory approval of a product in Europe or Japan. As of June 30, 2018 and December 31, 2017, no events have occurred that would require payment of the milestones.

The Company has several in-license agreements with academic organizations. The Company is obligated to pay annual license maintenance fees of less than $0.1 million per year as well as reimburse certain institutions for costs incurred related to the filing, prosecution and maintenance of patent rights licensed under the agreements. In addition, the Company may be obligated to pay contingent milestone payments of up to a maximum of $15.7 million upon the achievement of certain defined events as well as royalties of low single-digit percentages of sales of licensed products. In certain cases, the maximum payments to the academic organizations are capped. If the

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Company grants any sublicense rights under the license agreements, the Company has agreed to pay a percentage of sublicense fees received by the Company to the licensors. As of June 30, 2018 and December 31, 2017, no events have occurred that would require payment of the milestones, royalties, or sublicense fees.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its financial statements as of June 30, 2018 or December 31, 2017.

Legal Proceedings

At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings. On January 17, 2017, a participant dosed in one of the Company’s clinical trials filed a complaint against the Company in the United States District Court for the District of Arizona, alleging negligence, lack of informed consent, strict products liability and loss of consortium. The plaintiff is seeking unspecified damages. The Company filed an answer in March 2017 and the case is currently in discovery. The Company believes that it has meritorious defenses and believes the likelihood of a loss is remote.

12. Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

13. Retirement Plan    

The Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. As currently established, the Company is not required to make contributions to the 401(k) Plan. The Company made matching contributions of $0.1 million for each of the three months ended June 30, 2018 and 2017, and $0.2 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively.

14. Subsequent Events

Reverse Stock Split

On July 6, 2018, the Company effected a 1-for-11.009 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s convertible preferred stock (see Note 7). Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the convertible preferred stock conversion ratios.

2018 Equity Incentive Plan

In June 2018, the Company’s stockholders approved the 2018 Plan, which became effective on July 18, 2018. The 2018 Plan provides for the grant of incentive stock options, non-qualified options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The number of shares initially reserved for issuance under the 2018 Plan is 2,779,544 plus the shares of common stock remaining available for issuance under the 2008 Plan as of that date. The number of shares reserved shall be annually increased on January 1, 2019 and each January 1 thereafter through January 1, 2028 by the least of (i) 2,216,368 shares, (ii) 4% of the number of shares of the Company’s common stock outstanding on the first day of the year or (iii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that are expired, forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2018 Plan or the 2008 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

2018 Employee Stock Purchase Plan

In June 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan which became effective on July 18, 2018. A total of 272,504 shares of common stock were reserved for issuance under this plan. The number of shares reserved shall be annually increased on January 1, 2020 and each January 1 thereafter through January 1, 2028 by the least of (i) 545,008 shares, (ii) 1% of the number of shares of the Company’s common stock outstanding on the first day of the year or (iii) an amount determined by the Company’s board of directors.

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CONSTELLATION PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Initial Public Offering

On July 23, 2018, the Company completed an IPO of its common stock and issued and sold 4,000,000 shares of common stock at a public offering price of $15.00 per share, resulting in net proceeds of $55.8 million after deducting underwriting discounts and commissions but before deducting offering costs.

Upon closing of the IPO, the Company’s outstanding convertible preferred stock automatically converted into shares of common stock (see Note 7). Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the convertible preferred stock to common stock and additional paid-in capital.    

Upon closing of the IPO, the Company’s outstanding warrants to purchase convertible preferred stock automatically converted into warrants to purchase 34,062 shares of common stock (see Note 8). Upon conversion of the warrants, the Company reclassified the carrying value of the warrants to additional paid-in capital.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or SEC, on July 19, 2018. 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, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could 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 biopharmaceutical company using our expertise in epigenetics to discover and develop novel therapeutics that address serious unmet medical needs in patients with cancers associated with abnormal gene expression or drug resistance. Our integrated epigenetics platform enables us to validate targets and generate small molecules against these targets that selectively modulate gene expression in tumor and immune cells to drive anti-tumor activity. Platform insights and clinical experience guide development of our wholly owned lead product candidates: CPI-1205 which inhibits enhancer of zeste homolog 2, or EZH2, and CPI-0610 which inhibits bromodomain and extra terminal domain, or BET, proteins. We believe that our approach to targeting these central gene regulatory mechanisms associated with cancer proliferation may enable us to provide therapeutic benefits to cancer patients. We have observed clinical activity in the first few patients treated with each of CPI-1205 in a Phase 1b/2 trial in patients with metastatic castration-resistant prostate cancer, or mCRPC, and CPI-0610 in a Phase 2 trial in patients with myelofibrosis, or MF. We believe that we are well-positioned to determine proof of concept with each of our lead product candidates in mid-2019 and, if successful, to advance them into pivotal clinical trials in these indications.

