akao-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

or

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: 001-36323

 

ACHAOGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

68-0533693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1 Tower Place, Suite 300

South San Francisco, CA

(Address of principal executive offices)

94080

(Zip Code)

(650) 800-3636

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

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

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

As of November 2, 2017, there were 42,393,609 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 


 

 

ACHAOGEN, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

3

 

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

24

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

Item 4. Controls and Procedures

 

33

 

 

 

PART II—OTHER INFORMATION

 

35

 

 

 

Item 1. Legal Proceedings

 

35

 

 

 

Item 1A. Risk Factors

 

35

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

70

 

 

 

Item 3. Defaults Upon Senior Securities

 

70

 

 

 

Item 4. Mine Safety Disclosures

 

70

 

 

 

Item 5. Other Information

 

70

 

 

 

Item 6. Exhibits

 

70

 

 

 

SIGNATURES

 

72

 

 

 

 

Page 2 of 72


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Achaogen, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

134,657

 

 

$

118,964

 

Short-term investments

 

 

64,744

 

 

 

26,912

 

Contracts receivable

 

 

240

 

 

 

12,151

 

Prepaids and other current assets

 

 

6,245

 

 

 

2,189

 

Restricted cash

 

 

7,380

 

 

 

127

 

Total current assets

 

 

213,266

 

 

 

160,343

 

Property and equipment, net

 

 

12,972

 

 

 

3,261

 

Restricted cash

 

 

3,855

 

 

 

250

 

Deposit and other assets

 

 

 

 

 

71

 

Total assets

 

$

230,093

 

 

$

163,925

 

Liabilities, contingently redeemable common stock and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,820

 

 

$

5,739

 

Accrued liabilities

 

 

9,468

 

 

 

9,698

 

Loan payable, current portion

 

 

12,500

 

 

 

4,167

 

Deferred revenue

 

 

2,708

 

 

 

 

Other current liabilities

 

 

 

 

 

104

 

Total current liabilities

 

 

30,496

 

 

 

19,708

 

Loan payable, long-term

 

 

12,374

 

 

 

21,110

 

Warrant liability

 

 

15,681

 

 

 

13,874

 

Derivative liability

 

 

664

 

 

 

602

 

Deferred rent

 

 

7,596

 

 

 

1,896

 

Total liabilities

 

 

66,811

 

 

 

57,190

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Contingently redeemable common stock (Note 9)

 

 

10,000

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 290,000,000 shares authorized at

   September 30, 2017 and December 31, 2016; 42,360,929 and 35,638,052

   shares issued and outstanding at September 30, 2017 and December 31,

   2016, respectively

 

 

42

 

 

 

35

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized and zero

   shares issued and outstanding at September 30, 2017 and December 31, 2016

 

 

 

 

 

 

Additional paid-in-capital

 

 

489,704

 

 

 

353,927

 

Accumulated deficit

 

 

(336,455

)

 

 

(247,220

)

Accumulated other comprehensive loss

 

 

(9

)

 

 

(7

)

Total stockholders’ equity

 

 

153,282

 

 

 

106,735

 

Total liabilities, contingently redeemable common stock and stockholders’ equity

 

$

230,093

 

 

$

163,925

 

 

See accompanying notes to condensed consolidated financial statements.

Page 3 of 72


 

Achaogen, Inc.

Condensed Consolidated Statements of Operations

(In thousands except share and per share data)

(unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Contract revenue

 

$

577

 

 

$

16,046

 

 

$

9,306

 

 

$

31,039

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

25,316

 

 

 

20,536

 

 

 

66,113

 

 

 

56,137

 

General and administrative

 

 

11,805

 

 

 

4,460

 

 

 

27,415

 

 

 

12,188

 

Total operating expenses

 

 

37,121

 

 

 

24,996

 

 

 

93,528

 

 

 

68,325

 

Loss from operations

 

 

(36,544

)

 

 

(8,950

)

