10-Q 1 cemp-10q_20160930.htm 10-Q cemp-10q_20160930.htm

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

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

For the Transition Period from            to            

Commission File Number: 001-35405

 

CEMPRA, INC.

(Exact name of registrant specified in its charter)

 

 

Delaware

 

2834

 

45-4440364

(State or Other Jurisdiction of
Incorporation or Organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer
Identification No.)

6320 Quadrangle Drive, Suite 360

Chapel Hill, NC 27517

(Address of Principal Executive Offices)

(919) 313-6601

(Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

 

Name of Exchange on which Registered

Common Stock, $0.001 Par Value

 

Nasdaq Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

 

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 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

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 October 24, 2016 there were 52,381,530 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 

 


 

CEMPRA, INC.

TABLE OF CONTENTS

 

 

  

Page

PART I—FINANCIAL INFORMATION

  

1

 

 

 

Item 1.

 

Financial Statements (Unaudited)

  

1

 

 

 

 

 

Item 2.

 

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

  

14

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

26

 

 

 

 

 

Item 4.

 

Controls and Procedures

  

26

 

 

 

 

 

PART II—OTHER INFORMATION

 

27

 

 

 

 

 

Item 1A.

 

Risk Factors

 

27

 

 

 

 

 

Item 6.

 

Exhibits

 

27

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CEMPRA, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

248,917

 

 

$

153,765

 

Receivables

 

 

4,531

 

 

 

7,639

 

Prepaid expenses

 

 

792

 

 

 

573

 

Total current assets

 

 

254,240

 

 

 

161,977

 

Furniture, fixtures and equipment, net

 

 

59

 

 

 

90

 

Deposits

 

 

146

 

 

 

73

 

Total assets

 

$

254,445

 

 

$

162,140

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,531

 

 

$

9,635

 

Accrued expenses

 

 

2,090

 

 

 

1,475

 

Accrued payroll and benefits

 

 

3,679

 

 

 

2,337

 

Current portion of long-term debt

 

 

6,667

 

 

 

4,444

 

Total current liabilities

 

 

24,967

 

 

 

17,891

 

Deferred revenue

 

 

11,326

 

 

 

11,326

 

Long-term debt

 

 

10,300

 

 

 

15,258

 

Total liabilities

 

 

46,593

 

 

 

44,475

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock; $.001 par value; 5,000,000 shares authorized; no shares issued or

   outstanding at September 30, 2016 and December 31, 2015

 

 

-

 

 

 

-

 

Common stock; $.001 par value; 80,000,000 shares authorized; 52,381,530

   and 43,990,751 issued and outstanding at September 30, 2016 and December 31, 2015,

   respectively

 

 

52

 

 

 

44

 

Additional paid-in capital

 

 

613,345

 

 

 

436,643

 

Accumulated deficit

 

 

(405,545

)

 

 

(319,022

)

Total shareholders’ equity

 

 

207,852

 

 

 

117,665

 

Total liabilities and shareholders’ equity

 

$

254,445

 

 

$

162,140

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

1


 

CEMPRA, INC.

Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

3,972

 

 

$

2,497

 

 

$

10,071

 

 

$

7,744

 

License

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,000

 

Supply

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,770

 

Total revenue

 

 

3,972

 

 

 

2,497

 

 

 

10,071

 

 

 

21,514

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

21,096

 

 

 

23,541

 

 

 

60,643

 

 

 

73,334

 

General and administrative

 

 

15,021

 

 

 

5,848

 

 

 

35,333

 

 

 

16,230

 

Total operating expenses

 

 

36,117

 

 

 

29,389

 

 

 

95,976

 

 

 

89,564

 

Loss from operations

 

 

(32,145

)

 

 

(26,892

)

 

 

(85,905

)

 

 

(68,050

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

128

 

 

 

-

 

 

 

330

 

 

 

4

 

Interest expense

 

 

(295

)

 

 

(679

)

 

 

(948

)

 

 

(1,910

)

Other income (expense), net

 

 

(167

)

 

 

(679

)

 

 

(618

)

 

 

(1,906

)

Net loss and comprehensive loss

 

$

(32,312

)

 

$

(27,571

)

 

$

(86,523

)

 

$

(69,956

)

Basic and diluted net loss attributable to common shareholders

   per share

 

$

(0.62

)

 

$

(0.63

)

 

$

(1.74

)

 

$

(1.61

)

Basic and diluted weighted average shares outstanding

 

 

52,072,536

 

 

 

43,910,908

 

 

 

49,616,785

 

 

 

43,427,114

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

2


 

CEMPRA, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(86,523

)

 

$

(69,956

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

40

 

 

 

54

 

Share-based compensation

 

 

7,518

 

 

 

4,427

 

Amortization of debt issuance costs

 

 

44

 

 

 

405

 

Loss on extinguishment of debt

 

 

-

 

 

 

153

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Receivables

 

 

3,108

 

 

 

(748

)

Prepaid expenses

 

 

(219

)

 

 

2,012

 

Deposits

 

 

(73

)

 

 

288

 

Accounts payable

 

 

2,896

 

 

 

3,025

 

Accrued expenses

 

 

615

 

 

 

468

 

Accrued payroll and benefits

 

 

1,342

 

 

 

360

 

Net cash used in operating activities

 

 

(71,252

)

 

 

(59,512

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of furniture, fixtures and equipment

 

 

(9

)

 

 

(46

)

Net cash used in investing activities

 

 

(9

)

 

 

(46

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from borrowing on long-term debt

 

 

-

 

 

 

20,000

 

Payment of long-term debt

 

 

(2,779

)

 

 

(18,995

)

Payment of debt issuance costs

 

 

-

 

 

 

(327

)

Proceeds from exercise of stock options and warrants

 

 

364

 

 

 

2,953

 

Proceeds from issuance of common stock, net of underwriting discounts

 

 

169,112

 

 

 

139,044

 

Payment of offering costs

 

 

(284

)

 

 

(213

)

Net cash provided by financing activities

 

 

166,413

 

 

 

142,462

 

Net change in cash and equivalents

 

 

95,152

 

 

 

82,904

 

Cash and equivalents at beginning of the period

 

 

153,765

 

 

 

99,113

 

Cash and equivalents at end of the period

 

$

248,917

 

 

$

182,017

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

916

 

 

$

1,226

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

 

3


 

CEMPRA, INC.

September 30, 2016

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Description of Business

Cempra, Inc. (the “Company” or “Cempra”) is the successor entity of Cempra Pharmaceuticals, Inc. which was incorporated on November 18, 2005 and commenced operations in January 2006. Cempra is located in Chapel Hill, North Carolina, and is a pharmaceutical company developing antibiotics to treat drug-resistant bacterial infections in the hospital and community.

The Company expects to continue to incur losses and require additional financial resources to advance its products to either commercial stage or liquidity events.  There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.  

 

 

2. Basis of Presentation

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts and results of operations of Cempra and its wholly owned subsidiaries. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Data

The accompanying interim consolidated financial statements are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2015 contained in the Company’s Annual Report on Form 10-K. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for the fair statement of the Company’s financial position as of September 30, 2016 and the results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015. The December 31, 2015 consolidated balance sheet included herein was derived from audited consolidated financial statements, but does not include all disclosures including notes required by U.S. GAAP for complete financial statements.

Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Receivables

Receivables consist of amounts billed and amounts earned but unbilled under the Company’s contract with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services (“BARDA”). Receivables under the BARDA contract are recorded as qualifying research activities are conducted and invoices from the Company’s vendors are received. Unbilled receivables are also recorded based upon work estimated to be complete for which the Company has not received vendor invoices. The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance based on its history of collections and write-offs and the current status of all receivables. The Company does not accrue interest on trade receivables. If accounts become uncollectible, they will be written off through a charge to the allowance for doubtful accounts. The Company has not recorded an allowance for doubtful accounts as management believes all receivables are fully collectible.

4


 

Research and Development Expenses

Research and development (“R&D”) expenses include direct and indirect R&D costs. Direct R&D consists principally of external costs, such as fees paid to investigators, consultants, central laboratories and clinical research organizations, including costs incurred in connection with clinical trials, and related clinical trial fees and all employee-related expenses for those employees working in research and development functions, including stock-based compensation for R&D personnel. Indirect R&D costs include insurance or other indirect costs related to the Company’s research and development function to specific product candidates. R&D costs are expensed as incurred. Expenses paid but not yet incurred are recorded in prepaid expenses.  The Company expenses purchases of pre-approval inventory as R&D until regulatory approval is received.

Clinical Trial Accruals

As part of the process of preparing financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with conducting clinical trials. The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company determines accrual estimates through discussion with applicable personnel and outside service providers as to the progress of trials or the services completed. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial accrual is dependent upon the timely and accurate reporting of fee billings and passthrough expenses from contract research organizations and other third-party vendors as well as the timely processing of any change orders from the contract research organizations.

Revenue Recognition

The Company’s revenue generally consists of research related revenue under federal contracts and licensing revenue related to non-refundable upfront fees, milestone payments and royalties earned under license agreements. Revenue is recognized when the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods and services are delivered, limited to the consideration that is not contingent upon future deliverables. When an arrangement is accounted for as a single unit of accounting, the Company determines the period over which the performance obligations will be performed and revenue recognized.