As of June 30, 2018, we have financed our operations primarily through sales of our preferred stock, payments received in connection with our collaboration and research agreements and borrowings under loan agreements. In July 2018 we completed an initial public offering, or IPO, of our common stock and issued and sold 4,000,000 shares of common stock at a public offering price of $15.00 per share, resulting in net proceeds of $55.8 million after deducting underwriting discounts and commissions but before deducting offering costs. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. For the three and six months ended June 30, 2018, we reported a net loss of $11.9 million and $24.0 million, respectively. As of June 30, 2018, we had an accumulated deficit of $198.0 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:

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We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution. Further, as a result of the IPO, we expect to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of June 30, 2018, we had cash and cash equivalents of $88.5 million. We believe that our cash and cash equivalents and the net proceeds from our IPO will enable us to fund our operating expenses, debt payments and capital expenditure requirements into the first quarter of 2020. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We have entered into, and we may in the future enter into, license or collaboration agreements for our product candidates or intellectual property, and we may generate revenue in the future from payments as a result of such license or collaboration agreements. To date, all of our revenue has been derived from one collaboration arrangement. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

To date, our revenue has been derived from our license and collaboration arrangement with Genentech, Inc. and F. Hoffmann-La Roche Ltd., collectively referred to as Genentech, under which we licensed certain technology to Genentech and performed certain specified services. We completed our performance obligations under the collaboration arrangement in 2015 and we have not recognized revenue from Genentech since 2015. We are entitled to future milestone and royalty payments from Genentech if Genentech pursues further development of the technology licensed from us under the collaboration arrangement and if Genentech achieves specified development and sales-based milestones relating to such licensed technology. We cannot provide assurance as to the timing of milestone or royalty payments or if we will ever receive such payments from Genentech.

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Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

In July 2012, we entered into a Research, Development and Commercialization Agreement, or the LLS Agreement, with the Leukemia & Lymphoma Society, or LLS, pursuant to which LLS committed to provide funding to us for research and development services, conditional on (i) the achievement of milestones in accordance with the LLS Agreement and (ii) equal funding being provided by us. We recognize the nonrefundable payments received under the LLS Agreement as a reduction to the research and development expenses incurred, based on a proportional methodology comparing the total expenses incurred in the period under the project to the total expenses expected to be incurred under the project. During the three months ended June 30, 2018 and 2017, funding by LLS of research and development expenses of $0.2 million and $0.4 million, respectively, were recorded as a reduction of our research and development expenses. During the six months ended June 30, 2018 and 2017, funding by LLS of research and development expenses of $0.2 million and $0.4 million, respectively, were recorded as a reduction of our research and development expenses.

We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

Our direct external research and development expenses are tracked on a program-by-program basis and consist of costs that include fees, reimbursed materials and other costs paid to consultants, contractors, CMOs and CROs in connection with our preclinical, clinical development and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform technology and, as such, are not separately classified.

Product candidates in later 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 later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical and preclinical development activities in the near term and in the future as our current development programs progress and new programs are added. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly

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uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

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Other Income (Expense)

Interest Income

Interest income consists of interest earned on our invested cash balances. We expect our interest income to increase as we invest the cash received from the sale of Series F preferred stock and the net proceeds from our IPO.

Interest Expense

Interest expense consists of interest expense on outstanding borrowings under our April 2016 loan and security agreement with Oxford Finance LLC and Silicon Valley Bank, or the 2016 Loan Agreement, as well as amortization of debt discount and debt issuance costs. Interest expense also consists of the change in the fair value of our preferred stock warrants. In connection with the 2016 Loan Agreement, we issued warrants to purchase Series B preferred stock. We classify these warrants as a liability on our balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair value of the warrant liability as interest expense in our statements of operations and comprehensive loss. We will continue to recognize changes in the fair value of the warrant liability until the warrants are exercised, expire or qualify for equity classification.