 

 

(84,222

)

 

 

(37,286

)

Interest expense

 

 

(740

)

 

 

(670

)

 

 

(2,170

)

 

 

(1,555

)

Change in warrant and derivative liabilities

 

 

6,773

 

 

 

(1,499

)

 

 

(3,957

)

 

 

(2,881

)

Other income, net

 

 

604

 

 

 

81

 

 

 

1,114

 

 

 

219

 

Net loss

 

$

(29,907

)

 

$

(11,038

)

 

$

(89,235

)

 

$

(41,503

)

Net loss per common share (Note 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.71

)

 

$

(0.41

)

 

$

(2.31

)

 

$

(1.88

)

Diluted

 

$

(0.85

)

 

$

(0.41

)

 

$

(2.31

)

 

$

(1.88

)

Weighted-average shares used to compute net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,259,001

 

 

 

26,789,397

 

 

 

38,709,811

 

 

 

22,046,368

 

Diluted

 

 

43,211,059

 

 

 

26,789,397

 

 

 

38,709,811

 

 

 

22,046,368

 

See accompanying notes to condensed consolidated financial statements.

Page 4 of 72


 

Achaogen, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(29,907

)

 

$

(11,038

)

 

$

(89,235

)

 

$

(41,503

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on available-for-sale securities

 

 

33

 

 

 

(13

)

 

 

(2

)

 

 

40

 

Total comprehensive loss

 

$

(29,874

)

 

$

(11,051

)

 

$

(89,237

)

 

$

(41,463

)

See accompanying notes to condensed consolidated financial statements.

Page 5 of 72


 

Achaogen, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(89,235

)

 

$

(41,503

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

851

 

 

 

333

 

Amortization of (discount) premium on short-term investments

 

 

(144

)

 

 

278

 

Stock-based compensation expense

 

 

10,297

 

 

 

2,726

 

Loss on fixed asset disposition

 

 

54

 

 

 

 

Change in warrant and derivative liabilities

 

 

3,958

 

 

 

2,881

 

Non-cash interest expense relating to notes payable

 

 

639

 

 

 

481

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Contracts receivable

 

 

11,911

 

 

 

(9,854

)

Prepaids and other assets

 

 

(3,985

)

 

 

(340

)

Accounts payable and accrued liabilities

 

 

(752

)

 

 

10,062

 

Deferred revenue

 

 

2,708

 

 

 

 

Other liabilities

 

 

860

 

 

 

(60

)

Net cash used in operating activities

 

 

(62,838

)

 

 

(34,996

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(5,277

)

 

 

(434

)

Purchase of short-term investments

 

 

(121,796

)

 

 

(19,311

)

Maturities of short-term investments

 

 

84,106

 

 

 

38,230

 

Net cash (used in) provided by investing activities

 

 

(42,967

)

 

 

18,485

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from underwritten public offering, net of issuance costs

 

 

121,192

 

 

 

 

Proceeds from issuance of contingently redeemable common stock, net of issuance costs

 

 

10,000

 

 

 

 

Proceeds from issuance of common stock and warrants, net of issuance costs

 

 

 

 

 

28,095

 

Proceeds from the issuance of common stock in connection with equity incentive plans

 

 

1,789

 

 

 

181

 

Proceeds from issuance of loan payable

 

 

 

 

 

10,000

 

Proceeds from exercise of stock warrants

 

 

417

 

 

 

 

Repayment of loan payable

 

 

(1,042

)

 

 

 

Net cash provided by financing activities

 

 

132,356

 

 

 

38,276

 

Net increase in cash, cash equivalents, and restricted cash

 

 

26,551

 

 

 

21,765

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

119,341

 

 

 

20,414

 

Cash, cash equivalents, and restricted cash at end of period

 

$

145,892

 

 

$

42,179

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,531

 

 

$

1,074

 

Supplemental disclosures of noncash investing and financing information

 

 

 

 

 

 

 

 

Reclassification of warrant liability to additional paid-in capital

 

$

2,089

 

 

$

 

Purchases of property plant and equipment included in deferred rent

 

$

4,736

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

Page 6 of 72


 

Achaogen, Inc.