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments.  Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone.  Contingent-based payments the Company may receive under a license agreement will be recognized when received.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers.  This new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP.  The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance.  This guidance, as amended by ASU 2015-14, is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which is effective for the Company for the year ending December 31, 2018.  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations.  In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies an entity’s identification of its performance obligations in a contract.  The

5


 

update also clarifies the guidance regarding an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time.  In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which amends the guidance in the new revenue standard on collectability, non-cash consideration, presentation of sales tax, and transition. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard.  These pronouncements have the same effective date as the new revenue standard.  

Due to the potential launch in 2017 of solithromycin for the treatment of community acquired bacterial pneumonia, the Company anticipates early adoption of the new revenue recognition guidance effective January 1, 2017.  The Company’s ability to early adopt is dependent on system readiness and the evaluation of potential impacts on current revenue streams.  The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.  The Company plans to complete this analysis by the end of the 2016 calendar year.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern.  The guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the year ending December 31, 2016, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases.  The new guidance will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation.  The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.  This new guidance is effective for fiscal years beginning after December 15, 2017.  The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

 

 

3. Fair Value of Financial Instruments

The carrying values of cash and equivalents, receivables, prepaid expenses, and accounts payable at September 30, 2016 approximated their fair values due to the short-term nature of these items.

The Company’s valuation of financial instruments is based on a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

At September 30, 2016 and December 31, 2015, the Company held money market funds classified as Level 1 financial instruments of $243.3 million and $129.0 million, respectively.  The Term Loan (defined and discussed in Note 6), which is classified as a Level 2 liability, has a variable interest rate and, accordingly, its carrying value approximates its fair value.  At September 30, 2016, the carrying value was $17.0 million.  There were no transfers between levels of the fair value hierarchy for any assets or liabilities measured at fair value in the nine months ended September 30, 2016.

 

 

6


 

4. Significant Agreements and Contracts

License Agreements

Optimer Pharmaceuticals, Inc.

In March 2006, the Company, through its wholly owned subsidiary, Cempra Pharmaceuticals, Inc., entered into a Collaborative Research and Development and License Agreement (“Optimer Agreement”) with Optimer Pharmaceuticals, Inc. (“Optimer”) which was acquired by Cubist Pharmaceuticals, Inc. in October 2013, which was in turn acquired by Merck in January 2015. Under the terms of the Optimer Agreement, the Company acquired exclusive rights to further develop and commercialize certain Optimer technology worldwide, excluding member nations of the Association of Southeast Asian Nations (“ASEAN”).

In exchange for this license, during 2006 and 2007, the Company issued an aggregate of 125,646 common shares with a total fair value of $0.2 million to Optimer. These issuances to Optimer were expensed as incurred in research and development expense.

In July 2010, the Company paid a $0.5 million milestone payment to Optimer after the successful completion of its first solithromycin Phase 1 program. In July 2012, the Company paid a $1.0 million milestone after the successful completion of its first solithromycin Phase 2 program. Both milestones were expensed as incurred in research and development expense. Under the terms of the Optimer Agreement, the Company will owe Optimer additional payments, contingent upon the achievement of various development, regulatory and commercialization milestone events. One such milestone event would be owed upon FDA approval of solithromycin which would result in a payment to Optimer of $9.5 million.  The aggregate amount of such milestone payments the Company may need to pay is based in part on the number of products developed under the agreement and would total $27.5 million (including the two milestone payments made to date and the milestone payment for FDA approval) if four products are developed and gain FDA approval.  The Company will also pay tiered mid-single-digit royalties based on the amount of annual net sales of its approved products.

The Scripps Research Institute

In June 2012, the Company entered into a license agreement with The Scripps Research Institute (“TSRI”), whereby TSRI licensed to the Company rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to the Company are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except ASEAN member-nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, the Company paid a one-time only, non-refundable license issue fee in the amount of $0.4 million which was charged to research and development expense in the second quarter of 2012.

The Company is also obligated to pay annual maintenance fees to TSRI in the amount of (i) $50,000 each year for the first three years (beginning on the first anniversary of the agreement), and (ii) $85,000 each year thereafter (beginning on the fourth anniversary of the agreement). Each calendar year’s annual maintenance fees will be credited against sales royalties due under the agreement for such calendar year. Under the terms of the agreement, the Company must pay TSRI low single-digit percentage royalties on the net sales of the products covered by the TSRI patents for the life of the TSRI patents, a low single-digit percentage of non-royalty sublicensing revenue received with respect to countries in the nonexclusive territory and a mid-single-digit percentage of sublicensing revenue received with respect to countries in the exclusive territory, with the sublicensing revenue royalty in the exclusive territory and the sales royalties subject to certain reductions under certain circumstances. TSRI is eligible to receive milestone payments of up to $1.1 million with respect to regulatory approval in the exclusive territory and first commercial sale, in each of the exclusive territory and nonexclusive territory, of the first licensed product to achieve those milestones that is based upon each macrolide covered by the licensed patents. Each milestone is payable once per each macrolide. Each milestone payment made to TSRI with respect to a particular milestone will be creditable against any payment due to TSRI with respect to any sublicense revenues received in connection with the achievement of such milestone. Pursuant to the terms of the Optimer Agreement, any payments made to TSRI under this license for territories subject to the Optimer Agreement can be deducted from any sales-based royalty payments due under the Optimer Agreement up to a certain percentage reduction of the royalties due to Optimer.

Under the terms of the agreement, the Company is also required to pay additional fees on royalties, sublicensing and milestone payments if the Company, an affiliate with the Company, or a sub licensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.  In December 2014, the Company paid a $0.2 million milestone payment to TSRI in relation to license and milestone payments received under the license agreement with Toyama (discussed below).

7


 

The term of the license agreement (and the period during which the Company must pay royalties to TSRI in a particular country for a particular product) will end, on a country-by-country and product-by-product basis, at such time as no patent rights licensed from TSRI cover a particular product in the particular country.

TSRI may terminate the agreement in the event (i) the Company fails to cure any non-payment or default on its indemnity or insurance obligations, (ii) the Company declares insolvency or bankruptcy, (iii) the Company is convicted of a felony relating to the development, manufacture, use, marketing, distribution or sale of any products licensed under the agreement, (iv) the Company fails to cure any underreporting or underpayment by a certain amount in any 12-month period, or (v) the Company fails to cure any default on any other obligation under the agreement. The Company may terminate the agreement with or without cause upon written notice. In the event of such termination, (i) all licenses granted to the Company will terminate except in the case of any sublicensee that was not the cause of the termination, is not in default on its obligations under its sublicense, and that pays any unpaid amounts owed by the Company under the agreement with respect to the sublicense, and (ii) the Company may complete any work in progress and sell any completed inventory on hand for a period of time after termination.

Biomedical Advanced Research and Development Authority

In May 2013, the Company entered into an agreement with BARDA, for the evaluation and development of the Company’s lead product candidate solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens.

The agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $18.7 million with contract modifications, and four option work segments that BARDA may request at its sole discretion pursuant to the agreement. If all four option segments are requested, the cumulative value of the agreement, as amended to date, would be approximately $68.2 million. Three of the options are cost plus fixed fee arrangements and one option is a cost sharing arrangement without fixed fee, for which the Company is responsible for a designated portion of the costs associated with that work segment. If all option segments are requested, this estimated period of performance would be extended until approximately May 23, 2018.

The estimated period of performance for the base performance segment was May 24, 2013 through February 29, 2016.  BARDA exercised the second option in November 2014.  The value of the second option work segment is approximately $16.0 million and the estimated period of performance is November 14, 2014 through November 30, 2016.

On February 29, 2016, the Company entered into an amendment to its existing agreement with BARDA, for the evaluation and development of its lead product candidate solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia. The amendment evidences the authorization by BARDA of a third option work segment of the agreement. The value of this option work segment is approximately $25.5 million, which is intended to fund a Phase 2/3 study of intravenous, oral capsule and oral suspension formulations of solithromycin in pediatric patients from newborn to 17 years with community acquired bacterial pneumonia. The estimated period of performance for this option work segment is February 29, 2016 through May 23, 2018. This option is a cost sharing arrangement for which the Company will be responsible for an additional designated portion of the costs associated with the work segment.  In September 2016, the contract was modified to increase the third option work segment by $8.0 million for increased manufacturing work related to the development of a second supply source for solithromycin. The amendment raises the value of the third option work segment to approximately $33.5 million.  The estimated period of performance remains as running through May 23, 2018.

Under the agreement, the Company is reimbursed and recognizes revenue as allowable costs are incurred plus a portion of the fixed-fee earned, excluding the cost sharing option segment. The Company considers fixed-fees under cost reimbursable agreements to be earned in proportion to the allowable costs incurred in performance of the work as compared to total estimated agreement costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed. Since inception of the agreement through September 30, 2016, the Company has recognized $35.6 million in revenue under this agreement.