Upon the closing of our IPO, the preferred stock warrants became exercisable for common stock instead of preferred stock, and the fair value of the warrant liability at that time was reclassified to additional paid-in capital. As a result, we no longer remeasure the fair value of the warrant liability at each reporting date.

Change in Fair Value of Preferred Stock Tranche Liability

The Series E-1 preferred stock purchase agreement entered into in September 2016 provided the investors with the right to participate in a subsequent closing of Series E-1 preferred stock upon the earlier of one year from the issuance date or the achievement of a strategic event as determined by our board of directors. We refer to this right as the Series E-1 Tranche Right. The Series E-1 Tranche Right was classified as a liability and initially recorded at fair value. The liability was subject to revaluation at each balance sheet date prior to the exercise or expiration of the Series E-1 Tranche Right. The change in fair value of our preferred stock tranche liability consists of the re-measurement gains or losses associated with changes in the fair value of the Series E-1 Tranche Right. Upon issuance of the additional shares of Series E-1 preferred stock in July 2017, the Series E-1 Tranche Right was settled. As a result, we no longer measure the fair value of the Series E-1 Tranche Right at each balance sheet date.

Income Taxes

Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31, 2017, we had U.S. federal and state net operating loss carryforwards of $168.9 million and $166.6 million, respectively, which may be available to offset future income tax liabilities and begin to expire in 2028. As of December 31, 2017, we also had U.S. federal and state research and development tax credit carryforwards of $6.8 million and $2.9 million, respectively, which begin to expire in 2028 and 2025, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

On December 22, 2017, the Tax Cuts and Jobs Act, or the Act, was enacted in the United States. The Act incorporates significant changes to U.S. corporate income tax laws including, among other things, a reduction in the statutory federal corporate income tax rate from 35% to 21%, an exemption for dividends received from certain foreign subsidiaries, a one-time repatriation tax on deemed repatriated earnings from foreign subsidiaries, eliminating the alternative minimum tax, immediate expensing of certain depreciable tangible assets, changing rules related to net operating loss carryforwards, and limitations on the deduction for net interest expense and certain executive compensation. In December 2017, the SEC issued SAB 118, which directs taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law.

We have not completed our accounting for the tax effects of enactment of the Act. At December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. We have no foreign earnings and therefore are not subject to transition tax.

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However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. There have been no significant changes to the provisional amount recorded related to the remeasurement of our deferred tax balance or to the related, offsetting valuation allowance that fully offsets it.

Results of Operations

Comparison of the Three Months Ended June 30, 2018 and 2017

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

Research and Development Expenses

Research and development expenses were $9.5 million for the three months ended June 30, 2018 compared to $8.0 million for the three months ended June 30, 2017. The increase in costs related to our CPI-1205 program was primarily due to our ProSTAR trial, which we initiated in the fourth quarter of 2017, and our ORIOn-E trial, which we initiated in the first quarter of 2018. The increase in costs related to our second-generation EZH2 inhibitor CPI-0209 program in the second quarter of 2018 was primarily due to preparation for IND-enabling studies. The decrease in preclinical pipeline expenses was primarily due to the stage of development of our current pipeline candidates.

The increase in personnel related costs was primarily due to an increase in stock-based compensation expense and overall compensation in our research and development function. Personnel-related costs for the three months ended June 30, 2018 and 2017 included stock-based compensation expense of $0.3 million and $0.1 million, respectively.

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General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2018 were $2.5 million, compared to $1.5 million for the three months ended June 30, 2017. The increase in personnel related costs was primarily due to increased headcount and increased stock-based compensation expense. Personnel-related costs for the three months ended June 30, 2018 and 2017 included stock-based compensation expense of $0.4 million and less than $0.1 million, respectively. Professional and consultant fees, including those related to investor and public relations, legal fees and ongoing business activities, increased in preparation for becoming a public company.

Other Income (Expense)

Interest Income

Interest income increased to $0.3 million for the three months ended June 30, 2018 from less than $0.1 million for the three months ended June 30, 2017 due to higher invested balances.