September 30, 2017

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Basis of Presentation and Consolidation

Achaogen, Inc. (together with its consolidated subsidiary, the “Company”) is a late-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterial treatments against multi-drug resistant gram-negative infections.

The Company is developing plazomicin, its lead product candidate, for the treatment of bacterial infections due to multi-drug resistant Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae (“CRE”). The Company’s Phase 3 study of plazomicin in the treatment of patients with complicated urinary tract infections (“cUTI”) and acute pyelonephritis (“AP”), entitled EPIC (Evaluating Plazomicin In cUTI), is expected to serve as a single pivotal study required to support a new drug application (“NDA”) for plazomicin in the United States, which was submitted in October 2017. In addition, the Company’s Phase 3 study of plazomicin, the CARE (Combating Antibiotic Resistant Enterobacteriaceae) trial, is a resistant pathogen-specific trial designed to evaluate the efficacy and safety of plazomicin in patients with infections due to CRE.

The Company is also developing an orally-available antibacterial candidate, C-Scape, a combination of an approved β-lactam and an approved β-lactamase inhibitor to address a serious unmet need for an effective oral treatment for patients with cUTI, including AP, caused by ESBL-producing Enterobacteriaceae. The Company began a Phase 1 study of C-Scape in the second quarter of 2017. In the event the Phase 1 trial is successful, the Company intends to initiate a single pivotal Phase 3 study in patients with cUTI, including AP, who are suitable for treatment with oral antibiotics, in 2018.

The Company was incorporated in Delaware in 2002 and commenced operations in 2004. Since commencing operations in 2004, the Company has devoted substantially all its resources to identifying and developing its product candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these operations.

Reclassifications

The cash and cash equivalents on the condensed consolidated statements of cash flows for the nine-month period ended September 30, 2016 has been reclassified to include restricted cash to conform to the current period’s presentation. Such reclassifications did not impact the Company’s net loss or financial position.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. The results of operations for the three-month and nine-month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year or any other future period. The balance sheet as of December 31, 2016 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. Intercompany accounts and transactions have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K.

Liquidity and Going Concern

In September 2017, the Company was awarded a contract (“C-Scape Contract”) valued at up to $18.0 million in grant funding from the Biomedical Advanced Research and Development Authority (“BARDA”) to support the development of C-Scape. The C-Scape Contract includes a base period with committed funding of $12.0 million and subsequent option periods that, if exercised, would bring the total value of the award to $18.0 million.

On May 31, 2017, the Company completed an underwritten public offering of 5,750,000 shares of its common stock at a price to the public of $22.50 per share, including the closing of the full exercise of the underwriters’ option to purchase an additional 750,000

Page 7 of 72


 

shares of common stock on June 9, 2017. The Company received net proceeds from the offering of $121.2 million, after deducting the underwriting discounts and commissions and offering expenses.

On May 4, 2017, the Company entered into an agreement with the Bill & Melinda Gates Foundation (the “Gates Foundation”) to discover drug candidates against gram-negative bacterial pathogens intended to prevent neonatal sepsis (the “Grant Agreement”). Pursuant to the Grant Agreement, the Gates Foundation awarded the Company up to approximately $10.5 million in grant funding (“Grant Funds”) over a three-year research term, of which approximately $3.2 million was received in May 2017 (the “Advance Funds”). Concurrently with the Grant Agreement, the Company entered into a Common Stock Purchase Agreement (the “Gates Purchase Agreement”) with the Gates Foundation, pursuant to which the Company agreed to sell 407,331 shares of its contingently redeemable common stock to the Gates Foundation in a private placement at a purchase price per share equal to $24.55, for gross proceeds to the Company of $10.0 million (“Gates Investment”).  