The agreement provides the U.S. government the ability to terminate the agreement for convenience or to terminate for default if the Company fails to meet its obligations as set forth in the statement of work. The Company believes that if the government were to terminate the agreement for convenience, the costs incurred through the effective date of such termination and any settlement costs resulting from such termination would be allowable costs.

Toyama Chemical Co., Ltd.

In May 2013, Cempra Pharmaceuticals, Inc., the Company’s wholly owned subsidiary, entered into a license agreement with Toyama Chemical Co., Ltd. (“Toyama”), whereby the Company licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin, the Company’s lead compound, as its sole active

8


 

pharmaceutical ingredient (“API”) for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama granted the Company certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

Following execution of the agreement, the Company received a $10.0 million upfront payment from Toyama. Toyama is also obligated to pay the Company up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent, development and commercial milestones. Under the terms of the license agreement, Toyama must also pay the Company a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances. In August 2014, the Company received a $10.0 million milestone payment from Toyama (“August 2014 Milestone”), which was triggered by Toyama’s progress of its solithromycin clinical development program in Japan. The payment was made following Toyama’s receipt of regulatory acceptance to begin a Phase 2 trial of solithromycin in Japan following successful completion of a Phase 1 trial.  In March 2015, the Company recognized a $10.0 million milestone from Toyama based on the Japan Patent Office issuing a Decision of Allowance for the Company’s patent covering certain crystal forms of solithromycin in Japan, which payment was received in April 2015.

As part of the license agreement, Toyama and the Company also entered into a supply agreement, whereby the Company will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in Phase 1 and Phase 2 clinical trials in Japan. Pursuant to the supply agreement, which is an exhibit to the license agreement, Toyama will pay the Company for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to the Company’s costAll API for solithromycin supplied by the Company to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from the Company at prices determined by the Company’s manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. Either party may terminate the supply agreement for uncured material breach or insolvency of the other party, with Toyama’s right to terminate for the Company’s breach subject to certain further conditions in the case of the Company’s failure to supply API for solithromycin or clinical supply, but otherwise the supply agreement will continue until the expiration or termination of the license agreement.  Since inception of the agreement through September 30, 2016, the Company has recognized $6.1 million in revenue under this agreement.  

The Company has determined that there are six deliverables under this agreement including (1) the license to develop and commercialize solithromycin in Japan, (2) the obligation of the Company to conduct Phase 3 studies and obtain regulatory approval in the United States and one other territory, (3) participation in a Joint Development Committee (“JDC”) (4) participation in a Joint Commercialization Committee (“JCC”) (5) the right to use the Company’s trademark, and (6) a supply agreement. The amounts received under the license agreement have been allocated to the deliverables based on their relative fair values and will be recognized into income when the revenue recognition criteria have been achieved.

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. Contingent-based payments the Company may receive under a license agreement will be recognized when received.

Royalties are recorded as earned in accordance with the contract terms when third party sales can be reliably measured and collectability is reasonably assured.

The Company recognized $4.3 million in revenue associated with the delivery of the license in May 2013.  Additionally, because the milestone event triggering the August 2014 Milestone payment was considered non-substantive for accounting purposes, this milestone payment is being recognized into revenue proportionately to the six deliverables in the agreement using the same allocation as the upfront payment.  Therefore, $4.3 million of the August 2014 Milestone payment was recognized into revenue in August 2014.  The  remainder of the upfront and milestone payments which aggregate to $11.3 million are recorded as deferred revenue at September 2016 and will be recognized as revenue when the revenue recognition criteria of each deliverable has been met.  The Company also recognized a $10.0 million milestone based on the Japan Patent Office issuing a Decision of Allowance for the Company’s patent covering certain crystal forms of solithromycin in Japan. The March 2015 milestone payment is considered

9


 

substantive for accounting purposes, and therefore the $10.0 million milestone was recognized in its entirety as revenue in March 2015.  

FUJIFILM Finechemicals Co., Ltd.

On January 18, 2016, Cempra Pharmaceuticals, Inc. entered into an API manufacturing and supply agreement with FUJIFILM Finechemicals Co., Ltd. (“FFFC”), which will provide the Company with solithromycin in sufficient quantities and at reasonable prices to help ensure it meets its obligation under the May 8, 2013 supply agreement with Toyama. The Company will use reasonable efforts to ensure that the solithromycin supplied by FFFC is for use as the active pharmaceutical ingredient in a human drug product to be used or sold in Japan.

The Company is subject to a minimum purchase obligation for a designated number of years after the successful completion of the manufacturing facility and validation studies by FFFC.  Each calendar month, the Company will submit to FFFC a projection of the anticipated volume of solithromycin that it will order for the next designated period (as set forth in the agreement) (or, if earlier, the final calendar month of the current term). Several months of each forecast are binding and the remaining months are non-binding, provided that the quantity of solithromycin ordered for any month is between designated percentages of the quantity specified in the initial forecast and between designated percentages of the most recent previous forecast.

The price of each shipment of solithromycin will be equal to the total number of kilograms in such shipment multiplied by the per-kilogram transfer price as set forth in the agreement.

For the term of the agreement plus an additional five years or until the expiration of the patents identified in the agreement, FFFC is prohibited from supplying, selling or distributing solithromycin to, or enabling the manufacture of solithromycin by, any third party for any purpose. The Company is not precluded from developing one or more alternative or additional sources of solithromycin.

The agreement’s initial term runs until December 16, 2025. After the end of the initial term, and at the end of each year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate within a designated period of time prior to the expiration of the term, in which case the agreement will terminate at the end of such term. The parties may at any time terminate the agreement by mutual written consent. Each party has the right to terminate the agreement immediately if there is a product failure, the other party becomes involved in bankruptcy, insolvency or similar proceedings or materially breaches the agreement and such breach remains uncured for a period of time following notice of the breach. A violation by the Company of the minimum purchase obligation is considered a material breach. A product failure is not considered a material breach by the Company.  The Company has the right to terminate the agreement upon written notice if there is a supply failure. The Company also may terminate in the event that FFFC cannot provide the Company with solithromycin for more than a designated period of time. Upon termination, any unfulfilled binding portion of the forecast must be delivered by FFFC and paid for by the Company. The Company also may elect to purchase the remaining inventory of FFFC’s solithromycin and any remaining raw materials. If FFFC terminates the agreement for a material breach by the Company and, prior to such termination, (i) FFFC has constructed a facility in Japan for the primary purpose of manufacturing API for the Company under the agreement and (ii) such facility is completed and fully operational and qualified for the manufacture of API for delivery thereunder, then, except to the extent otherwise agreed to by the parties, the Company will pay FFFC an amount equal to (a) the remaining book value of the facility less (b) the product of the number of kilograms of API ordered by the Company under the agreement prior to such termination times a designated dollar amount, provided that if the total direct costs incurred by FFFC in the construction of the facility, net of any tax credits, tax refunds, government subsidies, or similar financial, monetary, or in-kind benefits provided by any governmental agency or authority, do not equal or exceed a designated dollar amount, then the remaining book value will be reduced by a pro rata amount, based on ratios set forth in the agreement, and (z) no amount will be payable if the agreement terminates after December 31, 2025; provided, however, that if FFFC manufactures any product or performs any activities (other than the manufacture of API for the Company under the agreement) in, by, or using the facility prior to such termination and makes any profit thereby, the total amount of such profits will be subtracted from the total payment amount due from the Company to FFFC.

Macrolide Pharmaceuticals, Inc.

On January 29, 2016, Cempra Pharmaceuticals, Inc. entered into an Option and License Agreement with Macrolide Pharmaceuticals, Inc. (“MP”), pursuant to which MP granted the Company an exclusive option to license certain of MP’s patents and know-how involving macrolides, including specifically novel methods of synthesizing solithromycin (the “Compound”). Under the agreement, the Company will support research at MP focused on developing a novel, cost-competitive manufacturing approach to solithromycin. The option will run until the later to occur of (i) the earlier of (a) the date that the Company first obtains FDA approval for any product incorporating the Compound as an API, or (b) January 27, 2019, or (ii) the date that is six months after the earlier of (a) MP’s satisfaction of certain milestones, or (b) the Company’s termination of MP’s obligations under the evaluation program. Under the evaluation program called for in the agreement, MP will conduct research activities for the manufacture of the Compound, which activities the Company will evaluate to determine whether to exercise the option to license.

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Upon execution of the agreement, the Company paid MP a non-refundable, non-creditable initial license fee of $0.4 million. For conducting the evaluation program, the Company paid MP a non-refundable, non-creditable fee in the amount of $0.4 million. In addition, the Company will pay MP the expected reasonable, documented, direct compensation-related costs of employees and advisors necessary to conduct MP’s portion of the evaluation program in the aggregate amount of $1.5 million, which the Company will pay in 18 equal consecutive non-refundable, non-creditable monthly installments of $83,333, beginning with the first monthly anniversary of entry into the agreement. Further, the Company will pay MP up to an aggregate of $1.0 million upon the satisfaction of certain performance milestones.

If the Company exercises the option, the license will be exclusive and worldwide (other than Association of Southeast Asian Nations) and for any and all uses in human and non-human animals, and with the right to sublicense. The Company may, in its discretion, exercise the option for a reduced portion of the territory and, if the Company makes this election, may increase as it wishes within the territory, and as many times as it wishes, provided such increase is made within 60 months of the Company’s exercise of the option.

If the Company exercises the option, it will pay MP a non-refundable, non-creditable license fee of $1.0 million, of which $0.5 million will be paid within 15 business days of exercise, and $0.5 million will be paid in the form of “deemed royalty” payments (up to such amount) equal to a fraction of a percent of net sales of licensed products. The Company will pay tiered royalties of a fraction of a percent on designated levels of annual net sales of license products. Further, the Company will pay a non-refundable, non-creditable additional royalty equal to a fraction of a percent on the net sales of licensed products of a designated amount sold by the Company, its sublicensees, and product partners, but the royalty will not exceed $1.0 million in the aggregate. Royalties will be paid on a country-by-country basis and product-by-product basis until the date on which there are no valid claims of any licensed MP patent covering a product in the applicable country.

If the Company exercises the option, the agreement’s term will run on a country by country and product by product basis until the date on which there are no valid claims in the licensed MP patents covering a particular product in a particular country.

 

 

5. Receivables

Receivables consist of amounts billed and amounts earned but unbilled under the Company’s contract with BARDA. At September 30, 2016, the Company’s receivables consisted primarily of earned but unbilled receivables under the BARDA agreement.

 

 

6. Long-term Debt 

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Comerica Bank (“Comerica”).  The Loan and Security Agreement provides that the Company may borrow up to $20.0 million in a term loan (the “Term Loan”) and, upon FDA approval of its New Drug Application for solithromycin, the Company may also borrow an aggregate amount equal to the lesser of (i) up to 75% of its eligible inventory and 80% of eligible accounts receivable or (ii) $10.0 million (the “Revolver”). After FDA approval of the Company’s New Drug Application for solithromycin, the Company may convert the Term Loan to the Revolver, in which event the Revolver would have a maximum amount available to the Company of $25.0 million.  The Loan and Security Agreement specifies the criteria for determining eligible inventory and eligible accounts receivable and sets forth ongoing limitations and conditions precedent to the Company’s ability to borrow under the Revolver.  The Company granted Comerica a security interest in substantially all of its personal property assets, excluding its intellectual property and its stock in its subsidiaries, to secure its outstanding obligations under the Loan and Security Agreement. The Company is also obligated to comply with various other customary covenants, including, among other things, restrictions on its ability to: dispose of assets, make acquisitions, be acquired, incur indebtedness, grant liens, make distributions to its stockholders, make investments, enter into certain transactions with affiliates, or pay down subordinated debt, subject to specified exceptions.

At closing, the Company received the full $20.0 million under the Term Loan and paid a facility fee of $0.1 million for the Term Loan and a facility fee of $0.2 million for the Revolver.  The Company immediately used proceeds from the Term Loan to pay all of its $17.7 million outstanding principal and interest and $1.2 million in end of term and prepayment fees under the loan and security agreement (“December 2011 Note”) with Hercules Technology Growth Capital, Inc. (“Hercules”) and terminated the Hercules Loan. The Company recorded a charge of $0.3 million on the early extinguishment of the December 2011 Note.  

Amounts borrowed under the Term Loan may be repaid and reborrowed at any time without penalty or premium.  The Term Loan was interest-only through April 30, 2016, followed by an amortization period of 36 months of equal monthly payments of principal plus interest, beginning on May 1, 2016 and continuing on the same day of each month thereafter until paid in full.  Any amounts borrowed under the Term Loan will bear interest at a floating interest rate equal to the 30 Day LIBOR rate plus 5.2%.  Amounts available to be borrowed under the Revolver may also be repaid and reborrowed at any time without penalty or premium prior to December 31, 2017, at which time all advances under the Revolver shall be immediately due and payable in full.  Any

11


 

amounts borrowed under the Revolver will bear interest at the 30 Day LIBOR rate plus 4.2%.  Once available, the Revolver is subject to an annual unused facility fee equal of 0.25%.  Under the Loan and Security Agreement, the Company is subject to certain covenants including maintaining a minimum unrestricted cash balance of $15.0 million and continuing the development or commercially launching solithromycin.

 

 

7. Shareholders’ Equity

Common Stock

In May 2016, the Company entered into an at-the-market (“ATM”) sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”) under which the Company may, at its discretion, from time to time sell shares of its common stock, with a sales value of up to $150.0 million. The Company has provided Cowen with customary indemnification rights, and Cowen is entitled to a commission at a fixed commission rate of 3.0% of the gross proceeds per share sold.  Sales of the shares under the Sales Agreement are to be made in transactions deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended.

The Company began the sale of ATM shares in May 2016. Through September 30, 2016, the Company sold 4,140,307 shares of common stock under the Sales Agreement resulting in net proceeds of $75.1 million after deducting commissions and expenses of $2.3 million.

During January 2016, the Company completed a public offering of 4,166,667 shares of common stock, at a price of $24.00 per share, resulting in net proceeds to the Company of approximately $93.8 million after deducting underwriting discounts and expenses of approximately $6.2 million.  

During the first nine months of 2016, the Company issued 83,805 shares of common stock at a weighted average exercise price of $4.34 per share upon the exercise of option grants.

During January 2015, the Company completed a public offering of 6,037,500 shares of common stock, at a price of $24.50 per share, resulting in net proceeds to the Company of approximately $138.8 million after deducting underwriting discounts, commissions and expenses of approximately $9.1 million.

The following table presents common stock reserved for future issuance for the following equity instruments as of September 30, 2016:

 

Warrants to purchase common stock

 

 

94,912

 

Options:

 

 

 

 

Outstanding under the 2006 Stock Plan

 

 

451,525

 

Outstanding under the 2011 Equity Incentive Plan

 

 

3,219,998

 

Available for future grants under the 2011 Equity Incentive Plan

 

 

3,074,428

 

Total common stock reserved for future issuance

 

 

6,840,863

 

 

 

8. Stock Option Plans

The Company adopted the 2006 Stock Plan (the “2006 Plan”) in January 2006. The 2006 Plan provided for the granting of incentive share options, nonqualified share options and restricted shares to Company employees, representatives and consultants. As of September 30, 2016, there were options for an aggregate of 451,525 shares issued and outstanding under the 2006 Plan.

The Company’s board of directors and stockholders adopted the 2011 Equity Incentive Plan (the “2011 Plan”) in October 2011, which, as amended, authorizes the issuance of up to 6,601,735 shares under the 2011 Plan, and provides for an automatic annual increase in the number of shares of common stock reserved for issuance thereunder in the amount of 4% of the shares of common stock outstanding on December 31 of the preceding year. As of September 30, 2016, there were 3,074,428 options available under the 2011 Plan for future grant.

Upon adoption of the 2011 Plan, the Company eliminated the authorization for any unissued shares previously reserved under the Company’s 2006 Plan. The stock awards previously issued under the 2006 Plan remain in effect in accordance with the terms of the 2006 Plan.

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The following table summarizes the Company’s 2006 and 2011 Plan activity:

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Options

 

 

Price

 

 

Term (in years)

 

 

Value (1)

 

Outstanding - December 31, 2015

 

 

2,813,765

 

 

$

12.80

 

 

 

 

 

 

 

 

 

Granted

 

 

998,158

 

 

 

26.88

 

 

 

 

 

 

 

 

 

Exercised

 

 

(83,805

)

 

 

4.34

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(53,225

)

 

 

21.72

 

 

 

 

 

 

 

 

 

Expired

 

 

(3,370

)

 

 

23.95

 

 

 

 

 

 

 

 

 

Outstanding - September 30, 2016

 

 

3,671,523

 

 

 

16.68

 

 

 

7.28

 

 

$

34,064,353

 

Exercisable - September 30, 2016

 

 

2,259,658

 

 

 

12.07

 

 

 

6.32

 

 

$

29,492,630

 

Vested and expected to vest at September 30, 2016 (2)

 

 

3,581,925

 

 

$

16.47

 

 

 

7.24

 

 

$

33,837,681

 

 

(1)

Intrinsic value is the excess of the fair value of the underlying common shares as of September 30, 2016 over the weighted-average exercise price.

(2)

The number of stock options expected to vest takes into account an estimate of expected forfeitures.

The following table summarizes certain information about all options outstanding as of September 30, 2016:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Exercise Price

 

Number of

Options

 

 

Weighted Average

Remaining Contractual

Term (in years)

 

 

Number of

Options

 

 

Weighted Average

Remaining

Contractual

Term (in years)

 

$2.09 - $2.47

 

 

451,525

 

 

 

3.27

 

 

 

451,525

 

 

 

3.27

 

$6.63 - $7.86

 

 

850,217

 

 

 

6.06

 

 

 

839,530

 

 

 

6.05

 

$8.70 - $13.71

 

 

643,438

 

 

 

7.20

 

 

 

421,118

 

 

 

7.10

 

$15.69 - $19.25

 

 

224,625

 

 

 

9.55

 

 

 

-

 

 

 

-

 

$22.11 - $43.43

 

 

1,501,718

 

 

 

8.87

 

 

 

547,485

 

 

 

8.63

 

 

 

 

3,671,523

 

 

 

 

 

 

 

2,259,658

 

 

 

 

 

 

During the three-month periods ended September 30, 2016 and 2015, the Company recorded $2.5 million and $1.6 million in share-based compensation expense, respectively.  During the nine-month periods ended September 30, 2016 and 2015, the Company recorded $7.5 million and $4.4 million in share-based compensation expense, respectively. As of September 30, 2016, approximately $19.6 million of total unrecognized compensation cost related to unvested share options is expected to be recognized over a weighted-average period of 2.76 years.

 

 

9. Income Taxes

The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2016 as the Company incurred losses for the nine-month period ended September 30, 2016 and is forecasting additional losses through the fourth quarter, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2016. Therefore, no federal or state income taxes are expected and none have been recorded at this time for the year ending December 31, 2016. Income taxes have been accounted for using the liability method in accordance with FASB ASC 740.

Due to the Company’s history of losses since inception, there is not enough evidence at this time and it is not more likely than not that the Company will generate sufficient future income of a nature to utilize the benefits of its net deferred tax assets. Accordingly, the deferred tax assets have been reduced by a valuation allowance, since it has been determined that it is more likely than not that all of the deferred tax assets will not be realized.

 

 

10. Net Loss Per Share

Basic and diluted net loss per common share was determined by dividing net loss attributable to common shareholders by the weighted average common shares outstanding during the period. The Company’s potentially dilutive shares, which include warrants

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and common share options, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Warrants outstanding

 

 

94,912

 

 

 

125,246

 

 

 

94,912

 

 

 

145,119

 

Stock options outstanding

 

 

3,605,373

 

 

 

2,847,922

 

 

 

3,517,324

 

 

 

2,938,101

 

 

 

 

3,700,285

 

 

 

2,973,168

 

 

 

3,612,236

 

 

 

3,083,220

 

 

11. Subsequent Events

In October 2016, the Company recognized the third $10.0 million milestone from Toyama (“October 2016 Milestone”), which was triggered by Toyama’s progress of solithromycin clinical development program in Japan.  The milestone relates to Toyama’s receipt of regulatory acceptance to begin a Phase 3 trial of solithromycin in Japan following successful completion of a Phase 2 trial.  The milestone event triggering the October 2016 Milestone was considered non-substantive for accounting purposes.  Therefore, the milestone is being recognized into revenue proportionately to the six deliverables in the agreement using the same allocation as the upfront payment.  An amount of $4.3 million of the October 2016 Milestone was recognized into revenue in October 2016.  The remainder is recorded as deferred revenue at October 2016 and will be recognized as revenue when the revenue recognition criteria of each deliverable has been met.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The unaudited interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2015. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties, including those set forth under “Part I. Item 1. Business - Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage pharmaceutical company focused on developing differentiated antibiotics for the acute care and community settings to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract infections and acute and chronic staphylococcal infections. Our lead product, solithromycin, has completed two Phase 3 clinical trials, for which topline results were reported in January and October 2015. Additionally, we are conducting a Phase 1B clinical trial, as well as a Phase 2/3 registrational trial, for solithromycin with pediatric patients. We are developing solithromycin in oral capsules, intravenous, or IV, and suspension formulations, initially for the treatment of community acquired bacterial pneumonia, or CABP, one of the most serious infections of the respiratory tract, for which we recently completed two new drug applications, or NDAs, to the U.S. Food and Drug Administration, or FDA, in the second quarter of 2016. We also completed our submission of the Marketing Authorization Application, or MAA, for solithromycin to the European Medicines Agency, or EMA, for the treatment of CABP.  The MAA is for the IV and oral capsule formulations.  Solithromycin is a potent new fourth generation macrolide and the first fluoroketolide in clinical development. We also are conducting a Phase 3 trial of solithromycin in uncomplicated gonorrhea.  In September 2015, we began exploring solithromycin’s anti-inflammatory properties by initiating Phase 2 studies of solithromycin treating chronic obstructive pulmonary disease, or COPD, and nonalcoholic steatohepatitis, or NASH patients. Our second program is Taksta, which we are developing exclusively in the U.S. as an oral treatment for acute bacterial skin and skin structure infections, or ABSSSI, and refractory bone and joint infections caused by staphylococci, including S. aureus and methicillin-resistant S. aureus, or MRSA. Based on our discussions with the FDA in 2015, we are conducting a Phase 3 trial for the treatment of ABSSSI that we began in November 2015 as well as a refractory bone and joint infection study that we began in March 2016.

On August 30, 2016, we announced that the FDA has scheduled a meeting of the Antimicrobial Drugs Advisory Committee on November 4, 2016 in Silver Spring, Maryland to discuss the safety and efficacy of solithromycin to treat CABP. We have conducted two pivotal Phase 3 global registration studies of solithromycin. The first study was conducted with solithromycin oral capsules, and the second study tested IV solithromycin progressing to oral solithromycin. Both Phase 3 studies met their primary endpoints that

14


 

were aligned with FDA guidance. Solithromycin was granted qualified infectious diseases product, or QIDP, designation which entitled the NDAs to eight-month priority reviews, resulting in PDUFA dates of December 27, and December 28, 2016, respectively, for the oral and IV NDAs.  

As part of the priority reviews, we made a rolling submission of the chemistry, manufacturing, and controls, or CMC, section of the NDAs beginning in January of 2016. In addition to evaluating the safety and efficacy of solithromycin, as is customary, the FDA is evaluating the CMC section of the solithromycin NDAs. Based on an import alert placed on a Wockhardt Limited, or Wockhardt, manufacturing facility in August 2016, several months after our NDA had been submitted and accepted for review by the FDA, Cempra began an active dialog with the FDA to determine if the active pharmaceutical ingredient, or API, produced at Wockhardt prior to the import alert was adequate for the NDA.

Based on an in person meeting held with the FDA in late October, we currently believe the FDA may not allow us to use API produced by Wockhardt for approval and commercial supply of solithromycin, and we are preparing to provide the FDA with data from API that we are manufacturing with another API supplier.

We believe that the FDA’s concerns with Wockhardt’s operations and facilities are related to the GMP quality systems at Wockhardt, and not specifically focused on Cempra’s product or processes.  Solithromycin API manufacturing at Wockhardt was closely supervised by our personnel and we continue to have confidence in the solithromycin manufacturing process and the quality of our drug product.

As disclosed previously, as part of our commercialization plans for the anticipated demand for solithromycin for the treatment of CABP we have been developing various additional supply sources for the API of solithromycin. This includes manufacturing activities at Uquifa in Cuernavaca, Mexico, which we began in the second quarter of 2014. Based on our recent discussions with the FDA, we have accelerated our API manufacturing activities with Uquifa.  We expect to provide data from Uquifa to the FDA over the next several months, which, if acceptable to the FDA, would allow us to launch solithromycin for the 2017-2018 influenza/pneumonia season.

Based on our discussions with the FDA, we believe their concerns are specific to Wockhardt rather than with any aspect of our API process and that providing satisfactory drug substance from Uquifa will address these concerns. The FDA could withhold or defer potential approval until they are satisfied that commercial supplies of solithromycin meet their CMC requirements.

Assuming FDA approval, we plan to sell solithromycin in the U.S. through our own specialty sales and marketing teams that will focus on the continuum of care for CABP focused in the outpatient setting, primarily on emergency rooms, urgent care centers, outpatient clinics and other high CABP antibiotic prescribing physician offices, and in the hospital, focused primarily on key academic medical centers and teaching hospitals with significant influence in a given geography.

We expect to build an antibiotic specialty sales force of between 200 and 300 representatives to be able to address the high prescribing centers we have identified as our primary targets. According to data we have generated, we believe this team can address the prescribers writing approximately 60% of the prescriptions for azithromycin and levofloxacin to treat CABP.  In the third quarter of 2016, we completed hiring our core sales leadership team, consisting of three area sales directors and more than 20 regional sales managers. We have also hired 12 medical science liaisons who are responsible for communicating medical information to physicians and two national account directors who are responsible for establishing and maintaining our relationships with payors.

We believe a strong position on commercial and hospital formularies could support the adoption rate for solithromycin.  Immediately following approval, we plan to begin discussions with commercial payors and hospital formularies in an effort to secure favorable positions. These discussions can take three to six months, or longer. We also anticipate that the committee responsible for updating the IDSA/ATS Consensus Guidelines on the Management of Community-Acquired Pneumonia in Adults may consider the published Phase 3 clinical data from solithromycin and could proceed to update the guidelines in 2017, if solithromycin is approved. We believe that an update to the guidelines to include solithromycin could further support the adoption rate for solithromycin.

Based on our market research to assess physician perspectives on the need for new CABP therapies and their potential adoption of solithromycin, we believe physicians will begin prescribing solithromycin fairly quickly once we make the product available and we want to have sufficient supplies of solithromycin available to support potential demand at launch. We further believe that having both the oral and the intravenous formulations readily available at launch will enhance physician and patient acceptance of solithromycin and, therefore, the trajectory of launch.

15


 

As we have continued to consider the timing of our PDUFA dates in late December, the seasonal nature of the influenza/pneumonia season typically creating declining demand for CABP therapy in the spring, the potential commercial advantages of launching solithromycin after securing potential formulary acceptance, potential inclusion in treatment guidelines, the costs associated with hiring, training and deploying a 200-300 person sales force at the tail end of the 2016-2017 influenza/pneumonia season, and the potential time required for FDA to approve the material we are producing at Uquifa, we now believe that focusing our commercial launch activities on the 2017-2018 influenza/pneumonia season is the best timing to support the most successful launch of solithromycin.

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products. All of our revenue to date has been derived from (1) a government contract and (2) the receipt of proceeds under our license and supply agreements with Toyama Chemical Co., Ltd., or Toyama, a portion of which has been recognized in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP.

In May 2013, we entered into an agreement with BARDA for the evaluation and development of solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia.

The agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $18.7 million with contract modifications, and four option work segments that BARDA may request at its sole discretion pursuant to the agreement. If all four option segments are requested, the cumulative value of the agreement, as amended to date, would be approximately $68.2 million. Three of the options are cost plus fixed fee arrangements and one option is a cost sharing arrangement without fixed fee, for which we are responsible for a designated portion of the costs associated with that work segment. The estimated period of performance for the base performance segment was May 24, 2013 through February 29, 2016. BARDA exercised the second option in November 2014. The value of the second option work segment is approximately $16.0 million and the estimated period of performance is November 14, 2014 through November 30, 2016. If all option segments are requested, this estimated period of performance would be extended until approximately May 23, 2018.

On February 29, 2016, we entered into an amendment to our agreement with BARDA for the evaluation and development of our lead product candidate solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia. The amendment evidences the authorization by BARDA of a third option work segment of the agreement. The value of this option work segment is approximately $25.5 million, which is intended to fund a Phase 2/3 study of intravenous, oral capsule and oral suspension formulations of solithromycin in pediatric patients from newborn to 17 years with community acquired bacterial pneumonia. The estimated period of performance for this option work segment is February 29, 2016 through May 23, 2018. This option is a cost sharing arrangement for which we will be responsible for an additional designated portion of the costs associated with the work segment.  In September 2016, the contract was modified to increase the third option work segment by $8.0 million for increased manufacturing work related to the development of a second supply source for solithromycin. The amendment raises the value of the third option work segment to approximately $33.5 million.  The estimated period of performance remains as running through May 23, 2018.

Under the agreement, we are reimbursed and recognize revenue as allowable costs are incurred plus a portion of the fixed-fee earned, excluding the cost sharing option segment. We consider fixed-fees under cost reimbursable agreements to be earned in proportion to the allowable costs incurred in performance of the work as compared to total estimated agreement costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed. Since inception of the agreement through September 30, 2016, we have recognized $35.6 million in revenue under this agreement.

In May 2013, Cempra Pharmaceuticals, Inc., our wholly owned subsidiary, entered into a license agreement with Toyama, whereby we licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin as its sole API for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama has granted us certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

Following execution of the agreement, we received a $10.0 million upfront payment from Toyama. Toyama is also obligated to pay us up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent,

16


 

development and commercial milestones. The first of these milestones was achieved in the third quarter of 2014 for which we received a payment of $10.0 million from Toyama.  The second $10.0 million milestone was recognized in the first quarter of 2015 which is based on the Japan Patent Office issuing a Decision of Allowance for our patent covering certain crystal forms of solithromycin in Japan.  We received payment for the second milestone in April 2015.  In October 2016, we recognized the third $10.0 million milestone which was triggered by Toyama’s receipt of regulatory acceptance to begin a Phase 3 trial of solithromycin in Japan following successful completion of a Phase 2 trial.  We expect to receive payment for the third milestone in the fourth quarter of 2016.  Under the terms of the license agreement, Toyama must also pay us a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances. Cumulatively, through September 30, 2016, we have recognized $18.7 million in revenue under this agreement with the remaining $11.3 million received being recorded as deferred revenue.  Substantially all of this deferred revenue would be recognized upon FDA approval of solithromycin in the United States.

As part of the license agreement, we also entered into a supply agreement with Toyama, whereby we will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in its clinical trials in Japan. Pursuant to the supply agreement, Toyama will pay us for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to our costs. All API for solithromycin supplied by us to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from us at prices determined by our manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. Either party may terminate the supply agreement for uncured material breach or insolvency of the other party, with Toyama’s right to terminate for our breach subject to certain further conditions in the case of our failure to supply API for solithromycin or clinical supply, but otherwise the supply agreement will continue until the expiration or termination of the license agreement.

In January 2016, we entered into a supply agreement with FUJIFILM Finechemicals Co., Ltd., or FFFC, which is intended to provide us with solithromycin in sufficient quantities and at reasonable prices to ensure we meet our obligation to Toyama under the supply agreement. We are subject to a minimum purchase obligation for a designated number of years after the successful completion of a manufacturing facility to be built and validation studies to be conducted by FFFC. The price of each shipment of solithromycin will be equal to the total number of kilograms in such shipment multiplied by the per-kilogram transfer price as set forth in the agreement. We are not precluded from developing one or more alternative or additional sources of solithromycin. The agreement’s initial term runs until December 16, 2025. After the end of the initial term, and at the end of each year thereafter, the term will automatically extend for an additional year unless either party gives written notice to the other of its intent to terminate within a designated period of time prior to the expiration of the term, in which case the agreement will terminate at the end of such term. The parties may at any time terminate the agreement by mutual written consent. Each party has the right to terminate the agreement immediately if there is a product failure, the other party becomes involved in bankruptcy, insolvency or similar proceedings or materially breaches the agreement and such breach remains uncured for a period of time following notice of the breach. A violation by us of the minimum purchase obligation is considered a material breach. A product failure is not considered a material breach by us.  We have the right to terminate the agreement upon written notice if there is a supply failure. We also may terminate in the event that FFFC cannot provide us with solithromycin for more than a designated period of time. Upon termination, any unfulfilled binding portion of the forecast must be delivered by FFFC and paid for by us. We also may elect to purchase the remaining inventory of FFFC’s solithromycin and any remaining raw materials. If FFFC terminates the agreement for a material breach by us and, prior to such termination, (i) FFFC has constructed a facility in Japan for the primary purpose of manufacturing API for us under the agreement and (ii) such facility is completed and fully operational and qualified for the manufacture of API for delivery thereunder, then, except to the extent otherwise agreed to by the parties, we will pay FFFC an amount equal to (a) the remaining book value of the facility less (b) the product of the number of kilograms of API ordered by us under the agreement prior to such termination times a designated dollar amount, provided that if the total direct costs incurred by FFFC in the construction of the facility, net of any tax credits, tax refunds, government subsidies, or similar financial, monetary, or in-kind benefits provided by any governmental agency or authority, do not equal or exceed a designated dollar amount, then the remaining book value will be reduced by a pro rata amount, based on ratios set forth in the agreement, and (z) no amount will be payable if the agreement terminates after December 31, 2025; provided, however, that if FFFC manufactures any product or performs any activities (other than the manufacture of API for us under the agreement) in, by, or using the facility prior to such termination and makes any profit thereby, the total amount of such profits will be subtracted from the total payment amount due from us to FFFC.

In the future, we anticipate generating revenue from a combination of sales of our products, if approved, whether through our own or a third-party sales force, and license fees, milestone payments and royalties in connection with strategic collaborations regarding any of our product candidates. We expect that any revenue we generate will fluctuate from quarter to quarter. If we or our strategic partners fail to complete the development of solithromycin or Taksta in a timely manner or obtain regulatory approval for them, or if we fail to develop our own sales force or find one or more strategic partners for the commercialization of approved products, our ability to generate future revenue, and our financial condition and results of operations would be materially adversely affected.

17


 

Research and Development Expenses

Since our inception, we have focused our resources on our research and development activities, including conducting pre-clinical studies and clinical trials, manufacturing development efforts, activities related to regulatory filings for our product candidates, and activities related to the planned commercial launch of solithromycin as a treatment for CABP. We recognize our research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

employee-related expenses, which include salaries, benefits and share-based compensation expense;

 

fees paid to consultants and clinical research organizations, or CROs, in connection with our clinical trials, and other related clinical trial costs, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;

 

costs related to acquiring and manufacturing clinical trial materials and costs for developing additional manufacturing sources for and the manufacture of pre-approval inventory of solithromycin;

 

costs related to compliance with regulatory requirements;

 

consulting fees paid to third parties related to non-clinical research and development;

 

activities and supplies related to preparing solithromycin for commercial launch in the U.S. for the treatment of CABP;

 

research supplies; and

 

license fees and milestone payments related to in-licensed technologies.

Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and related clinical trial fees. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are advancing solithromycin and Taksta in parallel primarily for the treatment of CABP and uncomplicated gonorrhea (for solithromycin) and ABSSSI and refractory bone and joint infections (for Taksta) as well as for other indications. Through our pre-clinical development programs, we are seeking to develop macrolide product candidates for non-antibacterial indications. The following table sets forth costs incurred on a program-specific basis for solithromycin and Taksta, excluding personnel-related costs. Macrolide research includes costs for discovery programs. All employee-related expenses for those employees working in research and development functions are included in “Research and development personnel cost” in the table, including salary, bonus, employee benefits and share-based compensation. We do not allocate insurance or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

 

(In thousands)

 

Direct research and development expense by program:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Solithromycin

 

$

13,036

 

 

$

15,305

 

 

$

36,943

 

 

$

58,812

 

Taksta

 

 

3,829

 

 

 

4,818

 

 

 

9,122

 

 

 

5,108

 

Macrolide research

 

 

425

 

 

 

9

 

 

 

1,886

 

 

 

183

 

Research and development personnel cost

 

 

3,599

 

 

 

3,133

 

 

 

11,885

 

 

 

8,423

 

Total direct research and development expense

 

 

20,889

 

 

 

23,265

 

 

 

59,836

 

 

 

72,526

 

Indirect research and development expense

 

 

207

 

 

 

276

 

 

 

807

 

 

 

808

 

Total research and development expense

 

$

21,096

 

 

$

23,541

 

 

$

60,643

 

 

$

73,334

 

 

The successful development of our clinical and pre-clinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or pre-clinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials required and other research and development activities;

 

ongoing and future clinical trial results; and

18


 

 

the costs and the timing of our regulatory submissions and any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate or if we experience significant delays in enrollment in or completion of any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

We have completed two pivotal trials for solithromycin, including one with oral solithromycin and one with IV solithromycin progressing to oral solithromycin. We are also conducting a Phase 3 trial for solithromycin in patients with uncomplicated gonorrhea.

We are also conducting a Phase 3 trial for the treatment of ABSSSI and a refractory bone and joint infection study to determine Taksta’s safety and efficacy as a long-term suppressive therapy of refractory bone and joint infections, including PJI.

We expect research and development expense in the last quarter of 2016 will be similar to research and development expense in the preceding quarters of 2016, excluding the costs of manufacturing of commercial product and the potential payment of any milestones tied to FDA approval of solithromycin for CABP. If approved by the FDA, we will owe a milestone payment of $9.5 million through our licensing agreement with Optimer Pharmaceuticals, Inc.  In 2017, unless we add new compounds to our clinical pipeline, we expect research and development expenses to decline.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including share-based compensation, for employees in executive, operational, finance and human resources functions. Other significant general and administrative expenses include professional fees for accounting, legal, and information technology services, facilities costs, expenses associated with obtaining and maintaining patents, and costs of commercialization activities.

We expect that our general and administrative expenses will continue to increase with the continued development of and in preparation for commercialization of our product candidates. Specifically, we anticipate general and administrative expenses to increase for the next several quarters as we further expand our commercial team, build out our sales infrastructure, conduct market research and develop and execute marketing programs.  We also believe that these increases will likely include increased costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls, information technology and similar requirements applicable to public companies.

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents.

Interest expense consists of interest incurred on the loan and security agreement with Hercules Technology Growth Capital, Inc. (“December 2011 Note”), which was paid in full in July 2015, using the proceeds from the loan and security agreement with Comerica Bank (“July 2015 Note”), which was entered into in July 2015.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation, on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission, or SEC, on February 25, 2016. We believe the following accounting policies to be most critical to the judgments and estimates used in preparation of our financial statements and such policies have been reviewed and discussed with our audit committee.

19


 

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable vendor personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued expenses include:

 

fees paid to CROs in connection with pre-clinical or clinical trials;

 

fees paid to investigative sites in connection with clinical trials;

 

milestone payments; and

 

unpaid salaries, wages and benefits.

We accrue our expenses related to clinical trials based on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we will adjust the accrual accordingly. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. We do not currently anticipate the future settlement of existing accruals to differ materially from our estimates.

Revenue Recognition

Our revenue generally consists of research related revenue under federal contracts and licensing revenue related to non-refundable upfront fees, milestone payments and royalties earned under license agreements. Revenue is recognized when the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods and services are delivered, limited to the consideration that is not contingent upon future deliverables. When an arrangement is accounted for as a single unit of accounting, we determine the period over which the performance obligations will be performed and revenue recognized. Management exercises significant judgment in the determination of whether a deliverable has stand-alone value, is considered to be a separate unit of accounting, and in estimating the relative fair value of each deliverable in the arrangement.

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. Contingent-based payments we may receive under a license agreement will be recognized when received.

20


 

Results of Operations

The following table summarizes the results of our operations for each of three and nine-month periods ended September 30, 2016 and 2015, together with the changes in those items in dollars:

 

 

 

Three Months Ended September 30,

 

 

Dollar

 

 

Nine Months Ended September 30,

 

 

Dollar

 

 

 

2016

 

 

2015

 

 

Change

 

 

2016

 

 

2015

 

 

Change

 

 

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract research

 

$

3,972

 

 

$

2,497

 

 

$

1,475

 

 

$

10,071

 

 

$

7,744

 

 

$

2,327

 

License

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,000

 

 

 

(10,000

)

Supply

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,770

 

 

 

(3,770

)

Total revenue

 

 

3,972

 

 

 

2,497

 

 

 

1,475

 

 

 

10,071

 

 

 

21,514

 

 

 

(11,443

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense (1)

 

 

21,096

 

 

 

23,541

 

 

 

(2,445

)

 

 

60,643

 

 

 

73,334

 

 

 

(12,691

)

General and administrative expense (1)

 

 

15,021

 

 

 

5,848

 

 

 

9,173

 

 

 

35,333

 

 

 

16,230

 

 

 

19,103

 

Other expense, net

 

 

167

 

 

 

679

 

 

 

(512

)

 

 

618

 

 

 

1,906

 

 

 

(1,288

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes the following share-based compensation

   expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

$

627

 

 

$

535

 

 

$

92

 

 

$

2,348

 

 

$

1,459

 

 

$

889

 

General and administrative expense

 

 

1,851

 

 

 

1,030

 

 

 

821

 

 

 

5,169

 

 

 

2,968

 

 

 

2,201

 

 

Comparison of the Three Months Ended September 30, 2016 and September 30, 2015

Contract revenue

For the three months ended September 30, 2016, contract research revenue increased $1.5 million compared to the three months ended September 30, 2015 due to increased activity in the second option period and the commencement of the third option period of the BARDA contract.  We expect contract research revenue to continue to increase as activity increases in the third option period of the BARDA contract.

Research and Development Expense

For the three months ended September 30, 2016, our research and development expense decreased $2.4 million compared to the three months ended September 30, 2015. The decrease is primarily related to the following:

 

a decrease in solithromycin clinical trial expenses of $5.7 million related to completion of the IV-to-Oral Phase 3 clinical trial;

 

a decrease of $2.4 million in purchases of clinical trial supplies for Taksta due to timing of the comparator purchase for the Phase 3 ABSSSI trial;

 

a decrease of $0.7 million in the purchase of API  ordered for commercial quantities in preparation for the planned commercial launch of solithromycin;

 

an increase in BARDA related expenses of $2.2 million as developmental activity increases;

 

an increase in Taksta clinical trial expenses of $1.4 million primarily related to the ongoing Phase 3 ABSSSI trial and the ongoing refractory bone and joint study;

 

an increase in clinical trial supplies of $1.0 million for validation batches;

 

an increase in regulatory expenses of $0.8 million for the preparation for the FDA Antimicrobial Drugs Advisory Committee meeting;

 

an increase of $0.5 million in expenses related to research for other potential indications of solithromycin; and

 

an increase in employee cost of $0.5 million primarily from increased headcount.

21


 

General and Administrative Expense

General and administrative expense increased by $9.2 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.  The increase is primarily related to the following:

 

an increase in employee cost of $4.3 million primarily from increased headcount;

 

an increase in professional service expenses of $2.2 million primarily related to our commercial readiness activities for the planned commercial launch; and

 

an increase of information technology services, medical affairs expenses and conference and travel fees of $2.7 million related to our commercial readiness activities for the planned commercial launch.

Other Income (Expense), Net

Other expense decreased by $0.5 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to an increased balance and a higher rate of return on cash equivalents, as well as a lower interest rate on the July 2015 Note compared to the December 2011 Note.

Comparison of the Nine Months Ended September 30, 2016 and September 30, 2015

Contract revenue

For the nine months ended September 30, 2016, contract research revenue increased approximately $2.3 million compared to the nine months ended September 30, 2015 due to increased activity in the second option period and the commencement of the third option period of the BARDA contract.  We expect contract research revenue to continue to increase as activity increases in the third option period of the BARDA contract.

License revenue

For the nine months ended September 30, 2016, license revenue decreased $10.0 million compared to the nine months ended September 30, 2015.  During the nine months ended September 30, 2015, we received a $10.0 million payment from Toyama.  No such payments have been received thus far in 2016.

Supply revenue

For the nine months ended September 30, 2016, supply revenue decreased $3.8 million compared to the nine months ended September 30, 2015, as no shipments to Toyama have occurred in 2016.

Research and Development Expense

For the nine months ended September 30, 2016, our research and development expense decreased $12.7 million compared to the nine months ended September 30, 2015. The decrease is primarily related to the following:

 

a decrease in solithromycin clinical trial expenses of $24.3 million related to completion of the IV-to-Oral Phase 3 clinical trial;

 

a decrease of $6.9 million in the purchase of API  ordered for commercial quantities in preparation for the planned commercial launch of solithromycin;

 

a decrease of $2.8 million in purchases of API for Toyama’s clinical trials in Japan;

 

a decrease of $2.4 million in purchases of clinical trial supplies for Taksta due to timing of the comparator purchase for the Phase 3 ABSSSI trial;

 

an increase in regulatory expenses of $7.9 million for submission fees related to the NDA and MAA filings as well as the preparation for the FDA Antimicrobial Drugs Advisory Committee meeting;

 

an increase in Taksta clinical trial expenses of $6.4 million primarily related to the ongoing Phase 3 ABSSSI trial and the ongoing refractory bone and joint study;

 

an increase in employee cost of $3.5 million primarily from increased headcount;

 

an increase in BARDA related expenses of $3.4 million as developmental activity increases;

22


 

 

an increase of $1.7 million in expenses related to research for other potential indications of solithromycin; and

 

an increase in clinical trial supplies of $0.8 million for ongoing clinical studies.

General and Administrative Expense

General and administrative expense increased by $19.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.  The increase is primarily related to the following:

 

an increase in employee cost of $8.8 million primarily from increased headcount; and

 

an increase in commercial readiness activities for the planned commercial launch of $10.3 million from our commercial primarily from professional services, conference, travel, and IT systems expenses.

Other Income (Expense), Net

Other expense decreased by $1.3 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to an increased balance and a higher rate of return on cash equivalents, as well as a lower interest rate on the July 2015 Note compared to the December 2011 Note.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through September 30, 2016, we have funded our operations primarily with an aggregate of $618.6 million from debt and the sale of convertible notes, convertible preferred shares, common shares and common stock, including net proceeds of $93.8 million from our January 2016 public offering and $75.1 million in 2016 from the at-the-market (“ATM”) sales agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”). As of September 30, 2016, we had cash and equivalents of approximately $248.9 million.

Cash Flows

The following table sets forth the major sources and uses of cash for the periods set forth below:

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(71,252

)

 

$

(59,512

)

Investing activities

 

 

(9

)

 

 

(46

)

Financing activities

 

 

166,413

 

 

 

142,462

 

Net increase in cash and equivalents

 

$

95,152

 

 

$

82,904

 

 

Operating Activities. Cash used in operating activities of $71.3 million for the nine months ended September 30, 2016 was primarily a result of our $86.5 million net loss offset by changes in operating assets and liabilities of $7.6 million and non-cash items of $7.6 million. Cash used in operating activities of $59.5 million for the nine months ended September 30, 2015 was primarily a result of our $69.9 million net loss offset by changes in operating assets and liabilities of $5.4 million and non-cash items of $5.0 million.  

Investing Activities. Net cash used in investing activities was $9,000 and $46,000 for the nine months ended September 30, 2016 and 2015, respectively related to purchases of equipment.

Financing Activities. Net cash provided by financing activities of $166.4 million for the nine months ended September 30, 2016 consisted of net proceeds of $169.1 million from the issuance of common stock, $0.4 million of proceeds from the exercise of stock options reduced by $2.8 million in payment of long-term debt and $0.3 million of offering costs. Net cash provided by financing activities was $142.5 million for the nine months ended September 30, 2015 and consisted of net proceeds of $139.0 million from the January 2015 public offering of common stock, offset by $0.2 million in offering costs, $20.0 million of gross proceeds from Comerica under the Term Loan which was used to pay off the outstanding debt balance to Hercules of $18.9 million offset by debt issuance costs of $0.3 million, and $2.9 million of proceeds from the exercise of stock options.

23


 

Funding Requirements

To date, we have not generated any product revenue from our clinical stage product candidates or from any other source. We do not know when, or if, we will generate any product revenue. We do not expect to generate product revenue unless and until we obtain marketing approval of and commercialize solithromycin and/or Taksta or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval of and engage in commercial readiness activities for, solithromycin and Taksta and our other product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates, including solithromycin for CABP, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We will need substantial additional funding in connection with our continuing operations.

Based on current assumptions, we expect that our existing cash and equivalents, including the proceeds of the January 2016 offering and the ATM program, will enable us to fund our operating expenses and capital expenditure through 2017, including the completion of our Phase 3 trial for solithromycin for the treatment of gonorrhea, and the cost of preparing for and executing the planned 2017 launch of solithromycin in the U.S..  This projection does not include any funds from future financings or partnerships beyond the Toyama relationship and the BARDA contract. We will need to obtain additional financing for the continued development of solithromycin and Taksta and our other product candidates and to support the ongoing commercialization of solithromycin and any of our other product candidates. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

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

 

the progress, costs and results of our ongoing Phase 3 uncomplicated gonorrhea trial, our ongoing Taksta Phase 3 trial for ABSSSI and exploratory study for bone and joint infections and any future trials for solithromycin and Taksta;

 

the costs and timing of commercialization readiness activities for solithromycin for CABP including developing additional manufacturing sources for solithromycin and building our inventory of commercial product;

 

the costs of commercial launch activities, including product sales, marketing, manufacturing and distribution, for solithromycin for CABP;

 

the progress, costs and results of our ongoing Phase 2 trials for solithromycin for COPD and NASH;

 

the scope, progress costs, and results of pre-clinical development, laboratory testing and clinical trials for our other product candidates;

 

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

 

the costs and timing of commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our other product candidates for which we receive regulatory approval;

 

the costs of commercial and clinical supplies of solithromycin and our other drug candidates;

 

obtaining milestone payments from Toyama;

 

receipt of payments under the BARDA contract;

 

our ability to establish collaborations on favorable terms;

 

the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;

 

the acceptance in the medical community of solithromycin for the treatment of CABP and any other product candidate for which we receive approval;

 

revenue if any, and the timing of the related payment, from the sale of our product candidates, if approved by the FDA;

 

obtaining a commercially viable price for solithromycin for the treatment of CABP, and for any other product candidate, for which we receive approval;

 

the availability of adequate coverage and reimbursement from federal, state and private healthcare payors for solithromycin and any other product candidate for which we receive approval;

24


 

 

reimbursement and medical policy changes that may adversely affect the pricing, profitability or commercial appeal of solithromycin and any other product candidate for which we receive approval;

 

our ability to enter into any license agreements for the distribution of our product candidates outside the U.S.;

 

the extent to which we acquire or invest in businesses, products and technologies; and

 

our ability to obtain government or other third-party funding.

Until we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We do not anticipate any substantial product revenue until we launch solithromycin in the U.S., assuming approval of our NDA for the treatment for CABP. Assuming FDA approval, we do not expect to be able to launch solithromycin for CABP until sometime in 2017 at the earliest.  The FDA Prescription Drug User Fee Act (“PDUFA”) dates for our applications are December 27 (Oral) and December 28 (IV), 2016, assuming there are no unexpected developments with our applications. We do not have any committed external source of funds except for the potential $10.0 million revolver available under the Comerica loan we entered into in July 2015, which will be available to us in the event of FDA approval of our NDA for solithromycin for CABP.  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 any securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or declaring dividends, such as those imposed under the Comerica loan. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances 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 to grant licenses on terms that may not be favorable to us.

We will need additional financing to support the ongoing commercialization of solithromycin, any development for other indications for solithromycin, as well as to continue development activities to obtain regulatory approval of and to commercialize Taksta.  We plan, as noted, to seek partners as well as equity or debt financings or other sources of third-party funding, including government grants to support the continued development and commercialization of solithromycin, Taksta and our other product candidates. If we are unable to raise additional funds when needed, whether on favorable terms or not, we may be required to delay, limit, reduce or terminate our development of our product candidates, or our commercialization efforts, or to grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for pre-clinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice and therefore we believe that our non-cancelable obligations under these agreements are not material.

During the nine months ended September 30, 2016, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those specified in our 2015 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers.  This new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP.  The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance.  This guidance, as amended by ASU 2015-14, is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which is effective for us for the year ending December 31, 2018.  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations.  In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies an entity’s identification of its performance obligations in a contract.  The update also clarifies the guidance regarding an entity’s evaluation of the nature of its promise to grant a license of intellectual property and

25


 

whether or not that revenue is recognized over time or at a point in time.  In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which amends the guidance in the new revenue standard on collectability, non-cash consideration, presentation of sales tax, and transition. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These pronouncements have the same effective date as the new revenue standard.

Due to the potential launch in 2017 of solithromycin for the treatment of CABP, we anticipate early adoption of the new revenue recognition guidance effective January 1, 2017.  Our ability to early adopt is dependent on system readiness and the evaluation of potential impacts on current revenue streams.  We are currently evaluating the impact that the implementation of this standard will have on our consolidated financial statements.  We plan to complete this analysis by the end of the 2016 calendar year.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern.  The guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the year ending December 31, 2016, with early adoption permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements

In February 2016, the FASB issued ASU 2016-02, Leases.  The new guidance will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  We are currently evaluating the impact that the implementation of this standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation.  The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We are currently evaluating the impact that the implementation of this standard will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 will make eight targeted changes to how cash receipts and cash payment