Interest Expense

Interest expense was $0.2 million and $0.3 million for the three months ended June 30, 2018 and 2017, respectively. The decrease in interest expense was due to the lower outstanding balance of debt as a result of repayment of principal balance.

Change in Fair Value of Preferred Stock Tranche Liability

The change in the fair value of our preferred stock tranche liability resulted in income of $1.7 million for the three months ended June 30, 2017 resulting from the decrease in fair value of the Series E-1 Tranche Right (liability).

Comparison of the Six Months Ended June 30, 2018 and 2017

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

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Research and Development Expenses

Research and development expenses were $19.4 million for the six months ended June 30, 2018 compared to $14.9 million for the six months ended June 30, 2017. The increase in costs related to our CPI-1205 program was primarily due to our ProSTAR trial, which we initiated in the fourth quarter of 2017, and our ORIOn-E trial, which we initiated in the first quarter of 2018. The increase in costs related to our second-generation EZH2 inhibitor CPI-0209 program in the six months ended June 30, 2018 was primarily due to preparation for IND-enabling studies. The decrease in preclinical pipeline expenses was primarily due to the stage of development of our current pipeline candidates.

The increase in personnel related costs was primarily due to an increase in headcount, overall compensation and stock-based compensation expense in our research and development function. Personnel-related costs for the six months ended June 30, 2018 and 2017 included stock-based compensation expense of $0.5 million and $0.2 million, respectively. The increase in facility related and other expenses was primarily due to increased depreciation expense from equipment and software purchased in 2017.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2018 were $4.8 million, compared to $2.7 million for the six months ended June 30, 2017. The increase in personnel related costs was primarily due to increased headcount and stock-based compensation expense. Personnel-related costs for the six months ended June 30, 2018 and 2017 included stock-based compensation expense of $0.8 million and less than $0.1 million, respectively. Professional and consultant fees, including those related to investor and public relations, legal fees and ongoing business activities, increased in preparation for becoming a public company.

Other Income (Expense)

Interest Income

Interest income increased to $0.4 million for the six months ended June 30, 2018 from $0.1 million for the six months ended June 30, 2017 due to higher invested balances.

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Interest Expense

Interest expense was $0.2 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. The decrease in interest expense was due to the lower outstanding balance of debt as a result of repayment of principal balance.

Change in Fair Value of Preferred Stock Tranche Liability

The change in the fair value of our preferred stock tranche liability resulted in income of $4.4 million for the six months ended June 30, 2017 resulting from the decrease in fair value of the Series E-1 Tranche Right (liability).

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. As of June 30, 2018, we have financed our operations primarily through sales of our preferred stock, payments received in connection with our collaboration and research agreements and borrowings under loan agreements. As of June 30, 2018, we had cash and cash equivalents of $88.5 million. No amounts remained available for borrowing under the 2016 Loan Agreement. In July 2018, we completed an IPO of our common stock and issued and sold 4,000,000 shares of common stock at a public offering price of $15.00 per share, resulting in net proceeds of $55.8 million after deducting underwriting discounts and commissions but before deducting offering costs.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

Operating Activities

During the six months ended June 30, 2018, operating activities used $22.4 million of cash, primarily resulting from our net loss of $24.0 million, partially offset by net non-cash expense of $1.7 million.

During the six months ended June 30, 2017, operating activities used $19.9 million of cash, primarily resulting from our net loss of $13.7 million, net non-cash income of $3.7 million and net cash used by changes in our operating assets and liabilities of $2.6 million. Net cash used by changes in our operating assets and liabilities for the six months ended June 30, 2017 consisted primarily of a $1.8 million decrease in accounts payable and accrued expenses and other current liabilities and a $0.9 million increase in prepaid expenses and other current assets.

Investing Activities

During the six months ended June 30, 2018 and 2017, net cash used in investing activities was less than $0.1 million and $0.3 million, respectively, due to purchases of property and equipment. The purchases of property and equipment during the six months ended June 30, 2018 related to equipment and software purchases as we expanded our discovery activities.