In connection with the Grant Agreement and the Gates Investment, the Company entered into a strategic relationship with the Gates Foundation (the “Letter Agreement”). Under the terms of the Letter Agreement, the Gates Investment and Grant Funds may only be used to conduct mutually agreed upon work, including the scale up of the Company’s antibody platform technology to launch a product intended to prevent neonatal sepsis (the “NSP”). Pursuant to the Letter Agreement, the Company agreed to make the NSP available and accessible in certain developing countries and to grant the Gates Foundation a non-exclusive license to commercialize selected drug candidates in certain developing countries, which may only be exercised in the event of certain defaults as described in the Letter Agreement (the “Global Access Commitments”). The Global Access Commitments will continue in effect until the earlier of 25 years from the closing of the Gates Investment or 7 years following the termination of all funding provided by the Gates Foundation; provided, that the Global Access Commitments will continue for any products or services developed with funding provided by the Gates Foundation which continue to be developed or available in certain developing countries.

The Company has incurred losses and negative cash flows from operations every year since its inception.  As of September 30, 2017, the Company had unrestricted cash, cash equivalents and short-term investments of approximately $199.4 million and an accumulated deficit of approximately $336.5 million. Management expects that, based on its current operating plans, the Company’s existing cash, cash equivalents and short-term investments as of September 30, 2017 will be sufficient to fund its current planned operations for at least the next twelve months from the issuance of these financial statements. Management plans to raise additional funds through equity or debt financing arrangements, government contracts, and/or third party collaboration funding in the future to fund its operations, including the commercial development of plazomicin. However, there can be no assurance that such funding sources will be available at terms acceptable to the Company or at all. If the Company is unable to raise additional funding to meet its working capital needs, it will be forced to delay or reduce the scope of its research programs and/or limit or cease its operations.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  The financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

2. Summary of Significant Accounting Policies

Use of Estimates

The accompanying financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. On an ongoing basis, management evaluates its estimates, including those related to clinical trial accruals, fair value of liabilities, common stock and stock-based awards and income taxes. Management bases its estimates on historical experience and on various other assumptions 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 materially from those estimates.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, contracts receivable, prepaid and other current assets, accounts payable, accrued liabilities, and other current liabilities approximate fair value due to their short-term maturities. Short-term investments consist of available-for-sale securities and are carried at fair value. Based upon the borrowing rates (which is a Level 2 input) currently available to the Company for loans with similar terms, the Company believes the carrying amount of the loan payable approximates its fair value. The warrant and derivative liabilities are recorded at estimated fair value with changes in estimated fair value recorded in the Company's statements of operations.

Page 8 of 72


 

Cash and Cash Equivalents

Cash equivalents include only securities having a maturity of three months or less at the time of purchase. As of September 30, 2017 and December 31, 2016, cash and cash equivalents consisted of bank deposits, cash, commercial paper, money market funds, cash repurchase agreement investments and overnight cash sweep investments in government money market funds.

Short-term Investments

Short-term investments consist of debt securities with maturities greater than three months, but less than one year from the date of acquisition, and are classified as available for sale. Short-term investments are carried at fair value. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as a component of net unrealized gain (loss) on available-for-sale securities in the Company's consolidated statements of comprehensive loss. The amortized cost of debt securities reflects amortization of purchase premiums and accretion of purchase discounts to date, which are included in interest income.

The Company reviews all of its marketable securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value.

Restricted Cash

At September 30, 2017 and December 31, 2016, the Company had restricted cash of $11.2 million and $0.4 million, respectively. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

 

$

134,657

 

 

$

118,964

 

Restricted cash, current

 

 

7,380

 

 

 

127

 

Restricted cash, non-current

 

 

3,855

 

 

 

250

 

Total cash, cash equivalents, and restricted cash

 

$

145,892

 

 

$

119,341

 

 

As of September 30, 2017 and December 31, 2016, the Company had $10.7 million and zero, respectively, of restricted cash related to the cash provided by the Gates Foundation, in connection with the Grant Agreement, Gates Purchase Agreement and Letter Agreement (see Note 1). As of September 30, 2017 and December 31, 2016, the Company had $0.5 million and $0.4 million, respectively, of restricted cash, which relates to the Company’s facility leases.

Concurrently with the Grant Agreement, the Company entered into the Gates Purchase Agreement, pursuant to which the Company issued 407,331 shares of contingently redeemable common stock to the Gates Foundation for the Gates Investment (see Note 1). In addition, the Letter Agreement, among other things, restricts the Company’s use of both the Grant Funds and the Gates Investment to expenditures, including an allocation of overhead and administrative expenses, that are reasonably attributable to the activities required to support the research projects funded by the Gates Foundation.

As a result of such restrictions, as of September 30, 2017, the Company classified the unspent portions of the Grant Funds and Gates Investment, held at one of the Company’s financial institutions, as restricted cash. The restricted cash related to the Company’s leases, which consists of a money market account with one of the Company’s financial institutions, serves as collateral for the letters of credit provided as security deposits under the Company’s facility lease and expire approximately 90 days from the end of their respective lease terms.

Warrant Liability

On June 3, 2016, the Company issued warrants to purchase 1,999,999 shares of its common stock in connection with a private placement financing transaction (the “Private Placement”). Each warrant has an exercise price of $3.66 per share and is exercisable for five years from the date of issuance. The Company accounts for these warrants as a liability instrument measured at estimated fair value. The initial fair value of the warrants was determined using a calibration model that involved using the Black-Scholes Pricing Model ("Black-Scholes"), which requires inputs such as the risk-free interest rate, expected share price volatility, underlying price per share of the Company's common stock and remaining term of the warrants. The warrants are subject to remeasurement at each balance sheet date, using Black-Scholes, with any changes in the fair value of the outstanding warrants recognized in the condensed consolidated statements of operations. As of September 30, 2017, warrants to purchase 1,178,782 shares of the Company’s common stock remain outstanding and unexercised.

Page 9 of 72


 

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. The Company has one operating segment.

Customer Concentration

For the three-month and nine-month periods ended September 30, 2017 and 2016, the Company’s revenue was generated from funding pursuant to U.S. government contracts and a non-profit foundation grant. All contracts receivable relate to funding from U.S. government contracts.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist of cash, cash equivalents and short-term investments. Cash and cash equivalents are deposited in checking, overnight sweep and money market accounts at one financial institution with balances that generally exceed federally insured limits. Management believes that the financial institution is financially sound, and, accordingly, minimal credit risk exists with respect to this financial institution. The Company’s investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of default by the institutions holding its cash and cash equivalents or issuing the debt securities. As of September 30, 2017 and December 31, 2016, the Company had not experienced any credit losses in such accounts or investments.

Revenue Recognition

The Company recognizes revenue when: (i) evidence of an arrangement exists, (ii) fees are fixed or determinable, (iii) services have been delivered, and (iv) collectability is reasonably assured. The Company currently generates revenue from government contracts and a non-profit foundation grant (collectively, the “Revenue Contracts”). Revenue Contracts are agreements that provide the Company with payments for certain types of expenditures in return for research and development activities over a contractually-defined period. Revenue from the Revenue Contracts is recognized in the period during which the related costs are incurred and the related services are rendered, provided that the applicable conditions under the government contracts have been met.  Costs of contract revenue are recorded as a component of operating expenses in the Company's consolidated statement of operations.

Funds received from third parties under contract arrangements are recorded as revenue if the Company is deemed to be the principal participant in the contract arrangements because the activities under the contracts are part of the Company’s development programs. If the Company is not the principal participant, the funds from contracts are recorded as a reduction to research and development expense. Contract funds received are not refundable and are recognized when the related qualified research and development costs are incurred and when there is reasonable assurance that the funds will be received. Funds billed and received in advance are recorded as deferred revenue.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses include certain payroll and personnel expenses; laboratory supplies; consulting costs; external contract research and development expenses; and allocated overhead, including rent, equipment depreciation and utilities, and relate to both Company-sponsored programs as well as costs incurred pursuant to collaboration agreements and government contracts.

The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates 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 the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and other current assets and recognized as an expense as the goods are delivered or the related services are performed.

Page 10 of 72


 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This ASU will be effective for the Company in fiscal year 2019. Early adoption is permitted. The Company is currently assessing the potential effects of this ASU on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This ASU defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The Company expects to adopt the new revenue standard as of January 1, 2018 using the modified retrospective method. The Company has completed its assessment of the first step which included identifying the Company’s customers. Through the remainder of 2017, the Company will continue to assess the potential impact of adopting this new standard on any current, new or significantly modified customer contracts. In subsequent quarters, the Company will complete its evaluation of additional disclosures that may be required upon adoption of the new standard.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award requires the Company to apply modification accounting. This ASU will be effective for the Company for annual reporting periods, including interim reporting periods, beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the potential effects of this ASU on its consolidated financial statements.

Net Loss Per Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period.  Diluted net loss per common share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. For purposes of this calculation, preferred stock, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The following tables set forth the computation of the Company’s basic and diluted net loss per share (in thousands, except shares and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss used to compute basic net loss per share

 

$

(29,907

)

 

$

(11,038

)

 

$

(89,235

)

 

$

(41,503

)

Less: Gain on private placement warrants

 

 

(6,795

)

 

 

-

 

 

 

-

 

 

 

-

 

Net loss used to compute diluted net loss per share

 

$

(36,702

)

 

$

(11,038

)

 

$

(89,235

)

 

$

(41,503

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic net loss per share

 

 

42,259,001

 

 

 

26,789,397

 

 

 

38,709,811

 

 

 

22,046,368

 

Add: Private placement warrant shares

 

 

952,058

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted-average shares used to compute diluted net loss per share

 

 

43,211,059

 

 

 

26,789,397

 

 

 

38,709,811

 

 

 

22,046,368

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.71

)

 

$

(0.41

)

 

$

(2.31

)

 

$

(1.88

)

Diluted

 

$

(0.85

)

 

$

(0.41

)

 

$

(2.31

)

 

$

(1.88

)

For the three-month and nine-month periods ended September 30, 2017 and 2016, potentially dilutive securities outstanding have been excluded from the computations of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported. The following potentially dilutive securities have been excluded from diluted net loss per share, because their effect would be antidilutive, as of September 30, 2017 and 2016:

 

Page 11 of 72


 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Options to purchase common stock

 

 

4,793,775

 

 

 

3,416,136

 

 

 

4,793,775

 

 

 

3,416,136

 

Restricted stock units

 

 

845,705

 

 

 

561,428

 

 

 

845,705

 

 

 

561,428

 

Warrants to purchase common stock

 

 

17,514

 

 

 

2,030,023

 

 

 

1,196,296

 

 

 

2,030,023

 

 

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, contracts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy, including cash held at overnight sweep accounts. The Company’s Level 2 valuations of marketable securities are generally derived from independent pricing services based upon quoted prices in active markets for similar securities, with prices adjusted for yield and number of days to maturity, or based on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets.

In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that are measured at estimated fair value on a recurring basis consist of a derivative liability in connection with loan payable and a warrant liability in connection with the Private Placement.

Page 12 of 72


 

As of September 30, 2017 and December 31, 2016, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

 

 

September 30, 2017

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

126,267

 

 

$

 

 

$

 

 

$

126,267

 

Restricted cash

 

 

11,235

 

 

 

 

 

 

 

 

 

11,235

 

Subtotal

 

 

137,502

 

 

 

 

 

 

 

 

 

137,502

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

8,664

 

 

 

 

 

 

(2

)

 

 

8,662

 

U.S. Treasury bills

 

 

21,004

 

 

 

 

 

 

(8

)

 

 

20,996

 

Commercial paper

 

 

43,475

 

 

 

1

 

 

 

 

 

 

43,476

 

Subtotal

 

 

73,143

 

 

 

1

 

 

 

(10

)

 

 

73,134

 

Total

 

$

210,645

 

 

$

1

 

 

$

(10

)

 

$

210,636

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

134,657

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

64,744

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

11,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

15,681

 

Derivative Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

664

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

16,345

 

 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,728

 

 

$

 

 

$

 

 

$

3,728

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

377

 

 

 

 

 

 

 

 

 

377

 

Money market funds

 

 

115,236

 

 

 

 

 

 

 

 

 

115,236

 

Subtotal

 

 

115,613

 

 

 

 

 

 

 

 

 

115,613

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

12,969

 

 

 

 

 

 

(7

)

 

 

12,962

 

Commercial paper

 

 

13,950

 

 

 

 

 

 

 

 

 

13,950

 

Subtotal

 

 

26,919

 

 

 

 

 

 

(7

)

 

 

26,912

 

Total

 

$

146,260

 

 

$

 

 

$

(7

)

 

$

146,253

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

118,964

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

26,912

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,874

 

Derivative liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

602

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,476

 

Page 13 of 72


 

All available-for-sale securities held as of September 30, 2017 had maturities less than one year from the date of acquisition. There were no sales of available-for-sale securities in any of the periods presented. The carrying value of debt securities that were in unrealized loss positions totaled $31.3 million as of September 30, 2017. The Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. The Company anticipates that it will recover the entire amortized cost basis of such debt securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three-month and nine-month periods ended September 30, 2017.

Pursuant to the loan and security agreement with Solar Capital Ltd. (see Note 7), the Company entered into a Success Fee Agreement under which the Company agreed to pay $1.0 million in cash (the "Success Fee") if the Company obtains approval to market plazomicin from the Food and Drug Administration (the "FDA"). If such approval is obtained, the Success Fee shall be due the later of (i) August 5, 2019 or (ii) the date such FDA approval is obtained. The fair value of the Success Fee, approximately $602,000 at December 31, 2016, is recorded as a derivative liability and included in other long-term liabilities on the accompanying condensed consolidated balance sheet. The estimated fair value of the derivative liability as of September 30, 2017 increased by $21,000 and $62,000 to $664,000 from December 31, 2016, as a result of the time value of money, which is presented as change in warrant and derivative liabilities in the Company's condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2017, respectively.

The fair value of the derivative liability was determined using a discounted cash flow analysis, and is classified as a Level 3 measurement within the fair value hierarchy since the Company’s valuation utilized significant unobservable inputs. Specifically, the key assumptions included in the calculation of the estimated fair value of the derivative instrument include: i) the Company’s estimates of both the probability and timing of a potential $1.0 million payment to Solar Capital Ltd. as a result of FDA approval to market plazomicin, and ii) a discount rate of 13% which was derived from the Company's estimated cost of debt. The estimated fair value of the derivative liability is most sensitive to the probability of FDA approval. Should the probability of FDA approval change by 5%, the fair value of the derivative liability as of September 30, 2017 would change by approximately $39,000. For the three-month and nine-month periods ended September 30, 2017, there was no change to the key assumptions used in the calculation of the estimated fair value. Any changes in the estimated fair values are presented as changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations.

Pursuant to the Private Placement (see Note 2), the Company issued warrants to purchase 1,999,999 shares of common stock at an exercise price of $3.66. The Company classified these warrants as a liability measured at fair value using Black-Scholes. Under certain entity conditions, the holder of a warrant may require the Company to settle the warrant in cash at its estimated fair value using Black-Scholes. On June 3, 2016, the closing date of the Private Placement, the $2.6 million initial estimated fair value of the warrants was recorded as a warrant liability on the accompanying condensed consolidated balance sheet. At September 30, 2017 and December 31, 2016, the estimated fair values of the outstanding warrants were approximately $15.7 million and $13.9 million, respectively. The change in the estimated fair value is primarily due to the change in the Company's stock price and is included in changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations.

During the nine-month period ended September 30, 2017, certain holders of these warrants exercised warrants to purchase 113,948 shares of common stock. The Company received $0.4 million in proceeds from these warrant exercises. The Company is required to record the exercised warrants at its estimated fair value at the time of exercise, with any change included in changes in warrant and derivative liabilities in the Company’s condensed consolidated statements of operations. The Company estimated the fair value of these exercised warrants at their respective exercise dates to be $2.1 million, an increase of $0.9 million from its valuation, at December 31, 2016, of $1.2 million, primarily due to an increase in the Company’s stock price.

The fair value of the warrant liability is classified as a Level 3 measurement within the fair value hierarchy since the Company’s valuation utilized significant unobservable inputs, including the risk-free interest rate, expected share price volatility, underlying price per share of the Company's common stock and remaining term of the warrants. At September 30, 2017 and December 31, 2016, the estimated fair values of the warrants were determined using Black-Scholes with the following assumptions:

 

 

September 30, 2017

 

 

December 31, 2016

 

Expected volatility

 

 

80%

 

 

 

80%

 

Expected term

 

3.7 years

 

 

4.2 years

 

Risk-free interest rate

 

 

1.7%

 

 

 

1.8%

 

Dividend yield

 

 

—%

 

 

 

—%

 

The expected volatility is based on the Company's expected volatility. The expected term is based on the remaining life of the warrants. The risk-free interest rate is obtained from the yields on actively traded U.S. Treasury securities for a period equal to the expected term of the warrants. The dividend yield is zero because the Company has never paid cash dividends and has no present

Page 14 of 72


 

intention to pay cash dividends. Should the share price change by 5%, the fair value of the warrant liability as of September 30, 2017 would change by approximately $0.9 million.

Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented as changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations and were as follows for the nine-month period ended September 30, 2017 (in thousands):

 

 

Estimated Fair Value

of Warrant Liability

 

 

Estimated Fair Value

of Derivative Liability

 

Balance of Level 3 Liabilities at December 31, 2016

 

$

13,874

 

 

$

602

 

Change in estimated fair value of warrant liability

 

 

3,896

 

 

 

Reclassification of warrant liability to additional paid in capital upon exercise of warrants

 

 

(2,089

)

 

 

Change in estimated fair value of derivative liability

 

 

 

 

62

 

Balance of Level 3 Liabilities at September 30, 2017

 

$

15,681

 

 

$

664

 

Warrants outstanding as of September 30, 2017 and 2016 have a weighted-average exercise price of $3.78.

4. Balance Sheet Components

Prepaids and other current assets

Prepaids and other current assets consisted of the following (in thousands):

 

 

September 30, 2017

 

 

December 31, 2016

 

Deferred research and development costs

 

$

4,457

 

 

$

660

 

Prepaid expenses

 

 

1,490

 

 

 

1,390

 

Other current assets

 

 

298

 

 

 

139

 

 

 

$

6,245

 

 

$

2,189

 

Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):

 

 

September 30, 2017

 

 

December 31, 2016

 

Office equipment

 

$

863

 

 

$

644

 

Laboratory equipment

 

 

5,701

 

 

 

4,038

 

Leasehold improvements

 

 

8,055

 

 

 

1,072

 

Construction-in-progress

 

 

1,436

 

 

 

1,896

 

 

 

 

16,055

 

 

 

7,650

 

Less: accumulated depreciation and amortization

 

 

(3,083

)

 

 

(4,389

)

Property and equipment, net

 

$