Financing Activities

During the six months ended June 30, 2018, net cash provided by financing activities was $94.6 million, consisting primarily of net proceeds from the issuance of Series F preferred stock of $99.6 million, partially offset by payments of $3.5 million on long-term debt under the 2016 Loan Agreement and $1.9 million of payments of initial public offering costs.

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During the six months ended June 30, 2017, net cash used in financing activities was $3.2 million, consisting primarily of payments of $3.3 million on long-term debt under the 2016 Loan Agreement.

Loan and Security Agreement

We previously had outstanding amounts due under a 2013 loan and security agreement, or the 2013 Loan Agreement, with Oxford Finance LLC and Silicon Valley Bank. In April 2016, we entered into the 2016 Loan Agreement, with the same lenders. Under the 2016 Loan Agreement, the amount outstanding under the 2013 Loan Agreement of $10.8 million, the portion of the final payment under the 2013 Loan Agreement then due of $0.9 million and issuance costs due to the lenders were paid to the lenders with proceeds from the 2016 Loan Agreement and payment terms of the new principal balance of $11.8 million were extended through July 2018. Borrowings under the 2016 Loan Agreement bore interest at an annual rate of 7.6%, and were repaid in full on July 3, 2018. In addition, a final payment equal to 5% of the original principal amount was paid upon the final principal payment.

Borrowings under the 2016 Loan Agreement were collateralized by substantially all of our personal property, other than our intellectual property, and by a negative pledge on intellectual property. There were no financial covenants associated with the 2016 Loan Agreement; however, we were subject to certain negative covenants until maturity. These covenants included limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. Obligations under the 2016 Loan Agreement were subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials for our product candidates in development. In addition, as a result of the IPO, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:

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As of June 30, 2018, we had cash and cash equivalents of $88.5 million. We believe that the net proceeds from the IPO, together with our cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2020. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs 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 or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, 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.

Contractual Obligations and Commitments

During the three months ended June 30, 2018, there were no material changes to our contractual obligations and commitments from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our final prospectus for our IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on July 19, 2018.

Critical Accounting Policies and Significant Judgments and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our critical accounting policies described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our final prospectus for our IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on July 19, 2018, the following involve the most judgment and complexity:

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. There have been no significant changes to our critical accounting policies from those described in our final prospectus for our IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on July 19, 2018.

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 in the rules and regulations of the SEC.

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Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

As of June 30, 2018, we had cash and cash equivalents of $88.5 million. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our investment portfolio.

As of June 30, 2018, we had $0.6 million of borrowings outstanding under the 2016 Loan Agreement. Amounts outstanding under the 2016 Loan Agreement bore interest at fixed interest rates prior to being repaid in full on July 3, 2018 and, therefore, did not expose us to interest rate risk.

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded based upon the evaluation described above that, as of June 30, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness described below.

In preparation of our financial statements to meet the requirements applicable to our initial public offering, we identified a material weakness over our financial reporting. A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. Specifically, we did not design and

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maintain effective controls over the completeness and review of the presentation and computation of net loss per share attributable to common stockholders as well as over the presentation of outstanding common shares in the statement of equity. This control deficiency could result in a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis, and accordingly, we determined that the control deficiency constitutes a material weakness.

The material weakness also resulted in immaterial changes to our previously reported net loss attributable to common stockholders and net loss per share attributable to common stockholders, basic and diluted, for the years ended December 31, 2016 and 2017. These immaterial errors were corrected prior to the filing of our Registration Statement on Form S-1 with the SEC on June 22, 2018.

Management’s Remediation Initiatives

Management is pursuing the implementation of corrective measures to address the material weakness described above. In an effort to remediate the identified material weakness and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

We believe the measures described above will remediate the material weakness we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

On January 17, 2017, a participant dosed in our Phase 1 clinical trial of CPI-0610 filed a complaint (Civil Action No. 2:17-cv-00109-ESW) against us in the United States District Court for the District of Arizona, alleging negligence, lack of informed consent, strict products liability and loss of consortium. The plaintiff is seeking unspecified damages. We filed an answer in March 2017 and the case is currently in discovery. We believe that we have meritorious defenses to the allegations made in the complaint and we do not expect the results of this suit to have a material effect on our business or financial statements.

Our future operating results could differ materially from the results described in this Quarterly Report on Form 10-Q due to the risks and uncertainties described below. You should consider carefully the following information about risks below in evaluating our business. If any of the following risks actually occur, our business, financial conditions, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline. In addition, we cannot assure investors that our assumptions and expectations will prove to be correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. See page i of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. Factors that could cause or contribute to such differences include those factors discussed below.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We expect to incur losses over the next several years and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss was $24.0 million for the six months ended June 30, 2018, $35.4 million for the year ended December 31, 2017 and $34.5 million for the year ended December 31, 2016. As of June 30, 2018, we had an accumulated deficit of $198.0 million. To date, we have financed our operations primarily through our initial public offering, which closed on July 23, 2018, sales of our preferred stock, payments received in connection with collaboration and research agreements and borrowings under loan agreements. All of our revenue to date has been collaboration revenue. We have devoted substantially all of our financial resources and efforts to research and development, including clinical trials and preclinical studies. We are still in the early stages of development of our product candidates, and we have not completed development of any product candidates. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we:

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To become and remain profitable, we must succeed in developing, and eventually commercializing, a product or products that generate significant revenue. The ability to achieve this success will require us to be effective in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses will increase if, among other things:

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment.

We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect to devote substantial financial resources to our ongoing and planned activities, particularly as we continue our Phase 1b/2 clinical trials of CPI-1205 and our Phase 2 clinical trial of CPI-0610 and prepare for a planned Phase 1 clinical trial of CPI-0209; and continue research and development and initiate additional clinical trials of, and seek regulatory approval for, these and other product candidates. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our preclinical activities and clinical trials. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, we will incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on acceptable terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

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

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As of June 30, 2018, we had cash and cash equivalents of approximately $88.5 million, which does not reflect the payment of $1.2 million that we made on July 3, 2018 to the lenders in connection with the final payment and termination of our loan and security agreement with Oxford Finance LLC and Silicon Valley Bank, which we refer to as our loan agreement. On July 23, 2018, we completed our initial public offering pursuant to which we issued 4,000,000 shares of our common stock at a price of $15.00 per share. We received net proceeds of $55.8 million, after deducting underwriting discounts and commissions but before estimated offering expenses payable by us. We believe that the net proceeds from our initial public offering, together with our existing cash and cash equivalents as of June 30, 2018, will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2020. However, we have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us. As a result, we could deplete our capital resources sooner than we currently expect.

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Commercial revenues, if any, will not be derived unless and until we can achieve sales of commercially available products, which we do not anticipate for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

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

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making capital expenditures or declaring dividends.

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If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. 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 product candidates that we would otherwise prefer to develop and market ourselves.

Our limited operating history may make it difficult for stockholders to evaluate the success of our business to date and to assess our future viability.

We commenced active operations in early 2008, and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking preclinical studies and conducting clinical trials. All but two of our product candidates are still in preclinical development. We have not yet demonstrated our ability to successfully develop any product candidate, obtain regulatory approvals, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions stockholders make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

In addition, as our business grows, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition at some point from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

We expect our financial condition and operating results to fluctuate significantly from quarter-to-quarter and year-to-year due to a variety of factors, many of which are beyond our control. Accordingly, stockholders should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

Any future indebtedness may limit cash flow available to invest in the ongoing needs of our business.

As of June 30, 2018, we had $0.6 million of borrowings outstanding under our loan agreement, which borrowings were repaid in full on July 3, 2018. In addition, a final payment equal to 5% of the original principal amount was paid upon the final principal payment. No amounts remain available for borrowing under our loan agreement. Our obligations under this agreement were secured by substantially all of our personal property, other than our intellectual property, and by a negative pledge on our intellectual property. We could in the future incur additional indebtedness.

Any future indebtedness combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:

We intend to satisfy any future debt service obligations with our existing cash and funds from external sources. Nonetheless, we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under any future debt. Funds from external sources may not be available on acceptable terms, if at all. In addition, a failure to comply with the covenants under any future loan agreements we may enter into could result in an event of default and acceleration of amounts due. If an event of default occurs and the lenders accelerate the amounts due under such loan agreements, we may not be able to make accelerated payments, and such lenders could seek to enforce security interests in the collateral securing such indebtedness.

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Comprehensive tax reform legislation could adversely affect our business and financial condition.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, or TCJA, which significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for net interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely), one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain how various states will respond to the TCJA. The impact of this reform on holders of our common stock is also uncertain and could be adverse. We urge investors in our common stock to consult with their legal and tax advisors with respect to TCJA and the potential tax consequences of investing in or holding our common stock.

Risks Related to the Discovery and Development of our Product Candidates

Our approach to the discovery and development of product candidates based on the inhibition of epigenetic regulators by small molecules is an emerging field, and we do not know whether we will be able to successfully develop any products.

The discovery and development of small molecules that inhibit epigenetic regulators to restore normal gene expression is an emerging field, and the scientific discoveries that form the basis for our efforts to discover and develop product candidates are relatively new. Although epigenetic regulation of gene expression plays an essential role in biological function, few drugs premised on the inhibition of epigenetic regulators have been developed.

Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must conduct extensive clinical trials to demonstrate the safety and efficacy of such product candidate in humans. We have not yet begun or completed a pivotal clinical trial of any product candidate. Clinical trials may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. Even if the clinical trials are successful, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may cause delays in the approval or rejection of an application. As a result of these factors, it is more difficult for us to predict the time and cost of product candidate development, and we cannot predict whether the application of our epigenetic platform, or any similar or competitive epigenetic platforms, will result in the development and regulatory approval of any products. There can be no assurance that any development problems we experience in the future related to our epigenetics platform or any of our research programs will not cause significant delays or unanticipated costs, or that such development problems can be solved.

In addition, adverse developments in preclinical studies or clinical trials conducted by others of epigenetic product candidates or adverse events in patients treated with epigenetic products may cause the FDA or other regulatory agencies to require modifications to clinical trials of epigenetic product candidates, revise the requirements for approval of epigenetic product candidates or limit the use of epigenetic products, any of which could materially harm our business. Moreover, there have been significant adverse side effects in clinical trials of epigenetic product candidates of our competitors. For example, one such competitor recently reported that a pediatric patient in its Phase 1 clinical trial of an EZH2 inhibitor had developed a secondary lymphoma following treatment. This same company previously reported that in the course of the preclinical safety studies of its EZH2 inhibitor it had observed the development of lymphoma in rats. We have no preclinical or clinical data from our studies to date to suggest that patients are likely to experience similar side effects with our product candidates that inhibit EZH2. However, due to

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concerns regarding hematological malignancies, the FDA previously inquired about our plans for typical long-term toxicology studies of CPI-1205, which studies we plan to conduct, and required that we include the development of a rare leukemia as a potential risk in the informed consent for our CPI-1205 trials. The FDA required us to update the investigator’s brochure and informed consent for our trials of CPI-1205 to include the risk of the development of T-cell lymphoma. The FDA provided guidance regarding our planned long-term toxicology study in rats, including that it should be designed to enhance the probability of detecting whether the development of lymphoma is associated with exposure to CPI-1205. Further, adverse events in our or our competitors’ preclinical studies and/or clinical trials of epigenetic product candidates, even if not ultimately attributable to the product candidate under exploration, and the resulting negative publicity, could result in increased governmental regulation, unfavorable public perception, inadequate acceptance in the medical community, potential regulatory delays in the testing or approval of our product candidates and any additional product candidates that we may identify and develop, stricter labeling requirements for those product candidates that are approved, and a decrease in demand for any such product candidates.

Any of these factors may prevent us from completing our preclinical studies, completing any clinical trials that we may initiate or commercializing any product candidates we may develop, on a timely or profitable basis, if at all.

We are early in our development efforts, and we only have two product candidates in clinical trials that we are developing. All of our other product candidates are still in preclinical development. If we are unable to commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

We are early in our development efforts, and we only have two product candidates in clinical trials that we are developing, CPI-1205 for the treatment of metastatic castration-resistant prostate cancer, or mCRPC, and solid tumors and CPI-0610 for the treatment of myelofibrosis, or MF. All of our other product candidates are still in preclinical development. We have invested substantially all of our efforts and financial resources in our integrated epigenetics platform to discover and develop new drugs that selectively modulate gene expression that may lead to the killing or reprogramming of cancer cells or result in anti-tumor immune activity. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates. The success of our product candidates will depend on several factors, including the following: