Achaogen
Achaogen Inc (Form: 10-Q, Received: 08/08/2016 16:09:30)
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

    (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or  
o
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.)
7000 Shoreline Court, Suite 371
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   x     No   o
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   x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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
o
 
Accelerated filer
x
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
As of August 2, 2016, there were 26,679,702 shares of the registrant’s common stock, par value $0.001 per share, outstanding.


Table of Contents

ACHAOGEN, INC.
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I—FINANCIAL INFORMATION  
Item 1.
Financial Statements.
Achaogen, Inc.
Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
 
June 30,
2016
 
December 31,
2015
(Note 1)
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
54,649

 
$
20,287

Short-term investments
15,350

 
38,444

Contracts receivable
8,652

 
5,039

Prepaids and other current assets
2,501

 
1,719

Restricted cash
127

 

Total current assets
81,279

 
65,489

Property and equipment, net
995

 
905

Restricted cash

 
127

Deposit and other assets
70

 
342

Total assets
$
82,344

 
$
66,863

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,095

 
$
3,537

Accrued liabilities
9,365

 
4,927

Other current liabilities
207

 
225

Total current liabilities
15,667

 
8,689

Loan payable, long-term
24,815

 
14,536

Warrant liability
3,937

 

Derivative liability
400

 
375

Other long-term liabilities
14

 
104

Total liabilities
44,833

 
23,704

Commitments and contingencies

 

Stockholders’ equity
 
 
 
Common stock, $0.001 par value, 290,000,000 shares authorized at June 30, 2016 and December 31, 2015; 26,548,023 and 18,395,219 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
26

 
18

Preferred stock, $0.001 par value, 10,000,000 shares authorized and zero shares issued and outstanding at June 30, 2016 and December 31, 2015

 

Additional paid-in-capital
243,938

 
219,182

Accumulated deficit
(206,458
)
 
(175,993
)
Accumulated other comprehensive income (loss)
5

 
(48
)
Total stockholders’ equity
37,511

 
43,159

Total liabilities and stockholders’ equity
$
82,344

 
$
66,863

See accompanying notes to condensed consolidated financial statements.


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Achaogen, Inc.
Condensed Consolidated Statements of Operations
(In thousands except share and per share data)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Contract revenue
$
9,144

 
$
12,041

 
$
14,993

 
$
16,921

Operating expenses
 
 
 
 
 
 
 
Research and development
21,708

 
10,088

 
35,601

 
17,967

General and administrative
3,951

 
2,882

 
7,728

 
6,113

Total operating expenses
25,659

 
12,970

 
43,329

 
24,080

Loss from operations
(16,515
)
 
(929
)
 
(28,336
)
 
(7,159
)
Interest expense
(447
)
 

 
(885
)
 

Change in warrant and derivative liabilities
(1,382
)
 

 
(1,382
)
 

Other income, net
76

 
43

 
138

 
94

Net loss
$
(18,268
)
 
$
(886
)
 
$
(30,465
)
 
$
(7,065
)
Basic and diluted net loss per common share
$
(0.87
)
 
$
(0.05
)
 
$
(1.55
)
 
$
(0.39
)
Weighted-average common shares outstanding used to calculate basic and diluted net loss per common share
20,899,297

 
18,070,045

 
19,648,792

 
18,034,416

See accompanying notes to condensed consolidated financial statements.


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Achaogen, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(18,268
)
 
$
(886
)
 
$
(30,465
)
 
$
(7,065
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities
(2
)
 

 
53

 
28

Total comprehensive loss
$
(18,270
)
 
$
(886
)
 
$
(30,412
)
 
$
(7,037
)
See accompanying notes to condensed consolidated financial statements.


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Achaogen, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(30,465
)
 
$
(7,065
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
227

 
201

Amortization of premium on short-term investments
252

 
279

Stock-based compensation expense
1,751

 
1,534

Change in warrant and derivative liabilities
1,382

 

Non-cash interest expense relating to loan payable
279

 

Change in operating assets and liabilities:
 
 
 
Contracts receivable
(3,613
)
 
745

Prepaids and other assets
(510
)
 
(361
)
Accounts payable and accrued liabilities
6,996

 
1,789

Other liabilities
(108
)
 
(51
)
Net cash used in operating activities
(23,809
)
 
(2,929
)
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(317
)
 
(378
)
Purchase of short-term investments

 
(1,997
)
Maturities of short-term investments
22,895

 
24,824

Net cash provided by investing activities
22,578

 
22,449

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net of issuance costs
25,420

 

Proceeds from issuance of loan payable
10,000

 

Proceeds from issuance of common stock in conjunction with equity incentive plans
173

 
1,147

Net cash provided by financing activities
35,593

 
1,147

Net increase in cash and cash equivalents
34,362

 
20,667

Cash and cash equivalents, beginning of period
20,287

 
18,881

Cash and cash equivalents, end of period
$
54,649

 
$
39,548

Supplemental disclosures of cash flow information
 
 
 
Interest paid
$
606

 
$

See accompanying notes to condensed consolidated financial statements.


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Achaogen, Inc.
June 30, 2016
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 clinical-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterial drugs to treat multi-drug resistant gram-negative infections. The Company is developing plazomicin, its lead product candidate, for the treatment of serious 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 supporting a new drug application ("NDA") for plazomicin in the United States. In addition, the Company is completing a Phase 3 study of plazomicin, entitled CARE (Combating Antibiotic Resistant Enterobacteriaceae), which is a resistant pathogen-specific trial designed to evaluate the efficacy and safety of plazomicin in patients with certain infections due to CRE.
The Company was incorporated in Delaware in 2002 and commenced operations in 2004. Since commencing operations in 2004, the Company has devoted substantially all of 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.
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 following 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 six-month periods ended June 30, 2016 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, 2015 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, 2015 included in the Company’s Annual Report on Form 10-K.
On June 3, 2016, the Company sold 7,999,996 shares of its common stock and warrants to purchase 1,999,999 shares of its common stock pursuant to Securities Purchase Agreement (the "Purchase Agreement") for aggregate gross proceeds of $25.4 million in connection with a private placement financing transaction (the "Private Placement"). The warrants have an exercise price of $3.66 per share and are exercisable up to five years from the date of issuance.
On April 7, 2015, the Company filed a Registration Statement on Form S-3, declared effective by the SEC on April 21, 2015, covering the offering of up to $150.0 million of common stock, preferred stock, debt securities, warrants, purchase contracts and/or units. This Registration Statement included a prospectus covering the offering, issuance and sale of up to $30.0 million of shares of our common stock from time to time in an "at-the-market" ("ATM") equity offering pursuant to a sales agreement with Cowen and Company, LLC. As of June 30, 2016, the Company had sold 267,520 shares pursuant to its ATM equity offering program at a weighted-average price of $6.29 per share for aggregate offering proceeds of $1.7 million and aggregate net proceeds of $1.6 million , after deducting the sales commissions and offering expenses.
In March 2014, the Company completed its initial public offering (“IPO”) of shares of its common stock, pursuant to which the Company issued 6,900,000 shares of common stock, which includes 900,000 shares issued pursuant to the over-allotment option granted to its underwriters, and received net proceeds of approximately $73.9 million , after deducting underwriting discounts, commissions and offering expenses. In connection with the completion of the Company’s IPO, all shares of convertible preferred stock converted into 10,386,894 shares of common stock and all of the Company’s convertible preferred stock warrants were converted into warrants to purchase common stock.


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The Company has incurred losses and negative cash flows from operations every year since its inception. As of June 30, 2016, the Company had unrestricted cash, cash equivalents and short-term investments of approximately $70.0 million and an accumulated deficit of approximately $206.5 million . Management expects to continue to incur additional substantial losses for the foreseeable future as a result of the Company's research and development activities, and the amounts of unrestricted cash, cash equivalents and short-term investments held at June 30, 2016 are sufficient to fund our current planned operations at least through the beginning of the second quarter of 2017 without securing additional funding sources. Management is currently evaluating different options for the raising of additional funds through equity or debt financing arrangements, government contracts and/or third party collaboration funding, 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 lack of financial resources to fund projected negative cash flows and the resultant need to raise substantial additional funding in the near term in order to sustain operations raise substantial doubt as to the Company's ability to continue as a going concern.
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.
Cash and Cash Equivalents
Cash equivalents include only securities having a maturity of three months or less at the time of purchase. As of June 30, 2016 and December 31, 2015, cash and cash equivalents consisted of bank deposits, cash, and investments in 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 is 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.


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Restricted Cash
At June 30, 2016 and December 31, 2015, the Company had restricted cash of $127,000 . The restricted cash, which consists of a money market account with one of the Company’s financial institutions, serves as collateral for a letter of credit provided as a security deposit under the Company’s facility lease. The facility lease expires on April 14, 2017 .
Warrant Liability
On June 3, 2016, the Company issued 1,999,999 warrants to purchase shares of its common stock in connection with the Private Placement. Each warrant has an exercise price of $3.66 and is exercisable for five years from the date of issuance. The Company accounted for these warrants as a liability instrument measured at its 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.
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 six-month periods ended June 30, 2016 and 2015, the Company’s revenue has been generated solely from funding pursuant to U.S. government contracts, and accordingly 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 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. Our 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 June 30, 2016 and December 31, 2015, the Company has 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 entirely from government contracts. Government 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 government 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


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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.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (Topic 205-40), Going Concern . This ASU introduces an explicit requirement for management to assess if there is substantial doubt about an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about an entity's ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. ASU 2014-15 is effective for all entities in the first annual period ending after December 15, 2016. The Company is currently assessing the potential effects of this ASU on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes . This guidance simplifies the presentation of deferred income taxes in a classified balance sheet to require that deferred tax liabilities and assets be classified as noncurrent and is effective for annual reporting periods, including interim reporting periods, beginning after December 15, 2016, and is applicable to the Company's fiscal year beginning January 1, 2017. Early adoption is permitted. The Company does not anticipate it will have a material impact to its consolidated financial statements.
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 March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments. This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance should be applied on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year in which the amendments are effective, and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently assessing the potential effects of this ASU on its consolidated financial statements.
In March 2016, the FASB issued ASU No 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting. This ASU simplifies 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. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. This ASU will be effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. 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 entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets


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recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) , Deferral of the Effective Date , which defers by one year the effective date of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017 (including interim periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim periods within those periods). In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which clarifies how to identify the unit of accounting for the principal versus agent evaluation and how to apply the control principle to certain types of arrangements. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) , Narrow-Scope Improvements and Practical Expedients, which addresses certain issues on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. These ASUs will be effective for the Company in the first quarter of fiscal year 2018, using one of two retrospective application methods. The Company has not selected a transition method and is currently assessing the potential effects of this ASU on the Company’s condensed 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.
For the three-month and six-month periods ended June 30, 2016 and 2015, all 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. Below are listed the potentially dilutive securities outstanding as of June 30, 2016 and 2015: 
 
June 30,
 
2016
 
2015
Options to purchase common stock
2,996,038

 
1,956,570

Restricted stock units
547,486

 
222,700

Warrants to purchase common stock
2,030,023

 
30,024

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


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Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. 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.
As of June 30, 2016 and December 31 2015, 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):  
 
June 30, 2016
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Assets
 
 
 
 
 
 
 
Cash
$
10,987

 
$

 
$

 
$
10,987

Level 1:
 
 
 
 
 
 
 
Restricted cash
127

 

 

 
127

Money market funds
43,662

 

 

 
43,662

Subtotal
43,789

 

 

 
43,789

Level 2:
 
 
 
 
 
 
 
Corporate debt securities
13,343

 
4

 
(1
)
 
13,346

U.S. Treasury bills
2,002

 
2

 

 
2,004

Subtotal
15,345

 
6

 
(1
)
 
15,350

 
$
70,121

 
$
6

 
$
(1
)
 
$
70,126

Reported as:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
54,649

Short-term investments
 
 
 
 
 
 
$
15,350

Restricted cash
 
 
 
 
 
 
$
127

 
 
 
 
 
 
 
 
Liabilities, Level 3:
 
 
 
 
 
 
 
Warrant liability in connection with Private Placement
 
 
 
 
 
 
$
3,937

Derivative liability in connection with loan payable
 
 
 
 
 
 
$
400

Total
 
 
 
 
 
 
$
4,337




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December 31, 2015
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Assets
 
 
 
 
 
 
 
Cash
$
1,013

 
$

 
$

 
$
1,013

Level 1:
 
 
 
 
 
 
 
Restricted cash
127

 

 

 
127

Money market funds
19,274

 

 

 
19,274

Subtotal
19,401

 

 

 
19,401

Level 2:
 
 
 
 
 
 
 
Corporate debt securities
34,490

 

 
(47
)
 
34,443

Commercial paper
1,997

 

 

 
1,997

U.S. Treasury bills
2,005

 

 
(1
)
 
2,004

Subtotal
38,492

 

 
(48
)
 
38,444

Total
$
58,906

 
$

 
$
(48
)
 
$
58,858

Reported as:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
20,287

Short-term investments
 
 
 
 
 
 
$
38,444

Restricted cash
 
 
 
 
 
 
$
127

 
 
 
 
 
 
 
 
Liabilities, Level 3:
 
 
 
 
 
 
 
     Derivative liability in connection with loan payable
 
 
 
 
 
 
$
375

All available-for-sale securities held as of June 30, 2016 had maturities greater than three months, but 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 corporate debt obligations that were in unrealized loss positions totaled $3.3 million as of June 30, 2016. 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 corporate debt obligations and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three-month and six-month periods ended June 30, 2016.
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 $375,000 at December 31, 2015, 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 June 30, 2016 increased by $25,000 to $400,000 from December 31, 2015, which amount is presented as changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations for the six-months ended June 30, 2016.
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. upon 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 June 30, 2016 would change by approximately $31,000 . 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


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estimated fair value using Black-Scholes. On the closing date of the Private Placement, June 3, 2016, the $2.6 million initial estimated fair value of the warrant liability was recorded as a warrant liability on the accompanying condensed consolidated balance sheet. At June 30, 2016, the estimated fair value of the warrants were approximately $3.9 million . This change in the estimated fair value is presented as changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations.
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. The estimated fair values of the warrants were determined using Black-Scholes with the following assumptions, during the six-months ended June 30, 2016:
Expected volatility
60%
Expected term
5.0 years
Risk-free interest rate
1.0%–1.2%
Dividend yield
0%
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 intention to pay cash dividends. Should the share price change by 5% , the fair value of the warrant liability as of June 30, 2016 would change by approximately $294,000 .
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 six-months ended June 30, 2016 (in thousands):
 
Estimated Fair Value of Warrant Liability
 
Estimated Fair Value of Derivative Liability
Balance of Level 3 Liabilities at December 31, 2015
$

 
$
375

Estimated fair value of warrants issued
2,580

 

Change in estimated fair value of warrant liability
1,357

 

Change in estimated fair value of derivative liability

 
25

Balance of Level 3 Liabilities at June 30, 2016
$
3,937

 
$
400

4. Balance Sheet Components
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):  
 
June 30,
2016
 
December 31,
2015
Accrued clinical and development expenses
$
6,276

 
$
2,869

Payroll and related bonus expenses
2,543

 
1,615

Other
546

 
443

 
$
9,365

 
$
4,927

5. License and Collaboration Agreements
Crystal Biosciences, Inc.


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In May 2016, the Company entered into a collaboration and license agreement with Crystal Biosciences, Inc. (“Crystal”). Pursuant to the terms of this agreement, the Company and Crystal agreed to collaborate on the discovery of monoclonal antibodies against multiple targets. Crystal agreed to conduct the initial discovery work with its antibody platform and the Company has the right to develop and commercialize the antibodies discovered through this collaboration. The Company is required to provide signing and milestone payments with respect to research, development, regulatory and commercialization milestones (if any). All such milestone payments may total, in aggregate, up to but no more than $20,550,000 . The upfront signing fee was fully recorded as research and development expense in the three-month period ended June 30, 2016. This collaboration and license agreement also provides that the Company shall pay royalties equal to a low single-digit percentage of annual worldwide net sales of the commercialized product.
Ionis Pharmaceuticals
In January 2006, the Company entered into a license agreement with Ionis Pharmaceuticals, Inc. (“Ionis”). Ionis granted the Company an exclusive, worldwide license with the right to grant and authorize sublicenses related to the research and development of aminoglycoside products. As an up-front fee, the Company issued 97,402 shares of Series A convertible preferred stock at a fair value of $15.40 per share. This license fee of $1,500,000 was recorded as research and development expense in 2006. In further consideration of this license, and in accordance with the terms of the agreement, the Company is required to make milestone payments with respect to development, regulatory and commercialization milestones, and to pay a percentage of revenue received from sublicensees (if any). All such milestone and sublicense revenue payments may total, in the aggregate, up to but no more than $19,500,000 for the first product and $9,750,000 following the second product commercialized under the agreement with Ionis. The Company is also required to pay additional milestone payments of up to $20,000,000 in the aggregate upon the first achievement of specified threshold levels of annual net sales of all aminoglycoside products in a calendar year. The license agreement also provides that the Company shall pay royalties equal to a low single-digit percentage of annual worldwide net sales of all licensed products, including plazomicin.
Through June 30, 2016, the Company has compensated Ionis $7,000,000 in connection with the first three milestones under the license for the first aminoglycoside product candidate. As of June 30, 2016 and December 31, 2015, the Company had no outstanding payments due under the agreement.
6. Government Contracts
Certain of the Company’s drug discovery and development activities are performed under contracts with U.S. government agencies. Management has determined that the Company is the principal participant in the following contract arrangements, and, accordingly, the Company records amounts earned under the arrangements as revenue. Costs incurred under revenue contracts are recorded as operating expenses in the Company's consolidated statements of operations.
Biomedical Advanced Research and Development Authority
In August 2010, the Company was awarded a contract with the Biomedical Advanced Research and Development Authority (“BARDA”) for the development, manufacturing, nonclinical and clinical evaluation of, and regulatory filings for, plazomicin as a countermeasure for disease caused by antibiotic-resistant pathogens and biothreats. The original contract included committed funding of $27,600,000 for the first two years of the contract and subsequent options exercisable by BARDA to provide additional funding. In September 2012, BARDA exercised an additional $15,798,000 contract option ("Option 1"), which increased the total contract committed funding to $43,398,000 through March 2014. In April 2013, the Company was awarded an additional $60,410,000 under the contract to support its Phase 3 clinical trial of plazomicin ("Option 2") to increase the total committed funding under this contract to $103,808,000 . On May 26, 2016, the Company was awarded an additional $20 million ("Option 3") under the contract to support its Phase 3 EPIC trial of plazomicin. This brings the total committed funding under the contract to $123,808,000 . The Company recorded contract revenue of $8,510,000 and $4,876,000 under this agreement during the three-month periods ended June 30, 2016 and 2015, respectively, and $13,780,000 and $9,717,000 during the six-month periods ended June 30, 2016 and 2015, respectively.
Defense Threat Reduction Agency
In November 2012, the Defense Threat Reduction Agency (“DTRA”), a division of the U.S. Department of Defense, terminated for convenience a contract with the Company to develop novel antibacterials for the treatment of biodefense pathogens. In connection with the termination, the Company sought payment from DTRA for additional expenses the Company had incurred. Effective April 30, 2015, the Company reached a settlement of its claim with DTRA. The net settlement of $7,122,000 was recorded as contract revenue during the three months ended June 30, 2015. Together with sums previously received, it constitutes complete and final settlement of the contract.


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National Institute of Allergy and Infectious Diseases
In July 2015, the Company was awarded a contract by the National Institute of Allergy and Infectious Diseases ("NIAID") for $1.5 million committed through June 30, 2016, with total funding of up to $4.5 million available if all options are exercised under the contract. In January 2016, an additional committed funding of $0.5 million was added to the awarded funding and the total potential funding was increased to $5.0 million . In April 2016, NIAID modified the contract to exercise an option which increased the total contract committed funding to $4.4 million through February 2018, with total potential funding remaining at $5.0 million if the remaining option is exercised.
In July 2014, the Company was awarded a one -year, $407,000 grant by NIAID to conduct discovery research on novel antibiotics targeting gram-negative bacteria. In July 2015, NIAID extended the grant term through July 31, 2016. The Company recorded contract revenue of $634,000 and $43,000 under these agreements during the three-month periods ended June 30, 2016 and 2015, respectively, and $1,213,000 and $82,000 the six-month periods ended June 30, 2016 and 2015, respectively.
7. Borrowings
Solar Capital Ltd. Loan Agreement
On August 5, 2015, the Company entered into a loan and security agreement (the “Loan Agreement”) with Solar Capital Ltd. (the “Lender”) pursuant to which the Lender agreed to make available to the Company term loans in an aggregate principal amount of up to  $25.0 million  with a maturity date of August 5, 2019. An initial  $15.0 million  term loan was funded at closing on August 5, 2015, and a second  $10.0 million  term loan was funded on June 20, 2016. Borrowings under the term loans bear interest per annum at  6.99%  plus the greater of  1%  or the one-month LIBOR. The Company is currently required to make interest-only payments on the term loans through August 2017, and beginning on September 1, 2017 the Company is required to make monthly payments of interest plus equal monthly payments of principal over a term of  24 months. The Loan Agreement requires collateral by a security interest in all of the Company’s assets except intellectual property (which is subject to a negative pledge) and contains customary affirmative and negative covenants, and also includes standard events of default, including payment defaults. Upon the occurrence of an event of default, a default interest rate of an additional 4% may be applied to the outstanding loan balances, and the Lender may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement. There were no financial covenants attached to the loan. The Loan Agreement included a closing fee of  $250,000  which was paid at closing, and the Company is obligated to pay a fee equal to 8% of the term loans funded upon the earliest to occur of the maturity date, the acceleration of the term loans or the voluntary prepayment of the term loans. The cost of these fees is being amortized as interest expense over the term of the loan using the effective-interest method. The Company may voluntarily prepay all, but not less than all, of the outstanding term loans. The Loan Agreement contains customary representations, warranties and covenants. In addition, the Loan Agreement contains customary events of default that entitle the Lender to cause the Company’s indebtedness under the Loan Agreement to become immediately due and payable.
On August 5, 2015, pursuant to the Loan Agreement, the Company entered into a Success Fee Agreement with the Lender under which the Company agreed to pay the Lender  $1.0 million  if the Company obtains FDA approval to market plazomicin. 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 at the date of issuance of approximately $356,000 was recorded as a debt discount and is being amortized as interest expense over the term of the loan using the effective-interest method.


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Future principal debt payments on the currently outstanding term loan are payable as follows (in thousands):
 
June 30, 2016
2016
$

2017
4,167

2018
12,500

2019
8,333

Total principal payments
25,000

Final fee due at maturity in 2019
2,000

Total principal and final fee payments
27,000

Unamortized discount and debt issuance costs
(2,185
)
Less current portion

Loan payable, long-term
$
24,815

The obligation includes a final fee of $2,000,000 , representing 8% of the term loan currently funded, which accretes over the life of the loan as interest expense. The Company recorded interest expense related to the loan of $447,000 and zero for the three-month periods ended June 30, 2016 and 2015, respectively, and $885,000 and zero for the six-month periods ended June 30, 2016 and 2015, respectively.
8. Stockholders' Equity
On April 7, 2015, the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which the Company may issue and sell shares of its common stock having aggregate sales proceeds of up to $30.0 million from time to time through an ATM equity program under which Cowen acts as sales agent.
As of June 30, 2016, the Company sold 267,520 shares of common stock under the Sales Agreement, at a weighted-average price of approximately $6.29 per share for aggregate gross proceeds of $1.7 million and net proceeds of $1.6 million after deducting the sales commissions and offering expenses. As of June 30, 2016, $28.3 million of common stock remained available to be sold under the Sales Agreement, subject to certain conditions specified therein.
On June 3, 2016, the Company sold 7,999,996 shares of its common stock and warrants to purchase 1,999,999 shares of its common stock pursuant to the Purchase Agreement for aggregate gross proceeds of $25.4 million in the Private Placement. The warrants have an exercise price of $3.66 and are exercisable up to five years from the date of issuance. The Company's Chief Operating Officer, a related party, participated in the Private Placement by purchasing 141,453 shares of common stock and a warrant to purchase 35,363 shares of common stock for an aggregate purchase price of $0.5 million .
At the close of the Private Placement, the estimated fair values of the common stock and warrants issued were $22.9 million and $2.6 million , respectively. At June 30, 2016, using Black-Scholes, the Company estimated the fair value of the warrant liability to be $3.9 million and recorded a charge in the the condensed consolidated statements of operations for the increase in the liability. Issuance costs of $318,000 were offset against equity as a reduction of gross proceeds.
Equity Incentive Plans
2014 Plan
In February 2014, the Company’s stockholders approved the 2014 Equity Incentive Award Plan (the "2014 Plan"), which became effective as of March 11, 2014. Under the 2014 Plan, the Company may grant incentive stock options ("ISOs"), nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units ("RSUs") and other stock-based awards for the purchase of that number of shares of common stock. Effective, January 1, 2016, the compensation committee of the board of directors approved an evergreen increase of 735,808 shares that may be granted in accordance with the terms of the 2014 Plan. As of June 30, 2016, 796,171 shares were available for future issuance under the 2014 Plan.


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Under the 2014 Plan, the terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2014 Plan. Options granted by the Company typically vest over a four year period and the exercise price may not be less than fair market value on the date of grant. Certain of the options are subject to acceleration of vesting in the event of certain change of control transactions. Options granted under the 2014 Plan expire no later than 10 years from the date of grant.
2014 Employment Commencement Incentive Plan
In December 2014, the Company adopted a 2014 Employment Commencement Incentive Plan (the "Inducement Plan"). The Inducement Plan is designed to comply with the inducement exemption contained in Nasdaq’s Rule 5635(c)(4), which provides for the grant of non-qualified stock options, RSUs, restricted stock awards, performance awards, dividend equivalents, deferred stock awards, deferred stock units, stock payment and stock appreciation rights to a person not previously an employee or director of the Company, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the Company. As of June 30, 2016, a total of 1,150,000 shares of common stock have been authorized under the Inducement Plan, including the additional 500,000 shares that became available resulting from an amendment adopted by the board of directors as of March 17, 2016. As of June 30, 2016, 527,800 shares were available for future issuance under the Inducement Plan.
2014 Employee Stock Purchase Plan
In February 2014, the Company’s stockholders approved the 2014 Employee Stock Purchase Plan (the “ESPP”), which became effective as of March 11, 2014. Effective, January 1, 2016, the compensation committee of the board of directors approved an evergreen increase of 183,952 shares that may be granted in accordance with the terms of the ESPP. As of June 30, 2016, 141,527 shares of common stock have been issued to employees participating in the ESPP, and 366,950 shares are available for issuance under the ESPP.
Amended and Restated 2003 Stock Plan
The Company’s Amended and Restated 2003 Stock Plan (the "2003 Plan"), provided for the granting of incentive and non-statutory stock options to employees, directors and consultants at the discretion of the board of directors. The Company granted options under its 2003 Plan until January 2014 and it was terminated as to future awards in March 2014, although it continues to govern the terms of options that remain outstanding under the 2003 Plan.
Options granted under the 2003 Plan expire no later than 10 years from the date of grant. Options granted under the 2003 Plan vest over periods determined by the board of directors, generally over four years .
The 2003 Plan allows for early exercise of certain options prior to vesting. Upon termination of employment, the unvested shares are subject to repurchase at the original exercise price. Stock options granted or modified after March 21, 2002, that are subsequently exercised for cash prior to vesting, are not deemed to be issued until those shares vest. As of June 30, 2016 and December 31, 2015 there were no shares subject to repurchase relating to the early exercise of options.
In connection with the board of directors and stockholders approval of the 2014 Plan, all remaining shares available for future awards under the 2003 Plan were transferred to the 2014 Plan, and the 2003 Plan was terminated as to future awards. As of June 30, 2016, a total of 932,332 shares of common stock are subject to options outstanding under the 2003 plan, which shares will become available under the 2014 Plan to the extent the options are forfeited or lapse unexercised.


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The following table summarizes stock option activity under the stock plans, excluding the ESPP, and related information:  
 
Shares
Available
for Grant
 
Shares
Subject to
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(years)
Balance at December 31, 2015
893,462

 
2,387,337

 
$
7.92

 
7.61
Additional shares authorized
1,235,808

 

 
 
 
 
Options granted
(782,350
)
 
782,350

 
$
3.89

 
 
Options exercised

 
(173
)
 
$
2.61

 
 
Options cancelled
173,476

 
(173,476
)
 
$
8.49

 
 
RSUs granted
(233,775
)
 

 
 
 
 
RSUs cancelled
37,350

 

 
 
 
 
Balance at June 30, 2016
1,323,971

 
2,996,038

 
$
6.83

 
7.83
Stock-based compensation expense recognized for stock options granted to employees and non-employee directors in the Company’s condensed consolidated statements of operations was as follows (in thousands): 
 
Three-Month Periods
Ended June 30,
 
Six-Month Periods
Ended June 30,
 
2016
 
2015
 
2016
 
2015
Research and development
$
515

 
$
348

 
$
969

 
$
660

General and administrative
410

 
425

 
782

 
874

Total
$
925

 
$
773

 
$
1,751

 
$
1,534

As of June 30, 2016, approximately $6,368,000 of total unrecognized stock-based compensation expense related to unvested stock options is expected to be recognized over a weighted-average period of 2.82 years.
The estimated grant date fair value of employee stock options with time-based vesting terms was calculated using the Black-Scholes valuation model, based on the following assumptions: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Expected term (years)
5.3–6.0 years
 
5.4 years
 
5.3–6.0 years
 
5.4–6.0 years
Expected volatility
74%
 
65%
 
73%–74%
 
65%–70%
Risk-free interest rate
1.1%–1.5%
 
1.9%
 
1.1%–1.5%
 
1.5%–1.9%
Expected dividend yield
 
 
 
Restricted Stock Units Granted to Employees
During the six-month period ended June 30, 2016, the Company granted RSUs to employees to receive 233,775 shares of common stock under the Company's stock plans with a weighted-average estimated grant-date fair value of $3.78 per share. RSUs generally vest annually over a  4 -year service period and vesting is contingent on continued service. As of June 30, 2016, there were unrecognized compensation costs of  $3,019,000  related to outstanding RSUs, which are expected to be recognized over a weighted-average period of  3.46  years.


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A summary of RSU activity is as follows:
 
RSU Awards Outstanding
 
 
 
Number of RSUs
 
Weighted-Average Grant Date Fair Market Value
 
Aggregate Intrinsic Value
(in thousands)
Balance, December 31, 2015
372,024

 
$
8.02

 
$
2,135

RSUs granted
233,775

 
$
3.78

 
 
RSUs released
(20,963
)
 
$
9.55

 
 
RSUs cancelled
(37,350
)
 
$
7.16

 
 
Balance, June 30, 2016
547,486

 
$
6.21

 
$
2,075

During the three-month and six-month periods ended June 30, 2016, the Company granted options to purchase an aggregate of 11,500 and 211,250 shares of common stock and 2,750 and 50,175 RSUs that vest upon the achievement of market-based common stock price targets. The fair values of these options and RSUs were estimated at the grant date using a Monte-Carlo simulation model. The Monte-Carlo simulation model requires the use of a range of assumptions. The risk-free interest rate range was 1.67% to 1.76% , expected volatility rate was 70% and the dividend rate was 0% . The expected life assumption is not used in Monte-Carlo simulation model, but the output of the model indicated an expected time to vest of 2.5 to 6.0 years. The associated stock-based compensation expense is being recognized on a straight-line basis over the implicit service period (expected time to vest) derived from that simulation model. The Company did not issue any performance based options to purchase common stock, or RSUs during the three-month and six-month periods ended June 30, 2015.
9. Commitments
In July 2015, the Company entered into an agreement with its pharmaceutical contract manufacturing organization that obligates it to make a total of $1.5 million of nonrefundable advance payments for the reservation of facilities and resources, plus procurement of long-lead raw materials, to produce plazomicin for regulatory commercial validation.  Such advance payments are initially capitalized as prepaid and other current assets and are being recognized as research and development expenses as goods are delivered and services are performed.  The Company assesses such prepaid and other current assets for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable or may not provide future economic benefits. As of June 30, 2016, the Company had recorded $1.0 million as prepaid and other current assets related to this agreement. Through June 30, 2016, the Company has recognized $500,000 as research and development expenses.


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. These forward-looking statements are subject to risks and uncertainties, including those set forth in Part II – Other Information, Item 1A. Risk Factors below and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
We are a clinical-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterials to treat multi-drug resistant ("MDR") gram-negative infections. We are developing plazomicin, our lead product candidate, for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae (“CRE”). In 2013, the Centers for Disease Control and Prevention identified CRE as “nightmare bacteria” and an immediate public health threat that requires “urgent and aggressive action.”
Our development plan for plazomicin includes two Phase 3 clinical trials. The first study, a Phase 3 trial of plazomicin for 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 supporting a new drug application (“NDA”) for plazomicin in the United States. The Phase 3 EPIC trial is a randomized, double blind, active controlled study in patients with cUTI and AP and allows broad enrollment of patients with gram-negative infections. We have reached agreement with the U.S. Food and Drug Administration ("FDA") that this non-inferiority trial comparing plazomicin to meropenem with a 15% non-inferiority margin and a corresponding sample size of approximately 530 patients, is acceptable. The first patient was enrolled in the Phase 3 EPIC trial in January 2016. We expect top-line results for our Phase 3 EPIC trial in the first quarter of 2017 and expect to submit an NDA for plazomicin in the second half of 2017, with a planned commercial launch of plazomicin in the U.S. in 2018, if our NDA is approved.
The Phase 3 EPIC trial is designed to enroll a broad range of patients with cUTI or AP, including patients with infections due to MDR gram-negative pathogens. If successful, this study will provide clinical evidence of non-inferiority to meropenem, a carbapenem antibiotic considered to be a last line of defense in patients with serious infections due to Enterobacteriaceae, including fluoroquinolone resistant and extended spectrum beta-lactamase ("ESBL") producing isolates. We believe that favorable efficacy data from this trial will provide the basis for FDA approval and will permit plazomicin to be used as a treatment for MDR gram-negative pathogens, including CRE and ESBL-producing pathogens. This study will also provide important safety data regarding plazomicin in patients with various co-morbidities, including those with varying degrees of renal function.
The second ongoing study, our Phase 3 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. We believe our Phase 3 CARE trial will provide important data about plazomicin's potential in treating patients with CRE infections, where there are limited treatment options currently available. The Phase 3 CARE trial is funded in part with a contract from the Biomedical Advanced Research and Development Authority ("BARDA"), an agency of the U.S. Department of Health and Human Services.
We expect to end enrollment in the CARE study in 2016 and announce top-line data results from our Phase 3 CARE study in the first half of 2017. We plan to submit the Phase 3 CARE study results as supportive data with the plazomicin NDA based on our Phase 3 EPIC trial and to submit the results to a peer-reviewed journal and for presentation at a medical meeting in 2017. Based on physician market research, we believe the Phase 3 CARE study will provide important and meaningful data regarding the efficacy, safety, microbiology, and dosing, as well as important health economic data, to better inform use of plazomicin in the treatment of patients with CRE infections.


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In 2012, the FDA granted fast track designation for the development and regulatory review of plazomicin to treat serious and life-threatening CRE infections. In 2014, plazomicin received Qualified Infectious Disease Product ("QIDP") designation from the FDA. The QIDP designation was created by the Generating Antibiotic Incentives Now ("GAIN") Act, which was part of the FDA Safety and Innovation Act and provides certain incentives for the development of new antibiotics, including priority review and an additional five years of market exclusivity. Our plazomicin program is funded in part with a contract from BARDA for up to $123.8 million . We have global commercialization rights to plazomicin, which has patent protection in the United States extending through 2031. Plazomicin is the first clinical candidate from our gram-negative antibiotic discovery engine, and we have other programs in early and late preclinical stages focused on other MDR gram-negative infections.
Since commencing operations in 2004, we have devoted substantially all of our resources to identifying and developing our product candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these functions. In addition to plazomicin, our research team is focused on discovering medicines with novel mechanisms of action for serious infections caused by gram-negative bacteria, including MDR Pseudomonas aeruginosa and MDR Acinetobacter baumannii. We are taking a multifaceted approach to identify new antibacterial agents through our research. In May 2016, we entered into a collaboration and license agreement with Crystal Biosciences, Inc. to identify and generate therapeutic antibodies against multiple novel targets. Our goal is to file an investigational new drug application (“IND”) from our research programs in 2017.
Since our inception, we have financed our operations with the proceeds of our initial public offering ("IPO") of common stock, proceeds from sales of our common stock through our at-the-market ("ATM") equity offering program, funding under our contracts with government agencies, private placements of our equity securities and certain debt-related financing arrangements. Currently, our plazomicin program is funded in part with a contract from BARDA. We estimate that our Phase 3 EPIC trial will necessitate funding of $45 to $50 million from 2015 through 2017 and approximately $25 million of this funding has been provided by the term loans from Solar Capital, and additional $20 million ("Option 3") under the BARDA contract. Our other programs are currently funded primarily with company funds, although we also received a contract for $4.4 million in 2015 from the National Institute of Allergy and Infectious Diseases ("NIAID"), with additional funding of up to $0.6 million available if all options are exercised. Historically, our preclinical programs have received funding support from organizations in addition to the NIH and NIAID, such as the U.S. Department of Defense and The Wellcome Trust, a global charitable foundation. We intend to continue to seek further collaborations with government agencies, non-profit foundations, and other research and development funding organizations to support our discovery efforts and advance the product candidates in our pipeline.
On March 17, 2014, we completed our IPO of common stock. We sold 6,900,000 shares of our common stock, which included 900,000 shares issued as a result of the underwriters exercising their over-allotment option in full. We received cash proceeds of approximately $73.9 million from the IPO, net of underwriting commissions and related expenses.
On April 7, 2015, we entered into the Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which we may issue and sell shares of our common stock having aggregate sales proceeds of up to $30.0 million from time to time through an ATM equity offering program under which Cowen acts as sales agent. As of June 30, 2016, we had sold 267,520 shares under the Sales Agreement at an average price of $6.29 per share and we received aggregate cash proceeds of $1.6 million , after deducting the sales commissions and offering expenses.
On August 5, 2015, we entered into a loan and security agreement with Solar Capital Ltd., pursuant to which Solar Capital Ltd. agreed to make available to us term loans with an aggregate principal amount of up to $25.0 million, $15.0 million of which was provided to us on August 5, 2015 and $10.0 million of which was provided to us on June 20, 2016.
On May 26, 2016, BARDA exercised Option 3 and we were awarded an additional $20.0 million in contract funding. Option 3 also includes a no-cost extension of the period of performance for Option 1 to September 20, 2016, under the contract to support our Phase 3 EPIC trial of plazomicin. The funding from Option 3 is focused on the Phase 3 pivotal clinical trial of plazomicin, the EPIC study, in cUTI. This brings the total committed funding under the contract to $123.8 million .
On June 3, 2016, we sold 7,999,996 shares of common stock and warrants to purchase 1,999,999 shares of common stock pursuant to a Securities Purchase Agreement (“Purchase Agreement”) for aggregate gross proceeds of $25.4 million in a private placement financing transaction (the "Private Placement"). The warrants have an exercise price of $3.66 and are exercisable up to five years from the date of issuance.
We have never been profitable and have incurred net losses in each year since the commencement of our operations. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and associated general and administrative costs. We expect to incur substantial losses from operations in the foreseeable future as we advance plazomicin and other product candidates through preclinical and clinical development, seek regulatory approval, and prepare for, and, if approved, proceed to commercialization. Management believes that, based on its current operating


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plans, our existing cash, cash equivalents and short-term investments, combined with the committed funds from the BARDA contract, are estimated to be sufficient to meet our anticipated cash requirements to fund our current planned operations at least through the beginning of the second quarter of 2017. Still, we will be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. See “Liquidity and Capital Resources” and Note 1 of the accompanying unaudited condensed consolidated financial statements and to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015 for additional information describing the circumstances that lead to the inclusion of this explanatory paragraph.
Financial Overview
Contract Revenue
We have derived all of our revenue to date from funding provided under U.S. government contracts in connection with the development of our product candidates. Our product candidates are still in clinical and preclinical development and may never be successfully developed or commercialized. Other than this contract revenue from government funding, we do not expect to derive any revenue from any product candidates that we develop until we obtain regulatory approval and commercialize such products, which we do not expect will occur before 2018, if at all, or until such time that we potentially enter into collaboration agreements with third parties for the development and commercialization of such product candidates.
Biomedical Advanced Research and Development Authority (BARDA) . We have received funding for our lead product candidate, plazomicin, under a contract with BARDA, an agency of the U.S. Department of Health and Human Services for the development, manufacturing, nonclinical and clinical evaluation of, and regulatory filings for, plazomicin as a countermeasure for disease caused by antibiotic-resistant pathogens and biothreats. Our BARDA contract provides for payments to us based on direct costs incurred and allowances for overhead, plus a fee, where applicable. The total committed funding under our BARDA contract is $123.8 million , including $20.0 million for Option 3, exercised by BARDA on May 26, 2016. The exercised option relates to the support of our Phase 3 EPIC study and the preparation and submission of a NDA to the FDA.
For the three-month periods ended June 30, 2016 and 2015, total revenue recognized under the BARDA contract was $8.5 million and $4.9 million , respectively, and $13.8 million and $9.7 million , respectively, for the six-month periods ended June 30, 2016 and 2015. Through June 30, 2016, a total of $90.9 million under the BARDA contract has been recorded as revenue, with $33.0 million remaining available from the funding currently committed under the contract.
National Institute of Allergy and Infectious Diseases (NIAID). In July 2014, the Company was awarded a one-year, $407,000 grant by NIAID to conduct discovery research on novel antibiotics targeting gram-negative bacteria. The contract was subsequently modified to extend through July 31, 2016.

In July 2015, the Company was awarded a contract by NIAID for $1.5 million committed through June 30, 2016, with total funding of up to $4.5 million available if all options are exercised under the contract. In January 2016, an additional committed funding of $0.5 million was added to the awarded funding and the total potential funding was increased to $5.0 million. In April 2016, NIAID modified the contract to exercise an option which increased the total contract committed funding to $4.4 million through February 2018, with total potential funding remaining at $5.0 million if the remaining option is exercised.

For the three-month periods ended June 30, 2016 and 2015, total revenue recognized under the NIAID contracts was $634,000 and $43,000 , respectively, and $1,213,000 and $82,000 , respectively, for the six-month periods ended June 30, 2016 and 2015.
Defense Threat Reduction Agency (DTRA) . In November 2012, the Defense Threat Reduction Agency (“DTRA”), a division of the U.S. Department of Defense, terminated for convenience a contract with us to develop novel antibacterials for the treatment of biodefense pathogens. In connection with the termination, we sought payment for additional expenses we had incurred. Effective April 30, 2015, we reached a settlement of our claim with DTRA. The net settlement of $7.1 million , together with sums previously received, constitutes complete and final settlement of the contract.
Research and Development Expenses
Research and development ("R&D") expenses consist primarily of costs associated with research, discovery and preclinical studies of potential new drug compounds, plus product development efforts related to clinical trials and materials manufacturing processes. R&D costs are expensed as incurred and include the following:  


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expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a substantial portion of our preclinical activities;
employee and consultant-related expenses, which include salaries, benefits, stock-based compensation and consulting fees;
third-party supplier expenses including the cost of acquiring and manufacturing clinical trial and other materials; and
facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization or depreciation of leasehold improvements, equipment and laboratory supplies and other expenses.
Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as an expense as the goods are delivered or the related services are performed.
We expect to continue to incur substantial expenses for the foreseeable future related to our R&D activities as we continue research programs and the development of our product candidates. In particular, we expect our research and development costs associated with our plazomicin program to increase significantly as our Phase 3 EPIC and CARE trials progress. Since product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of research and clinical development, primarily due to the increased size and duration of later-stage clinical trials, we expect that our R&D expenses will increase in the future.
General and Administrative Expenses
General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in R&D. We anticipate general and administrative expenses will continue to increase in future periods, reflecting an expanding infrastructure.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed 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, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe 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 under different assumptions and conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements and in Note 2 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015.
During the six-month period ended June 30, 2016, we have adopted the accounting policy related to the warrant liabilities as discussed below, in addition to the critical accounting policies described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2015.
Warrant Liability
In June 2016, we issued warrants to purchase 2.0 million shares of common stock in connection with the Private Placement. The fair value of the warrants is classified as a liability on our consolidated balance sheets as the warrants contain certain material terms which require us to settle the warrants, in a case of certain change of control transactions, for cash equal to the estimated fair value, determined by the Black-Scholes Pricing Model (“Black Scholes”).
The initial fair value of the warrants was determined using a calibration model that involved using Black-Scholes, which requires inputs such as the risk-free interest rate, expected share price volatility, underlying price per share of our 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 presented as “change in warrant and derivative liabilities” in the condensed consolidated statements of operations.


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Results of Operations
Comparison of the Three-Month Periods Ended June 30, 2016 and 2015  
 
Three Months Ended
June 30,
 
Change
 
2016
 
2015
 
 
(in thousands)
Contract revenue
$
9,144

 
$
12,041

 
$
(2,897
)
Operating expenses:
 
 
 
 
 
Research and development
21,708

 
10,088

 
11,620

General and administrative
3,951

 
2,882

 
1,069

Loss from operations
(16,515
)
 
(929
)
 
(15,586
)
Interest expense
(447
)
 

 
(447
)
Change in warrant and derivative liabilities
(1,382
)
 

 
(1,382
)
Other income, net
76

 
43

 
33

Net loss
$
(18,268
)
 
$
(886
)
 
$
(17,382
)
Contract Revenue
Contract revenue in each period related solely to funding pursuant to our government contracts. Contract revenue decreased $2.9 million to $9.1 million in the three-month period ended June 30, 2016 from $12.0 million in the comparable period in 2015. This decrease was primarily due a $7.1 million settlement of our claim with DTRA related to our research contract that occurred in the comparable period in 2015, partially offset by a $4.2 million increase in research and development services performed under our BARDA and NIAID contracts.
Research and Development Expenses
R&D expenses increased $11.6 million to $21.7 million in the three-month period ended June 30, 2016 from $10.1 million in the comparable period in 2015. This was primarily due to increases of $7.4 million in the external expenses related to our plazomicin program, mainly attributable to the Phase 3 EPIC trial of plazomicin, $2.0 million in external non-clinical costs for research programs other than plazomicin, including a signing fee under a collaboration and license agreement for an early research program, and $1.8 million in personnel and overhead related costs as headcount increased in our research and development organization since 2015.
We record R&D expenses by program where directly identifiable. In the table below, we have allocated indirect R&D costs based on time charged directly to programs by R&D employees. Indirect R&D costs include employee benefit expenses, employee time not charged directly to a program, laboratory supplies and expenses, and allocated facility expenses.
 
 
Three Months Ended
June 30,
 
Change
 
2016
 
2015
 
 
(in thousands)
Research and development expenses by program:
 
 
 
 
 
Plazomicin
$
16,556

 
$
7,732

 
$
8,824

Other research programs
5,152

 
2,356

 
2,796

Total research and development expenses
$
21,708

 
$
10,088

 
$
11,620

General and Administrative Expenses
General and administrative expenses increased $1.1 million to $4.0 million for the three-month period ended June 30, 2016 from $2.9 million for the comparable period in 2015. The increase in general and administrative expenses was primarily due to an increase of $0.4 million in personnel and facility related costs and an increase of $0.7 million in consulting and professional fees.
Interest Expense


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Interest expense increased $0.4 million for the three-month period ended June 30, 2016 from zero for the comparable period in 2015. The increase was a result of $25.0 million of borrowings under the Solar Capital loan agreement as of June 30, 2016.
Change in Warrant and Derivative Liabilities
Change in warrant and derivative liabilities increased $1.4 million for the three-month period ended June 30, 2016 from zero for the comparable period in 2015, primarily due the change in the estimated fair value of the warrant liability.
Comparison of the Six-Month Periods Ended June 30, 2016 and 2015  
 
Six Months Ended
June 30,
 
Change
 
2016
 
2015
 
 
(in thousands)
Contract revenue
$
14,993

 
$
16,921

 
$
(1,928
)
Operating expenses:
 
 
 
 
 
Research and development
35,601

 
17,967

 
17,634

General and administrative
7,728

 
6,113

 
1,615

Loss from operations
(28,336
)
 
(7,159
)
 
(21,177
)
Interest expense
(885
)
 

 
(885
)
Change in warrant and derivative liabilities
(1,382
)
 

 
(1,382
)
Other income, net
138

 
94

 
44

Net loss
$
(30,465
)
 
$
(7,065
)
 
$
(23,400
)
Contract Revenue
Contract revenue in each period related solely to funding pursuant to our government contracts. Contract revenue decreased $1.9 million to $15.0 million in the six-month period ended June 30, 2016 from $16.9 million in the comparable period in 2015. This decrease was primarily due a $7.1 million settlement of our claim with DTRA related to our research contract that occurred in the comparable period in 2015, partially offset by a $5.2 million increase in research and development services performed under our BARDA and NIAID contracts.
Research and Development Expenses
R&D expenses increased $17.6 million to $35.6 million in the six-month period ended June 30, 2016 from $18.0 million in the comparable period in 2015. This was primarily due to increases of $11.8 million in the external expenses related to our plazomicin program, mainly attributable to the Phase 3 EPIC trial of plazomicin, $2.2 million in external non-clinical costs for research programs other than plazomicin, including a signing fee under a collaboration and license agreement for our early research program, and $2.9 million in personnel and overhead related costs as headcount increased in our research and development organization since 2015.
We record R&D expenses by program where directly identifiable. In the table below, we have allocated indirect R&D costs based on time charged directly to programs by R&D employees. Indirect R&D costs include employee benefit expenses, employee time not charged directly to a program, laboratory supplies and expenses, and allocated facility expenses.
 
 
Six Months Ended
June 30,
 
Change
 
2016
 
2015
 
 
(in thousands)
Research and development expenses by program:
 
 
 
 
 
Plazomicin
$
27,819

 
$
13,571

 
$
14,248

Other research programs
7,782

 
4,396

 
3,386

Total research and development expenses
$
35,601

 
$
17,967

 
$
17,634

General and Administrative Expenses


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General and administrative expenses increased $1.6 million to $7.7 million for the six-month period ended June 30, 2016 from $6.1 million for the comparable period in 2015. The increase in general and administrative expenses was primarily due to an increase of $0.8 million in personnel and facility related costs and an increase of $0.8 million in consulting and professional fees.
Interest Expense
Interest expense increased $0.9 million for the six-month period ended June 30, 2016 from zero for the comparable period in 2015. The increase was a result of $25.0 million of borrowings under the Solar Capital loan agreement as of June 30, 2016.
Change in Warrant and Derivative Liabilities
Change in warrant and derivative liabilities increased $1.4 million for the six-month period ended June 30, 2016 from zero for the comparable period in 2015, primarily due to the change in the estimated fair value of the warrant liability.
Liquidity and Capital Resources  
 
Six-Month Period Ended
June 30,
 
2016
 
2015
 
(in thousands)
Cash Flows from Continuing Operations:
 
 
 
Net cash used in operating activities
$
(23,809
)
 
$
(2,929
)
Net cash provided by investing activities
22,578

 
22,449

Net cash provided by financing activities
35,593

 
1,147

Net increase (decrease) in cash and cash equivalents
$
34,362

 
$
20,667

Net cash used in operating activities was $23.8 million for the six-month period ended June 30, 2016. The primary use of cash was to fund our operations related to the research and development of our product candidates. Our net loss from operations in the six-month period ended June 30, 2016 of $30.5 million was partially offset by non-cash charges of $1.4 million for the revaluation of the warrant and derivative liabilities, $0.2 million for depreciation and amortization, $0.3 million for amortization of premium on short-term investments, $0.3 million for non-cash interest expense, $1.8 million for stock-based compensation, and a change in net operating assets and liabilities of $2.8 million . The change in net operating assets and liabilities was primarily due to an increase in accounts payable and accrued liabilities partially offset by an increase in contract receivable and prepaid expenses and other assets, as a result of costs for our ongoing Phase 3 EPIC trial and the timing of our payments.
Net cash used in operating activities was $2.9 million for the six-month period ended June 30, 2015. The primary use of cash was to fund our operations related to the research and development of our product candidates. Our net loss from operations in the six-month period ended June 30, 2015 of $7.1 million was partially offset by non-cash charges of $0.2 million for depreciation and amortization, $0.3 million for amortization of premium on short-term investments and $1.5 million for stock-based compensation. The change in net operating assets of $2.1 million was due to a decrease in accounts receivable of $0.7 million due to higher collections in the quarter and an increase in accounts payable and accrued liabilities of $1.8 million as a result of costs related to preparing for our Phase 3 cUTI trial of plazomicin and the timing of our payments.
Net cash provided by investing activities was $22.6 million and $22.4 million for the six-month period ended June 30, 2016 and 2015, respectively. The net cash provided by investing activities during the six-month periods ended June 30, 2016 and 2015 is primarily a result of maturities in excess of purchases of short-term investments of $22.9 million and $22.8 million, respectively. Other uses of cash in both periods resulted from purchases of property, plant and equipment to facilitate our increased R&D activities.
Net cash provided by financing activities was $35.6 million and $1.1 million for the six-month period ended June 30, 2016 and 2015, respectively. The net cash provided by financing activities during the six-month period ended June 30, 2016 includes $25.4 million for the sale of common stock and warrants to purchase common stock from the Private Placement, $10.0 million from the term loan provided by Solar Capital Ltd. in June 2016, and $0.2 million from issuance of common stock pursuant to our equity incentive plans. The net cash provided by financing activities during the six-month period ended June 30, 2015 were proceeds from issuance of common stock pursuant to our equity incentive plans.


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Plan of Operations and Future Funding Requirements
We expect to incur substantial expenditures in the foreseeable future for research, development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our clinical development of plazomicin. Management believes that, based on its current operating plans, our existing cash, cash equivalents and short-term investments, combined with the committed funds from the BARDA contract, are estimated to be sufficient to meet our anticipated cash requirements to fund our current planned operations at least through the beginning of the second quarter of 2017.
On August 5, 2015, we entered into a loan and security agreement with Solar Capital Ltd., pursuant to which Solar Capital Ltd. agreed to make available to us term loans with an aggregate principal amount of up to $25.0 million, $15.0 million of which was provided to us on August 5, 2015 and $10.0 million of which was provided to us on June 20, 2016. In addition, we are permitted to make interest-only payments through August 2017, followed by 24 equal monthly payments of principal plus interest through the scheduled maturity date of August 2019.
On April 7, 2015, we filed a Registration Statement on Form S-3 (File No. 333-203282), declared effective by the Securities and Exchange Commission (the "SEC") on April 21, 2015 (the "Shelf Registration Statement"), covering the offering of up to $150 million of common stock, preferred stock, debt securities, warrants, purchase contracts and units. The Shelf Registration Statement included a prospectus covering the offering, issuance and sale of up to $30.0 million of shares of our common stock from time to time in "at the market" offerings pursuant to a Common Stock Sales Agreement entered into with Cowen and Company, LLC (the "Sales Agreement") on April 7, 2015. Through June 2016, we sold 267,520 shares of common stock under the Sales Agreement, at a weighted-average price of approximately $6.29 per share for aggregate gross proceeds of $1.7 million and net proceeds of $1.6 million , after deducting the sales commissions and offering expenses. As of June 30, 2016, approximately $148.3 million in securities remained unissued under the Shelf Registration Statement, including up to $28.3 million of common stock available to be sold under the Sales Agreement, subject to certain conditions specified therein.
On May 26, 2016, we were awarded an additional $20.0 million from Option 3 of the BARDA Contract to support the Phase 3 EPIC trial of plazomicin, which includes a no-cost extension of the period of performance for Option 1 to September 20, 2016.
On June 3, 2016, we closed a Private Placement and received aggregate gross proceeds of $25.4 million from the sale of 7,999,996 shares of its common stock and warrants to purchase 1,999,999 shares of its common stock. The warrants have an exercise price of $3.66 and are exercisable up to five years from the date of issuance.
We do not expect that our current capital resources will be sufficient to enable us to seek marketing approval for plazomicin or commercially launch plazomicin. We anticipate that we will need to raise substantial additional financing in the future to fund our operations, including for obtaining marketing approval for plazomicin. We may obtain additional financing through public or private equity offerings, debt financings, a credit facility, government contracts and/or strategic collaborations. Additional financing may not be available to us when we need it or it may not be available to us on acceptable terms, if at all. Our ability to obtain debt financing may be limited by covenants we have made under our loan and security agreement with Solar Capital Ltd. and our pledge to Solar Capital Ltd. of substantially all of our assets, other than our intellectual property, as collateral. The negative pledge in favor of Solar Capital Ltd. with respect to our intellectual property under the loan and security agreement could further limit our ability to obtain additional debt financing. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. The amount and timing of our future financing requirements will depend on many factors, including:
the size, timing and type of the nonclinical and clinical trials that we decide to pursue in the development of our product candidates, including plazomicin;
the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;
the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals;
our ability to enter into additional collaboration, licensing or other arrangements and the terms and timing of such arrangements;
the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, including litigation costs and the results of such litigation;


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the emergence of competing technologies and other adverse market developments;
the resources we devote to marketing, and, if approved, commercializing our product candidates;
the scope, progress, expansion, and costs of manufacturing our product candidates;
our ability to enter into additional government contracts, or other collaborative agreements, to support the development of our product candidates and development efforts; and
the costs associated with being a public company.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments as included in our Annual Report on Form 10-K, which was filed with the SEC on March 15, 2016, except as noted below:
We received an additional $10 million term loan from Solar Capital Ltd. See Note 7 of the accompanying unaudited condensed consolidated financial statements for more information.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
There have not been any material changes to our exposure to market risk during the six-month period ended June 30, 2016. For additional information regarding market risk, refer to the Quantitative and Qualitative Disclosures About Market Risk section of our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Our management, with the participation of our Chief Executive Officer and Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of such date.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION
Item 1.
Legal Proceedings.
We are not currently a party to any material litigation or other material legal proceedings. 
Item 1A.
Risk Factors.
Risks Related to Our Business and Capital Requirements
We have a limited operating history, have incurred net losses in each year since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, and if we are unable to achieve and sustain profitability, the market value of our common stock will likely decline.
We are a clinical-stage biopharmaceutical company with a limited operating history. We have not generated any revenue from the sale of products and have incurred losses in each year since we commenced operations in 2004. All of our product candidates are in development, and none has been approved for sale. In the years ended December 31, 2015 and 2014 and the six months ended June 30, 2016, we derived all of our revenue from government contracts for research and development. Our net losses for the years ended December 31, 2015 and 2014 were $27.1 million and $20.2 million, respectively. Our net losses for the six-months ended June 30, 2016 and 2015 were $30.5 million and $7.1 million , respectively. As of June 30, 2016, we had an accumulated deficit of $206.5 million .
We expect to continue incurring significant expenses and increasing operating losses for the foreseeable future as we continue to conduct our Phase 3 EPIC (Evaluating Plazomicin In cUTI) trial of our lead product candidate, plazomicin, in the treatment of complicated urinary tract infections ("cUTI"), our Phase 3 CARE (Combating Antibiotic Resistant Enterobacteriaceae) trial of plazomicin in the treatment of infections due to carbapenem-resistant Enterobacteriaceae ("CRE"), seek marketing approval for plazomicin, and continue the development of our other product candidates. Our expenses will also increase substantially if and as we:
conduct additional clinical trials for our product candidates;
continue to discover and develop additional product candidates;
establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain marketing approval;
establish a manufacturing and supply chain sufficient for commercial quantities of any product candidates for which we may obtain marketing approval;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific and commercial personnel;
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts, as well as operating as a public reporting company; and
acquire or in-license other product candidates and technologies.
If our product candidates fail to demonstrate safety and efficacy in clinical trials, do not gain regulatory approval, or do not achieve market acceptance following regulatory approval and commercialization, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. If we are unable to achieve and sustain profitability, the market value of our common stock will likely decline. Because of the numerous risks and uncertainties associated with developing biopharmaceutical products, we are unable to predict the extent of any future losses or when, if ever, we will become profitable.


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We are substantially dependent on the success of our lead product candidate, plazomicin, which is in Phase 3 clinical development. If we are unable to develop, obtain marketing approval for and successfully commercialize plazomicin, or experience significant delays in doing so, our business could be materially harmed.
We currently have no products approved for sale, and since 2007, we have invested a significant portion of our efforts and financial resources in the development of plazomicin. Our future success is substantially dependent on our ability to successfully develop, obtain regulatory approval for and, ultimately, successfully commercialize plazomicin. In early January 2016, we dosed our first patient in our Phase 3 EPIC trial, which we expect to serve as a single pivotal study supporting a new drug application (“NDA”) for plazomicin in the United States. In September 2014, we dosed our first patients in our Phase 3 CARE trial, and we expect to stop enrollment in the Phase 3 CARE study when we complete enrollment in the Phase 3 EPIC study. We have not previously completed a clinical trial of plazomicin in patients with CRE infections, and we have no direct clinical evidence that plazomicin is effective in treating CRE infections in humans. Our Phase 2 trial evaluated the efficacy of plazomicin compared with levofloxacin in patients with cUTI. Our ability to develop, obtain regulatory approval for, and successfully commercialize plazomicin effectively will depend on several factors, including the following:
successful enrollment and completion of our registration trial for plazomicin in our Phase 3 EPIC trial and our Phase 3 CARE trial, which will depend substantially upon the satisfactory performance of third-party contractors;
receipt of marketing approvals from the U.S. Food and Drug Administration ("FDA") and similar regulatory authorities outside the United States;
receiving the product labeling that enables the successful promotion of plazomicin;
establishing commercial manufacturing and supply arrangements;
establishing a commercial infrastructure;
identifying and successfully establishing one or more collaborations to commercialize plazomicin;
acceptance of the product by patients, the medical community and third-party payors;
establishing market share while competing with other therapies;
successfully executing our pricing and reimbursement strategy;
a continued acceptable safety and adverse event profile of the product following regulatory approval; and
qualifying for, identifying, registering, maintaining, enforcing and defending intellectual property rights and claims covering the product.
In addition, our product development program includes the development of an in vitro diagnostic (“IVD”) assay which must successfully complete a clinical performance study, conducted concurrently with and utilizing patient samples from our Phase 3 CARE trial of plazomicin, and be approved or cleared for marketing by the FDA and certain other foreign regulatory agencies, contemporaneously with the marketing approval of plazomicin, and then be commercialized concurrently with plazomicin in the associated markets. If we are unable to develop, receive marketing approval for plazomicin or the IVD assay in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize plazomicin, which would materially and adversely affect our business, financial condition, and results of operations.
Our recurring losses from operations and negative cash flows have raised substantial doubt regarding our ability to continue as a going concern.
Our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of, and for the year ended, December 31, 2015. In June 2016, we received aggregate gross proceeds of $25.4 million in a private placement of equity securities and a $10.0 million term loan from Solar Capital. However, our only current source of revenue is for services performed for the research and development of our product candidates under government contracts, and we do not expect to generate revenue from product sales until, and unless, we receive regulatory approval of and successfully commercialize plazomicin. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations or significantly curtail our operations to conserve our capital resources. Further, the perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations, or necessitate that we obtain financing on terms that are more favorable to investors, and could result in the loss of confidence by investors, suppliers and employees.


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We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or terminate our product development, other operations or commercialization efforts.
Developing biopharmaceutical products, including conducting preclinical studies and clinical trials, is an expensive and highly uncertain process that takes years to complete. We expect our expenses to increase substantially as we continue the clinical development of our lead product candidate, plazomicin, seek marketing approval for plazomicin and continue the development of our other product candidates. If we obtain marketing approval of plazomicin, we also expect to incur significant sales, marketing, manufacturing and supply expenses.
As of June 30, 2016, we had working capital of $65.6 million and unrestricted cash, cash equivalents and short-term investments of $70.0 million . Management believes that, based on its current operating plans, our existing cash, cash equivalents and short-term investments, combined with the committed funds from the Biomedical Advanced Research and Development Authority (“BARDA”) contract, is estimated to be sufficient to meet our anticipated cash requirements to fund our current planned operations at least through the beginning of the second quarter of 2017. We estimate that our Phase 3 EPIC trial will necessitate funding of $45 to $50 million from 2015 through 2017 and approximately $25 million of this funding has been provided by the term loans from Solar Capital, and additional $20 million from Option 3 under BARDA contract. In addition, other factors may arise causing us to need additional capital resources sooner than anticipated. We anticipate that we will need to raise substantial additional financing in the future to fund our operations, including for obtaining marketing approval for plazomicin.
We may obtain additional financing through public or private equity offerings, debt financings, a credit facility, government contracts and/or strategic collaborations. Additional financing may not be available to us when we need it or it may not be available to us on acceptable terms, if at all. Our ability to obtain debt financing may be limited by covenants we have made under our loan and security agreement with Solar Capital Ltd. and our pledge to Solar Capital Ltd. of substantially all of our assets, other than our intellectual property, as collateral. The negative pledge in favor of Solar Capital Ltd. with respect to our intellectual property under the loan and security agreement could further limit our ability to obtain additional debt financing. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. The amount and timing of our future financing requirements will depend on many factors, including:
the rate of progress and cost of our Phase 3 trials, any other clinical trials we may commence, preclinical studies and other discovery and research and development activities;
the size and type of the nonclinical studies that we decide to pursue in the development of our product candidates, including plazomicin;
the type, number, costs and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;
whether or not we decide to pursue additional or alternative pivotal trials for plazomicin;
the costs associated with bringing a plazomicin IVD assay to support therapeutic drug monitoring through development, approval, and commercialization;
the timing of, and costs involved in, seeking and obtaining FDA and other regulatory approvals, including the preparation of a NDA for plazomicin, and any supplemental applications thereto;
our ability to enter into additional collaboration, licensing or other arrangements and the terms and timing of such arrangements;
the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, including litigation costs and the results of such litigation;
the emergence of competing technologies and other adverse market developments;
the resources we devote to marketing, and, if approved, commercializing our product candidates;
the scope, progress, expansion, and costs of manufacturing our product candidates;
our ability to enter into additional government contracts, or other collaborative agreements, to support the development of our product candidates and development efforts; and
the costs associated with being a public company.


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Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies. We currently have no understandings, commitments or agreements relating to any of these types of transactions.
If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.
Clinical drug development involves a lengthy and expensive process with uncertain outcomes that may lead to delayed timelines and increased cost, and may prevent us from being able to complete clinical trials.
Clinical testing is expensive, can take many years to complete, and its outcome and timeline is inherently uncertain. The results of preclinical and clinical studies of our product candidates may not be predictive of the results of later-stage clinical trials. For example, the positive results generated to date in nonclinical and clinical studies for plazomicin do not ensure that our Phase 3 trials will demonstrate similar results or provide data supportive of similar results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we will not face similar setbacks.
The first patient in our Phase 3 EPIC trial for plazomicin was enrolled in early January 2016. In June 2016, over 50% patient enrollment was reached. We expect top-line results for our Phase 3 EPIC trial in the first quarter of 2017 and expect to submit an NDA for plazomicin in the second half of 2017, with a planned commercial launch of plazomicin in the U.S. in 2018, if our NDA is approved.
The first patient in our Phase 3 CARE trial for plazomicin was enrolled in September 2014. We expect to end enrollment in the CARE study in 2016, announce top-line data results in the first half of 2017, and to submit the study results as supportive data with the plazomicin NDA based on our Phase 3 EPIC trial. We also plan to submit the results to a peer-reviewed journal and for presentation at a medical meeting in 2017. Based on physician market research, we believe the Phase 3 CARE study will provide important and meaningful data regarding the efficacy, safety, microbiology, and dosing, as well as important health economic data, to better inform use of plazomicin in the treatment of patients with CRE infections.
We cannot be certain that our Phase 3 EPIC trial or our Phase 3 CARE trial, or any other future clinical trials for plazomicin, or other product candidates, will progress as expected, not need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all, or support continued clinical development of the associated product candidate.
Clinical trials can be delayed, aborted or fail for a variety of reasons, including delay or failure:
to obtain regulatory approval to commence a trial in the countries where the trial is to be conducted;
to successfully initiate a clinical trial, enroll patients, and complete clinical trial activities in foreign countries;
to recruit and enroll suitable patients to participate in a trial;
to reach agreement on acceptable terms with prospective contract research organizations (“CROs”), clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
to obtain institutional review board (“IRB”) approval at each site;  
to have patients complete a trial or return for post-treatment follow-up;
of clinical sites to adhere to trial protocols or continue to participate in a trial;
to address any patient safety concerns that arise during the course of a trial;
to address any conflicts with new or existing laws or regulations;
to add a sufficient number of clinical trial sites;
to manufacture sufficient quantities of product supply for use in clinical trials; or
to ensure clinical trial sites comply with Good Clinical Practice ("GCP") guidelines.


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Enrollment delays in our clinical trials may result in increased development costs for our product candidates, slow down or halt our product development and approval processes, and jeopardize our ability to commence product sales and generate revenue, which would cause the value of our company to decline and limit our ability to obtain additional financing if needed. Patient enrollment in clinical trials is a function of many factors, including: the nature of clinical trial protocols, existence of competing protocols or treatments (if any), the size and longevity of the target patient population, proximity of patients to clinical sites and eligibility criteria for the clinical trials. Although we will continue to look for opportunities for faster regulatory approval of plazomicin or our other product candidates, we cannot guarantee that additional opportunities will arise, that the FDA or other regulatory authorities will agree with any additional proposals we make or that such additional proposals, even if approved, will be successful.
We could also encounter delays if a clinical trial is suspended or terminated by us upon recommendation of the data monitoring committee for such trial, by the IRBs of the institutions in which such trials are being conducted, or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions, or lack of adequate funding to continue the clinical trial.
If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our ability to generate revenue from the sale of any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval processes, and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may significantly harm our business, financial condition and prospects.
Our Phase 3 EPIC trial for plazomicin is subject to a number of specific risks that may affect the timeline and outcome of the trial, including the use of a new comparator drug and our lack of experience with clinical trials in certain foreign countries.
Our Phase 3 EPIC trial for plazomicin is subject to a number of specific risks arising from our clinical program and the design of the trial. For example, in our Phase 3 EPIC trial, plazomicin will be compared to meropenem. Although we have completed a Phase 2 clinical trial demonstrating that plazomicin was as effective as a comparator drug in treating cUTI, the results of our completed Phase 2 cUTI trial were based on a comparison to levofloxacin in treating cUTI, not meropenem. This use of a different comparator may cause our Phase 3 EPIC trial results to be unsuccessful or less favorable than anticipated, particularly if meropenem is more effective than levofloxacin in treating patients with cUTI.
Comparisons to results from other reported clinical trials, including our completed Phase 2 cUTI clinical trial, can assist in evaluating the potential efficacy of plazomicin; however, there are many factors that affect the outcome for patients in clinical trials, some of which are not apparent in published reports, and results from different trials often cannot be reliably compared. Therefore, there is no assurance that the results of our Phase 3 EPIC trial for plazomicin will demonstrate safety and efficacy comparable to the results of trials conducted to date or will be sufficient to attain FDA approval.
Any failure to meet our endpoints in the Phase 3 EPIC trial or adequately address safety concerns would jeopardize our ability to obtain regulatory approval for and commercialize plazomicin on schedule, or at all, and significantly harm our business, financial condition, and prospects.
Our Phase 3 CARE trial for plazomicin is subject to a number of specific risks that may affect the outcome of the trial, including the lack of a prior clinical trial in patients with CRE infections and challenges in enrolling an adequate number of patients with rare infections.
Our Phase 3 CARE trial for plazomicin is subject to a number of specific risks arising from our clinical program and the design of the trial. We have not conducted a clinical trial of plazomicin in patients with CRE infections or with bloodstream infections or pneumonia, who are the subjects of our Phase 3 CARE trial, and we have no direct clinical evidence that plazomicin is effective in treating CRE infections in humans. Our Phase 2 trial demonstrated that plazomicin was as effective as the comparator drug in treating cUTI arising from non-CRE bacteria. Although we believe that plazomicin will be effective in treating CRE infections in humans based upon our nonclinical in vitro and in vivo animal model study results, together with our Phase 2 trial results, these results are not necessarily predictive of the results in humans and we cannot guarantee that plazomicin will demonstrate the expected efficacy in our Phase 3 CARE trial in patients. We also cannot guarantee that the data from our Phase 3 CARE trial will support the projections made from our pharmacokinetic and pharmacodynamic models we developed from our nonclinical and clinical plazomicin studies.


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Because our Phase 3 CARE trial for plazomicin is enrolling patients with rare infections, finding a sufficient number of suitable patients with CRE infections to enroll in the trial has been a significant challenge. In addition, we may face competition in enrolling suitable patients as a result of other companies conducting clinical trials for antibiotic product candidates treating similar infections, resulting in slower than currently anticipated enrollment in our trial. In March 2015, based on discussions with the FDA, we amended the protocol for our Phase 3 CARE trial and these amendments are designed to accelerate the rate of patient enrollment in the Phase 3 CARE trial. We plan to stop enrollment in the Phase 3 CARE study when we expect to complete enrollment in the EPIC study. We may choose to further revise the enrollment protocol, commence new trials in a different patient population, or take other actions that may result in a substantial change in the clinical development program of plazomicin.
Our Phase 3 CARE trial also involves dosing of patients with plazomicin for longer durations (7–14 days) than in our Phase 1 and 2 trials at the comparable dosage (up to five days), which may lead to additional or more severe adverse events than were reported in our Phase 1 and 2 trials, including as a result of toxicity in the kidneys, inner ear, or hypotension.
Even if successful, the revisions to our Phase 3 CARE trial protocol no longer allow it to be powered to demonstrate a superiority outcome and the FDA, the EMA and other regulatory authorities as well as physicians and other third parties may not consider the data from our Phase 3 CARE trial to be supportive of plazomicin’s potential to address serious bacterial infections caused by CRE.
Cohort 1 of our Phase 3 CARE trial was originally planned and the size estimated based on a superiority design. We have recently decided to reduce the planned enrollment of our Phase 3 CARE trial. With this reduced sample size, the study will not be powered to demonstrate superiority but we still expect the same trend in improvement with the plazomicin-based regimen compared to the comparator arm. We may be unable to demonstrate a clear trend in favor of plazomicin as the "mortality plus" and other endpoints will depend to a significant degree on the accuracy of our assumptions about the rates of mortality and a number of significant disease-related complications in the comparator and plazomicin arms of our Phase 3 CARE trial. Although we believe we have been conservative in our assumptions, if, for example, patients in the comparator arm of our trial have significantly lower rates of mortality, or rates of applicable disease-related complications, than we expect, we may find that our trial is unfeasible or may have to enroll more patients at additional cost and delay. Further, if we choose to further revise our current trial protocol or complete an alternative pivotal trial for plazomicin, we may not be able to claim certain of the potential market and label benefits that the currently proposed Phase 3 CARE trial could provide. Our ability to claim certain of the market and label benefits that a successful superiority trial would have provided, will be reduced by pursuing a reduced target enrollment in our Phase 3 CARE trial. Further, the FDA, the European Medicines Agency ("EMA") and other regulatory authorities as well as physicians and other third parties may not consider the data from our Phase 3 CARE trial to be supportive of plazomicin’s potential to address serious bacterial infections caused by CRE.
Failure to successfully validate, develop and obtain regulatory clearance or approval for our IVD assay could harm our product development strategy for plazomicin for the treatment of serious bacterial infections caused by CRE.
An important element of our clinical development strategy for plazomicin for the treatment of serious bacterial infections caused by CRE is the development of an IVD assay to measure levels of plazomicin in the blood, which will enable patients to receive safe and efficacious doses of plazomicin. In collaboration with ARK Diagnostics, Inc. (“ARK”), we are co-developing such an assay for our Phase 3 CARE study, which could be commercialized concurrently with plazomicin, if approved.
IVD assays are subject to regulation by the FDA and comparable foreign regulatory authorities as medical devices and therefore require separate regulatory clearance or approval prior to commercialization. An IVD assay that is required for safe and effective use of a drug is referred to as a companion diagnostic. The clinical development of novel therapeutics with a companion diagnostic is complex from an operational and regulatory perspective because of the need for both the drug and the diagnostic to receive regulatory clearance or approval. Specifically, on August 6, 2014, the FDA issued the final guidance document addressing the development and approval processes for “In vitro Companion Diagnostic Devices.” According to the final guidance, for novel therapeutic products such as plazomicin, a companion diagnostic device should be developed and approved or cleared contemporaneously with the therapeutic. We believe our programs for the development of our companion diagnostic are consistent with the guidance. If the regulatory clearance or approval process for our IVD assay is delayed, our ability to commercialize plazomicin for the treatment of serious bacterial infections caused by CRE could be delayed until we receive regulatory clearance or approval for the companion diagnostic assay.
It may be necessary to resolve issues such as selectivity/specificity, analytical validation, reproducibility, or clinical validation of our assay during the development and regulatory approval process. We also expect to develop the assay for use on additional analyzers beyond the current Roche Modular P. We, ARK or our future collaborators may encounter difficulties in developing, obtaining regulatory clearance or approval for and manufacturing of the assay with appropriate quality standards,


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similar to those we face with respect to our drug product candidates themselves. Failure to overcome these hurdles could have an adverse effect on our ability to obtain regulatory approval for or to obtain market acceptance for and to commercialize our IVD assay or plazomicin for the treatment of serious bacterial infections caused by CRE.
If we fail to demonstrate the safety and efficacy of plazomicin or any other product candidate that we develop to the satisfaction of the FDA or comparable foreign regulatory authorities we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of plazomicin or such other product candidate. This would adversely impact our ability to generate revenue, our business and our results of operations.
We are not permitted to commercialize, market, promote, or sell any product candidate in the United States without obtaining marketing approval from the FDA or in other countries without obtaining approvals from comparable foreign regulatory authorities, such as the EMA, and we may never receive such approvals. To gain approval to market a drug product, we must complete extensive preclinical development and clinical trials that demonstrate the safety and efficacy of the product for the intended indication to the satisfaction of the FDA or other regulatory authority.
We have not previously submitted an NDA to the FDA, or similar drug approval filings to comparable foreign authorities, for any product candidate, and we cannot be certain that plazomicin will be successful in clinical trials or receive regulatory approval. Further, plazomicin may not receive regulatory approval even if it is successful in clinical trials. If we do not receive regulatory approval for plazomicin, we may not be able to continue our operations. Even if we successfully obtain regulatory approval to market plazomicin, our revenue from this approval will be dependent, in part, upon our or a commercial partner’s ability to obtain regulatory approval of an IVD assay to be used with plazomicin for the treatment of serious bacterial infections caused by CRE, as well as upon the size of the markets in the territories for which we gain regulatory approval and have commercial rights.
The FDA or any foreign regulatory agencies can delay, limit, or deny approval of plazomicin for many reasons, including:
our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory agency that plazomicin is safe and effective for the requested indication;
the FDA’s or the applicable foreign regulatory agency’s disagreement with the interpretation of data from preclinical studies or clinical trials;
our inability to demonstrate that the clinical and other benefits of plazomicin outweigh any safety or other perceived risks;
the FDA’s or the applicable foreign regulatory agency’s requirement for additional preclinical or clinical studies;
the FDA’s or the applicable foreign regulatory agency’s non-approval of the formulation, labeling or the specifications of plazomicin;
the FDA’s or the applicable foreign regulatory agency’s failure to approve the manufacturing processes or facilities of third-party manufacturers with which we contract;
the potential for approval policies or regulations of the FDA or the applicable foreign regulatory agencies to significantly change in a manner rendering our clinical data insufficient for approval; or
failure to adequately demonstrate study conduct oversight, ensure data integrity, and that clinical study sites complied with the principles of Good Clinical Practice, such that we do not pass pre-approval inspections by the FDA or other foreign regulatory agencies.
Even if we eventually complete clinical testing and receive approval of an NDA or foreign regulatory filing for plazomicin, the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional clinical trials which may be required after approval. The FDA or the applicable foreign regulatory agency also may approve plazomicin for a more limited indication or a narrower patient population than we originally requested, and the FDA, or applicable foreign regulatory agency, may not approve the labeling that we believe is necessary or desirable for the successful commercialization of plazomicin. For example, we anticipate the NDA for plazomicin will initially be based on our Phase 3 EPIC trial and that, if approved, we anticipate the U.S. label will indicate that plazomicin is for use in patients with infections that have limited or no alternative antibiotic treatment options. In addition, we believe that the label will include in vitro data against antibiotic resistant pathogens in the microbiology section of the drug label. However, the FDA may approve a label that omits this in vitro data or that limits plazomicin to a more limited indication or narrower patient population, which may harm our ability to successfully commercialize plazomicin, if approved. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of plazomicin and would materially adversely impact


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our business and prospects. Any other product candidate we advanced to the marketing approval stage would also be subject to the risks delineated above.
Serious adverse events or other unexpected properties of plazomicin or any other product candidate may be identified during development or after approval that could delay, prevent or cause the withdrawal of regulatory approval, limit the commercial potential, or result in significant negative consequences following marketing approval.
Serious adverse events or undesirable side effects caused by, or other unexpected properties of, our product candidates could cause us, an IRB, or regulatory authorities to interrupt, delay or halt our clinical trials and could result in a more restrictive label, the imposition of distribution or use restrictions or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. If plazomicin or any of our other product candidates are associated with serious adverse events or undesirable side effects or have properties that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later been found to cause undesirable or unexpected side effects that prevented further development of the compound.
To date, plazomicin has generally been well tolerated in clinical trials conducted in healthy subjects, subjects with renal impairment, and in patients with cUTI, and there have been no reports of serious adverse events related to plazomicin in our completed clinical trials. However, our Phase 3 EPIC trial and our Phase 3 CARE trial for plazomicin call for more extended dosing (up to 7 days for our Phase 3 EPIC trial and 7–14 days for our Phase 3 CARE trial) than our Phase 1 and 2 trials at the comparable dosage (up to five days), which may lead to additional or more severe adverse events than were reported in our Phase 1 and 2 trials. Toxicity in the kidneys and inner ear are the most significant identified risks for plazomicin, which are well-known risks for the aminoglycoside class of antibiotics. Hypotension is also a potential risk for plazomicin.
Undesirable side effects or other unexpected adverse events or properties of plazomicin or any of our other product candidates could arise or become known either during clinical development or, if approved, after the approved product has been marketed. If such an event occurs during development, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of, or deny approval of, plazomicin or our other product candidates. If such an event occurs after plazomicin or such other product candidates are approved, a number of potentially significant negative consequences may result, including:
regulatory authorities may withdraw the approval of such product;
regulatory authorities may require additional warnings on the label or impose distribution or use restrictions;
regulatory authorities may require one or more post-market studies;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.  
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate, if approved, or could substantially increase commercialization costs and expenses, which could delay or prevent us from generating revenue from the sale of our products and harm our business and results of operations.
We cannot predict to what extent bacteria may develop resistance to plazomicin or how resistance could spread, which could affect the revenue potential for plazomicin.
We are developing plazomicin to treat multi-drug resistant ("MDR") infections. The bacteria responsible for these infections evolve quickly and readily transfer their resistance mechanisms within and between species. Furthermore, some resistance to plazomicin already exists and we cannot predict how the prevalence of bacterial resistance to plazomicin will change over time.
As with some other commercially available aminoglycosides, plazomicin is not active against organisms expressing a resistance mechanism known as ribosomal methyltransferase. Although occurrence of this resistance mechanism among CRE varies regionally and is currently rare in the United States, there have been isolated cases of infections by bacteria carrying ribosomal methyltransferase in the United States. We cannot predict whether ribosomal methyltransferase will become widespread in regions where we intend to market plazomicin if it is approved. The growth of MDR infections in community settings or in countries with poor public health infrastructures, or the potential use of plazomicin outside of controlled hospital


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settings, could contribute to the rise of plazomicin resistance. If resistance to plazomicin becomes prevalent, our ability to generate revenue from plazomicin could suffer.
We are dependent on ARK to develop and manufacture our IVD assay for our Phase 3 CARE trial for plazomicin for the treatment of blood stream infections and pneumonia caused by CRE, and may become dependent on ARK to commercialize such IVD assay.
We are dependent on the sustained cooperation and effort of ARK in the development and manufacture of our IVD assay for plazomicin for our Phase 3 CARE trial for the treatment of blood stream infections and pneumonia caused by CRE, including in the generation of analytical data for regulatory approval of such assay. We have also agreed to negotiate with ARK for a commercialization agreement for the IVD assay, and have agreed that any such commercialization agreement would provide ARK with the first right to commercialize the assay in the United States and the European Union ("EU"), and to manufacture and supply the assay worldwide for commercialization, while we would have the first right to commercialize the assay in any other country or territory, in addition to rights to commercialize the assay in the United States and the EU if ARK elects not to do so. Should we enter into such an agreement with ARK, we will be dependent on ARK with respect to such manufacturing and supply and with respect to commercialization in the United States and the EU. This will reduce our control over these activities but does not relieve us of our responsibility to ensure compliance with all required legal, regulatory and scientific standards with respect to the assay.
If ARK does not successfully carry out its contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, we may not be able to complete, or may be delayed in completing, the Phase 3 CARE trial and clearance or approval of the assay. We or ARK may encounter difficulties in developing the assay for commercial application in one or more countries, including issues in relation to automation, selectivity/specificity, analytical validation, reproducibility, or clinical validation of such assay. If we do not enter into such a commercialization agreement with ARK, and ARK elects not to participate in the commercialization of the assay in the United States and/or the EU, we would have to find an alternative collaborator, which we may not be able to do on commercially reasonable terms, or at all. If ARK or any such alternative collaborator does not perform its contractual duties or obligations, experiences work stoppages, does not meet expected deadlines, terminates its agreements with us or needs to be replaced, or if they otherwise do not meet our expectations for development, manufacture or commercialization of the assay, we may need to enter into new arrangements with one or more alternative third parties for development, manufacture or commercialization of the assay or an alternative assay. We may not be able to do so on commercially reasonably terms, or within the terms of the commercialization agreement without amending such terms, or at all, which could adversely impact our business and results of operations related to plazomicin for the treatment of serious bacterial infections caused by CRE.
If we are not successful in discovering, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.
Although a substantial amount of our efforts is focused, and will continue to be focused, on our Phase 3 trials and potential approval of our lead product candidate, plazomicin, a key element of our strategy is to discover, develop and commercialize a portfolio of therapeutics to treat MDR bacterial infections. We are seeking to do so through our internal research programs and are exploring, and intend to explore in the future, strategic partnerships for the development of new products. Other than plazomicin, all of our other potential product candidates remain in the discovery and preclinical stages.  
Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:
the research methodology used may not be successful in identifying potential product candidates;
we may be unable to successfully modify candidate compounds to be active in gram-negative bacteria or defeat bacterial resistance mechanisms or identify viable product candidates in our screening campaigns;
competitors may develop alternatives that render our product candidates obsolete;
product candidates we develop may nevertheless be covered by third party patents or other exclusive rights;
a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;


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a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors; and
the development of bacterial resistance to potential product candidates may render them ineffective against target infections.
We withdrew ACHN-975, one of the product candidates from our LpxC inhibitor development program, from clinical trials due to inflammation at the infusion site in some of our Phase 1 subjects and withdrew the Investigational New Drug ("IND") application for this compound in May 2014. We are actively assessing alternative backup compounds in order to identify candidates that preclinical lab tests will show are effective and likely to exhibit a superior clinical safety profile. We cannot guarantee that these efforts will be successful. If we identify viable product candidates, we would have to submit a new IND application for any compound we seek to advance to clinical trials.
If we are unsuccessful in identifying and developing additional product candidates, our potential for growth may be impaired.
Even if a product candidate does obtain regulatory approval it may never achieve market acceptance by physicians, patients, hospitals, third-party payors and others in the medical community necessary for commercial success and the market opportunity may be smaller than we estimate.
Even if we obtain FDA or other regulatory approvals, and are able to launch plazomicin or any other product candidate commercially, the product candidate may not achieve market acceptance among physicians, patients, hospitals (including pharmacy directors) and third-party payors and, ultimately, may not be commercially successful. Market acceptance and market opportunity of any product candidate for which we receive approval depends on a number of factors, including:
the efficacy and safety of the product candidate as demonstrated in clinical trials;
relative convenience and ease of administration;
the clinical indications for which the product candidate is approved;
the potential and perceived advantages and disadvantages of the product candidates, including cost and clinical benefit relative to alternative treatments;
the willingness of physicians to prescribe the product;
the willingness of hospital pharmacy directors to purchase our products for their formularies;
acceptance by physicians, operators of hospitals and treatment facilities and parties responsible for reimbursement of the product;
the availability of adequate coverage and reimbursement by third-party payors and government authorities;
the effectiveness of our sales and marketing efforts;
the strength of our marketing and distribution support;
limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling or an approved risk evaluation and mitigation strategy;
whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular infections;
the approval of other new products for the same indications;
the timing of market introduction of the approved product as well as competitive products;
adverse publicity about the product or favorable publicity about competitive products;
the emergence of bacterial resistance to the product candidate; and
the rate at which resistance to other drugs in the target infections grow.
Any failure by plazomicin or any other product candidate that obtains regulatory approval to achieve market acceptance or commercial success would adversely affect our business prospects.
The availability of adequate third-party coverage and reimbursement for newly approved products is uncertain, and failure to obtain adequate coverage and reimbursement from government and other third-party payors could impede our ability to market any future products we may develop and could limit our ability to generate revenue.


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There is significant uncertainty related to the third-party payor coverage and reimbursement of newly approved medical products. The commercial success of our future products in both domestic and international markets depends on whether third-party coverage and reimbursement is available for our future products. Governmental payors, including Medicare and Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to manage their healthcare expenditures by limiting both coverage and the level of reimbursement of new drugs and biologics and, as a result, they may not cover or provide adequate reimbursement for our future products. These payors may not view our future products as cost-effective, and coverage and reimbursement may not be available to our customers or may not be sufficient to allow our future products to be marketed on a competitive basis.
Third-party payors are exerting increasing influence on decisions regarding the use of, and coverage and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party payors limit or delay coverage and reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could cause us to decrease the price we might establish for products, which could result in lower than anticipated revenue from the sale of our product candidates. If we decrease the prices for our product candidates because of competitive pressures or if governmental and other third-party payors do not provide adequate coverage or reimbursement, our prospects for revenue and profitability will suffer.
In addition, to the extent that our product candidates will be used in a hospital inpatient setting, hospitals often receive fixed reimbursement for all of a patient’s care, including the cost of our drug products and IVD assay, based on the patient’s diagnosis. For example, Medicare reimbursement for hospital inpatient stays is generally made under a prospective payment system that is determined by a classification system known as the Medicare severity diagnosis-related groups. Our patients’ access to adequate coverage and reimbursement by government and private insurance plans is central to the acceptance of our future products. We may be unable to sell our products on a profitable basis if third-party payors reduce their current levels of payment, or if our costs of production increase faster than increases in reimbursement levels.
We are developing our lead product candidate plazomicin for the treatment of serious bacterial infections due to MDR Enterobacteriaceae, including CRE, which constitute a growing but relatively small patient population. Antibiotics have historically been marketed towards broad patient populations at relatively low prices. Based on the high unmet medical need in the treatment of these infections and the high costs of treating antibiotic resistant infections, we are targeting value-based pricing for plazomicin. If hospitals or governmental or other third-party payors do not view the benefits of plazomicin as worth the cost, we will be unable to achieve our pricing and reimbursement objectives and our prospects for revenue and profitability will suffer.
We rely on third parties to conduct some of our preclinical studies and all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize any of our product candidates.
We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct our preclinical studies and clinical trials on our product candidates in compliance with applicable regulatory requirements. These third parties are not our employees and, except for restrictions imposed by our contracts with such third parties, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct our preclinical studies and clinical trials, we remain responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol and the applicable legal, regulatory, and scientific standards, and our reliance on these third parties does not relieve us of our regulatory responsibilities. The FDA and regulatory authorities in other jurisdictions require us to comply with regulations and standards, commonly referred to as current good clinical practices (“cGCPs”), for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. If we or any of our third party contractors fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, we are required to report certain financial interests of our third party investigators if these relationships exceed certain financial thresholds and meet other criteria. The FDA or comparable foreign regulatory authorities may question the integrity of the data from those clinical trials conducted by principal investigators who previously served or currently serve as scientific advisors or consultants to us from time to time and receive cash compensation in connection with such services. Our clinical trials must also generally be conducted with products produced under current good manufacturing practice (“cGMP”) regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.
Many of the third parties with whom we contract may also have relationships with other commercial entities, some of which may compete with us. If the third parties conducting our preclinical studies or our clinical trials do not perform their


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contractual duties or obligations or comply with regulatory requirements we may need to enter into new arrangements with alternative third parties. This could be costly, and our preclinical studies or clinical trials may need to be extended, delayed, terminated or repeated, and we may not be able to obtain regulatory approval in a timely fashion, or at all, for the applicable product candidate, or to commercialize such product candidate being tested in such studies or trials. If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third party contractors or to do so on commercially reasonable terms. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.
We rely on third-party contract manufacturing organizations to manufacture and supply plazomicin and other product candidates for us, as well as certain raw materials used in the production thereof. If one of our suppliers or manufacturers fails to perform adequately we may be required to incur significant delays and costs to find new suppliers or manufacturers.
We currently have limited experience in, and we do not own facilities for, manufacturing our product candidates, including plazomicin. We rely upon third-party manufacturing organizations to manufacture and supply our product candidates and certain raw materials used in the production thereof. Some of our key components for the production of plazomicin have a limited number of suppliers. In particular, sisomicin, the aminoglycoside precursor for plazomicin, is supplied by a single manufacturer in China for which we do not have a commercial supply agreement.
The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with cGMP regulations for manufacture of our drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.
We do not have commercial supply agreements with our suppliers. In the event that we and our suppliers cannot agree to the terms and conditions for them to provide clinical and commercial supply needs, we would not be able to manufacture our product or candidates until a qualified alternative supplier is identified, which could also delay the development of, and impair our ability to commercialize, our product candidates.
Our third party suppliers may not be able to meet our supply needs or timelines and this may negatively affect our business. A majority of the manufacturing process is operated internationally, and therefore may be subject to similar risks of the sort described by the risk factor entitled “ A variety of risks associated with international operations could materially adversely affect our business .”  
The failure of third-party manufacturers or suppliers to perform adequately or the termination of our arrangements with any of them may adversely affect our business.
A variety of risks associated with international operations could materially adversely affect our business.
Certain of our existing suppliers are located outside of the United States, including our sole source supplier for sisomicin, a key raw material for the production of plazomicin, which is located in China, and for which we do not have a commercial supply agreement. Additionally, if plazomicin is approved for commercialization outside the United States, we will likely seek to enter into agreements with third parties to market plazomicin outside the United States. We are, or we expect that we will be, subject to additional risks related to these international business relationships, including:
different regulatory requirements for drug approvals in foreign countries;
differing U.S. and foreign drug import and export rules;
reduced protection for intellectual property rights in certain foreign countries;
unexpected changes in tariffs, trade barriers and regulatory requirements;
different reimbursement systems;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;


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foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
potential liability resulting from development work conducted by these third parties; and
business interruptions resulting from geopolitical events, including war and terrorism, or natural disasters.
We may be subject to costly product liability claims related to our clinical trials and product candidates and, if we are unable to obtain adequate insurance or are required to pay for liabilities resulting from a claim excluded from, or beyond the limits of our insurance coverage, a material liability claim could adversely affect our financial condition.
Because we conduct clinical trials with human patients, we face the risk that the use of our product candidates may result in adverse side effects to patients in our clinical trials. We face even greater risks upon any commercialization of our product candidates. Although we have product liability insurance, which covers our clinical trials for up to $5 million, our insurance may be insufficient to reimburse us for any expenses or losses we may suffer, and we will be required to increase our product liability insurance coverage for our advanced clinical trials that we plan to initiate. We do not know whether we will be able to continue to obtain product liability coverage and obtain expanded coverage if we require it, on acceptable terms, if at all. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limits of, our insurance coverage. Where we have provided indemnities in favor of third parties under our agreements with them, there is also a risk that these third parties could incur liability and bring a claim under such indemnities. An individual may bring a product liability claim against us alleging that one of our product candidates or products causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any product liability claim brought against us, with or without merit, could result in:
withdrawal of clinical trial volunteers, investigators, patients or trial sites;
the inability to commercialize our product candidates;
decreased demand for our product candidates;
regulatory investigations that could require costly recalls or product modifications;
loss of revenue;
substantial costs of litigation;
liabilities that substantially exceed our product liability insurance, which we would then be required to pay ourselves;
an increase in our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, if at all;
the diversion of management’s attention from our business; and
damage to our reputation and the reputation of our products.
Product liability claims may subject us to the foregoing and other risks, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
If we fail to establish an effective distribution process, which includes utilizing cold-chain logistics for plazomicin and the associated IVD assay, our business may be adversely affected.
We do not currently have the infrastructure necessary for distributing pharmaceutical products to patients. We intend to contract with a third-party logistics company to warehouse these products and distribute them, and we will require plazomicin and the associated IVD assay to be maintained at a controlled temperature for some of the distribution chain. Failure to secure contracts with a logistics company could negatively impact the distribution of plazomicin or the IVD assay. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of plazomicin and the associated IVD assay will be delayed or severely compromised and our results of operations may be harmed.
In addition, the use of third party distributors, including with respect to cold-chain logistics for plazomicin and the associated IVD assay, involves certain risks, including, but not limited to, risks that distributors or pharmacies will:
not provide us with accurate or timely information regarding their inventories, the number of patients who are using plazomicin or the IVD assay, or complaints regarding them;
not effectively sell or support plazomicin or the associated IVD assay with sufficient cold storage;
reduce their efforts or discontinue to sell or support plazomicin or the IVD assay;


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not devote the resources necessary to sell plazomicin or the IVD assay in the volumes and within the time frames that we expect;
be unable to satisfy financial obligations to us or others; or
cease operations.
Plazomicin is still undergoing evaluation for, and we expect our IVD assay will have, a room temperature shelf life. Currently cold-chain logistics is required and if we do not effectively maintain our cold-chain supply logistics, then we may experience an unusual number of product returns or out of date product. Any such failure may result in decreased product sales and lower product revenue, which would harm our business.
We currently have limited sales and marketing and distribution staff. If we are unable to develop an adequate sales and marketing and distribution capability on our own or through third parties, we will not be successful in commercializing our future products.
We currently have limited sales, marketing and distribution staff and no history in this capacity. To achieve commercial success for any approved product candidate, we must either develop an adequate sales, marketing and distribution organization or outsource these functions to third parties. If we rely on third parties for selling, marketing and distributing our approved products, any revenue we receive will depend upon the efforts of third parties, which may not be successful and are only partially within our control, and our product revenue may be lower than if we directly sold or marketed our products. If we are unable to enter into arrangements with third parties to sell, market and distribute product candidates for which we have received regulatory approval on acceptable terms or at all, we will need to market these products ourselves. This is likely to be expensive and logistically difficult, as it would require us to build our own sales, marketing and distribution capacity. We have no historical operations in this area, and if such efforts were necessary, we may not be able to successfully commercialize our future products. If we are not successful in commercializing our future products, either on our own or through third parties, any future product revenue will be materially and adversely affected, which would harm our business.
We face substantial competition and our competitors may discover, develop or commercialize products faster or more successfully than us.
The development and commercialization of new drug products is highly competitive. We face competition from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide with respect to plazomicin and other product candidates that we may seek to develop or commercialize in the future. There are a number of pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of MDR infections. Potential competitors also include academic institutions, government agencies and other public and private research organizations. Our competitors may succeed in developing, acquiring or licensing technologies and drug products that are more effective, safer or less costly than plazomicin or any other product candidates that we are currently developing or that we may develop, which could render our product candidates obsolete and noncompetitive.
There are a variety of available therapies marketed for the treatment of MDR infections that we would expect would compete with plazomicin, including Avycaz TM (ceftazadime/avibactam), which is marketed by Allergan plc in the United States (anticipated to be marketed by AstraZeneca plc outside the United States), tigecycline, which is marketed by Pfizer as Tygacil®, other aminoglycosides that are generically available (such as gentamicin, amikacin, tobramycin), and polymixins that are generically available (colistin and polymixin B). Many of the available therapies are well-established and widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may also encourage the use of generic products. If plazomicin is approved, it may be priced at a premium over other competitive products. This may limit plazomicin’s adoption for MDR gram-negative infections.
There are also a number of products in late-stage clinical development by third parties to treat MDR gram-negative infections. Allergan plc and AstraZeneca plc are developing Avyacaz: (ceftazidime and avidbactam) for serious infections. Tetraphase Pharmaceuticals, Inc. is developing eravacycline for complicated urinary and intra-abdominal infections, as well as pneumonia. The Medicines Company is developing Carbavance™ for cUTI and various infection types due to CRE. Merck & Co., Inc. is developing imipenem/relebactam for complicated urinary and intra-abdominal infections, and potentially for pneumonia. Zavante Therapeutics, Inc. is developing ZTI-01 for cUTI. We may also eventually face competition from products in earlier development stage. If our competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than us, it could result in our competitors establishing a strong market position before we are able to enter the market.
In July 2012, the Food and Drug Administration Safety and Innovation Act was passed, which included the Generating Antibiotics Incentives Now Act (the “GAIN Act”). The GAIN Act provides incentives for the development of new, qualified


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infectious disease products, including adding five years to the otherwise applicable regulatory exclusivity period. We requested and the FDA granted qualified infectious disease product designation for plazomicin for the treatment of hospital acquired bacterial pneumonia, ventilator-associated pneumonia, complicated intra-abdominal infections, cUTIs, and catheter-related bloodstream infections on December 14, 2014. The incentives provided under the GAIN Act, along with government contract funding and other incentives for antibiotic research, may result in more competition in the market for new antibiotics.
Many of our competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than we do. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Large pharmaceutical companies in particular have extensive expertise in preclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with our competitors.
Finally, the success of any product that is successfully commercialized will depend in large part on our ability to prevent competitors from launching a generic version that would compete with such product. If such competitors are able to establish that our patents are invalid or not infringed by the generic version of our product, they may be able to launch a generic product prior to the expected expiration of our relevant patents, and any generic competition could have a material adverse effect on our business, results of operations, financial condition and prospects.
We may attempt to form collaborations in the future with respect to our product candidates, but we may not be able to do so, which may cause us to alter our development and commercialization plans.
We may form strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties with respect to our programs that we believe will complement or augment our existing business. For example, we currently intend to identify one or more strategic partners for the commercialization of plazomicin, and we may also attempt to find one or more strategic partners for the development or commercialization of one or more of our other product candidates. We face significant competition in seeking appropriate strategic partners, and the negotiation process to secure appropriate terms is time-consuming and complex. We may not be successful in our efforts to establish strategic partnerships for our product candidates and programs on terms that are acceptable to us, or at all.
Any delays in identifying suitable collaborators and entering into agreements to develop or commercialize our product candidates could negatively impact the development or commercialization of our product candidates in geographic regions where we do not have development and commercialization infrastructure. Absent a collaboration partner, we would need to undertake development or commercialization activities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we are unable to do so, we may not be able to develop our product candidates or bring them to market and our business may be materially and adversely affected.
We may be unable to realize the potential benefits of any collaboration.
Even if we are successful in entering into a collaboration with respect to the development or commercialization of one or more product candidates, there is no guarantee that the collaboration will be successful. Collaborations may pose a number of risks, including:
collaborators often have significant discretion in determining the efforts and resources that they will apply to the collaboration, and may not commit sufficient resources to the development, marketing or commercialization of the product or products that are subject to the collaboration;
collaborators may not perform their obligations as expected;
collaborators may cease to devote resources to the development or commercialization of our product candidates if the collaborators view our product candidates as competitive with their own products or product candidates;
disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the course of development, might cause delays or termination of the development or commercialization of product candidates, and might result in legal proceedings, which would be time-consuming, distracting and expensive;
collaborators may be impacted by changes in their strategic focus or available funding, or business combinations involving them, which could cause them to divert resources away from the collaboration;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;


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the collaborations may not result in us achieving revenue to justify such transactions; and
collaborations may be terminated and, if terminated, may result in a need for us to raise additional capital to pursue further development or commercialization of the applicable product candidate.
As a result, a collaboration may not result in the successful development or commercialization of our product candidates.
Our operating activities may be restricted as a result of covenants related to the indebtedness under our loan agreement and we may be required to repay the outstanding indebtedness in an event of default, which could have a materially adverse effect on our business.
On August 5, 2015, we entered into a loan and security agreement with Solar Capital Ltd., pursuant to which Solar Capital Ltd. agreed to make available to us term loans with an aggregate principal amount of up to $25 million, $15 million of which was provided to us on August 5, 2015 and $10 million of which was provided to us on June 20, 2016. Until we have repaid such indebtedness, the loan and security agreement subjects us to various customary covenants, including requirements as to financial reporting and insurance, and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock, to redeem capital stock, to enter into licensing agreements, to engage in transactions with affiliates, or to encumber our intellectual property. Our business may be adversely affected by these restrictions on our ability to operate our business.
Additionally, we may be required to repay the outstanding indebtedness under the loan facility if an event of default occurs under the loan and security agreement. Under the loan and security agreement, an event of default will occur if, among other things, we fail to make payments under the loan and security agreement; we breach any of our covenants under the loan and security agreement, subject to specified cure periods with respect to certain breaches; the Lender determines that a material adverse change has occurred; we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to pay our debts as they become due; or we default on contracts with third parties which would permit the holder of indebtedness to accelerate the maturity of such indebtedness or that could have a material adverse change on us. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In this case, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Solar Capital Ltd. could also exercise its rights as collateral agent to take possession of and to dispose of the collateral securing the term loans, which collateral includes substantially all of our property (excluding intellectual property, which is subject to a negative pledge). Our business, financial condition and results of operations could be materially adversely affected as a result of any of these events.
We may need to grow our organization, and we may experience difficulties in managing growth.
As of June 30, 2016, we had 79 employees. We will need to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize plazomicin or other product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our business strategy requires that we:
manage all our Phase 3 trials, which are being conducted at multiple trial sites, and manage any other clinical trials;
manage our internal discovery and development efforts effectively while carrying out our contractual obligations to licensors, contractors, government agencies, any future collaborators and other third parties;
continue to improve our operational, financial and management controls, reporting systems and procedures; and
identify, recruit, maintain, motivate and integrate additional employees.
 
If we are unable to expand our managerial, operational, financial and other resources to the extent required to manage our development and commercialization activities, our business will be materially adversely affected.
We are highly dependent on the services of our Chief Executive Officer, Kenneth J. Hillan, M.B., Ch.B. and our ability to attract and retain qualified personnel.


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We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco Bay Area. We are highly dependent on the principal members of our management and scientific staff, particularly our Chief Executive Officer, Dr. Hillan. If we are not able to retain Dr. Hillan or are not able to attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow. Although we have executed employment agreements with each member of our current executive management team, including Dr. Hillan, we may not be able to retain their services as expected. In addition to the competition for personnel, the San Francisco Bay Area in particular is characterized by a high cost of living. Although we historically have not had any material difficulty attracting qualified experienced personnel to our company, we could in the future have such difficulties and may be required to expend significant financial resources in our employee recruitment and retention efforts.
In addition, we have scientific and clinical advisors who assist us in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours.
If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
Recent changes in our executive leadership and any similar changes in the future may serve as a significant distraction for our management and employees.
Since the beginning of 2015, there have been a number of changes to our executive leadership team. In July 2016, we hired our Chief Financial Officer, Tobin Schilke. In October 2015, we hired our Chief Operating Officer, Blake Wise. Such changes, or any other future changes in our executive leadership, may disrupt our operations as we adjust to the reallocation of responsibilities and assimilate new leadership and, potentially, differing perspectives on our strategic direction. If the transition in executive leadership is not smooth, the resulting disruption could negatively affect our operations and impede our ability to execute our strategic plan.
Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.
Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials, including the components of our pharmaceutical product candidates, test samples and reagents, biological materials and other hazardous compounds. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and/or interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.
Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.
Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage or disruption from computer viruses, software bugs, unauthorized access, natural disasters, terrorism, war, and telecommunication, equipment and electrical failures. While we have not, to our knowledge, experienced any significant system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for any of our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure or theft of confidential or proprietary information, we could incur liability, the further development of our product candidates could be delayed or our competitive position could be compromised.  


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Our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, consultants and vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA; (2) manufacturing standards; (3) federal and state healthcare fraud and abuse laws and regulations; or (4) laws that require the true, complete and accurate reporting of financial information or data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
We incur significant costs as a result of operating as a public company, and our management devotes substantial time to new compliance initiatives.
Prior to our initial public offering ("IPO") in March 2014, we had not been subject to the reporting requirements of the Exchange Act of 1934, as amended (the "Exchange Act"), or the other rules and regulations of the Securities and Exchange Commission (the "SEC") or any securities exchange relating to public companies. We continue to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses associated with being a public company could be material, particularly after we cease to be an “emerging growth company.” Compliance with the various reporting and other requirements applicable to public companies require considerable time and attention of management. In addition, the changes we make may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.
In addition, certain types of insurance, including directors’ and officers’ liability insurance are more expensive as a public company. Being a public company could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be subject to sanctions by regulatory authorities.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and provide a management report on the internal control over financial reporting. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be evaluating our internal controls systems to allow management to report on, and eventually our independent auditors will attest to, the effectiveness of the operation of our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and eventual auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The aforementioned auditor attestation requirements will not apply to us until we are no longer considered an “emerging growth company.”
We cannot be certain as to the timing of completion of our evaluation, testing and remediation action or the impact of the same on our operations. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, we could be subject to sanctions or investigations by The NASDAQ Stock Market LLC, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources and could materially


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adversely affect our stock price. Deficient internal controls could also cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, which could have a negative effect on our stock price.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We have designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the acts of some individuals, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Our corporate headquarters is located in the San Francisco Bay Area, which in the past has experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our information technology systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.
Furthermore, integral parties in our supply chain are geographically concentrated and operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.
Risks Related to Our U.S. Government Contracts
Our use of government funding for certain of our programs adds uncertainty to our research and commercialization efforts with respect to those programs and may impose requirements that increase the costs of commercialization and production of product candidates developed under those government-funded programs.
Our development of plazomicin as a countermeasure for diseases caused by antibiotic-resistant pathogens and biothreats is currently being funded in significant part through a contract with BARDA. We are also receiving funding from the National Institute of Allergy and Infectious Diseases ("NIAID") for one of our pre-clinical programs and we in the past received funding for other programs from the Defense Threat Reduction Agency ("DTRA") and from NIAID. Contracts funded by the U.S. government and its agencies, including our contract with BARDA, include provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to:
terminate agreements, in whole or in part, for any reason or no reason;
reduce or modify the government’s obligations under such agreements without the consent of the other party;
claim rights, including intellectual property rights, in products and data developed under such agreements;
audit contract-related costs and fees, including allocated indirect costs;
suspend the contractor from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;
impose U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;
suspend or debar the contractor from doing future business with the government;
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pursue criminal or civil remedies under the False Claims Act (“FCA”), the False Statements Act and similar remedy provisions specific to government agreements.
We may not have the right to prohibit the U.S. government from using or allowing others to use certain technologies developed by us, and we may not be able to prohibit third-party companies, including our competitors, from using those technologies in providing products and services to the U.S. government. The U.S. government generally obtains the right to royalty-free use of technologies that are developed under U.S. government contracts.
In addition, government contracts normally contain additional requirements that may increase our costs of doing business, reduce our profits, and expose us to liability for failure to comply with these terms and conditions. These requirements include, for example:
specialized accounting systems unique to government contracts;
mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent;
public disclosures of certain contract information, which may enable competitors to gain insights into our research program; and
mandatory socioeconomic compliance requirements, including labor standards, anti-human-trafficking, non-discrimination, and affirmative action programs and environmental compliance requirements.
If we fail to maintain compliance with these requirements, we may be subject to potential contract or FCA liability and to termination of our contracts.
We are dependent on our BARDA contract to fund portions of our Phase 3 CARE trial and Phase 3 EPIC trial. If we do not receive all of the funds under this contract, we may be forced to suspend or terminate either or both of these programs or obtain alternative sources of funding.
We expect a significant portion of the funding for our Phase 3 CARE trial and Phase 3 EPIC trial will continue to come from our BARDA contract. BARDA may terminate our contract at any time for convenience and there can be no assurances that this contract will not be terminated. Changes in government budgets and agendas may result in a decreased and de-prioritized emphasis on supporting the development of antibacterial products such as plazomicin. Although we are currently using a portion of the net proceeds from our IPO and other debt and equity offerings to fund our plazomicin development program, any reduction or delay in BARDA funding may force us to suspend or terminate the program or seek alternative funding, which may not be available on non-dilutive terms, terms favorable to us or at all.
U.S. government agencies have special contracting requirements that give them the ability to unilaterally control our contracts.
U.S. government contracts typically contain unfavorable termination provisions and are subject to audit and modification by the government at its sole discretion, which will subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:
audit and object to our BARDA contract-related costs and fees, and require us to reimburse all such costs and fees;
suspend or prevent us for a set period of time from receiving new contracts or extending our existing contracts based on violations or suspected violations of laws or regulations;
cancel, terminate or suspend our contracts based on violations or suspected violations of laws or regulations;
terminate our contracts if in the government’s interest, including if funds become unavailable to the applicable governmental agency;
reduce the scope and value of our contract; and
change certain terms and conditions in our contract.
The U.S. government will be able to terminate any of its contracts with us, either for convenience or if we default by failing to perform in accordance with or to achieve the milestones set forth in the contract schedules and terms. Termination-for-convenience provisions generally enable us to recover only our costs incurred or committed and settlement expenses on the work completed prior to termination. Except for the amount of services received by the government, termination-for-default provisions do not permit these recoveries and would make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source.


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The U.S. government’s determination to award a future contract or contract option may be challenged by an interested party, such as another bidder, at the U.S. Government Accountability Office (the “GAO”), or in federal court. If such a challenge is successful, our BARDA contract or any future contract we may be awarded may be terminated.
The laws and regulations governing the procurement of goods and services by the U.S. government provide procedures by which other bidders and interested parties may challenge the award of a government contract. If we are awarded a government contract, such challenges or protests could be filed even if there are not any valid legal grounds on which to base the protest. If any such protests are filed, the government agency may decide to suspend our performance under the contract while such protests are being considered by the GAO or the applicable federal court, thus potentially delaying delivery of payment. In addition, we could be forced to expend considerable funds to defend any potential award. If a protest is successful, the government may be ordered to terminate any one or more of our contracts and reselect bids. The government agencies with which we have contracts could even be directed to award a potential contract to one of the other bidders.
Our business is subject to audit by the U.S. government, including under our contracts with BARDA and NIAID, and a negative outcome in an audit could adversely affect our business.
U.S. government agencies such as the Department of Health and Human Services (“DHHS”) and the Defense Contract Audit Agency (the "DCAA") routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.
The DHHS and the DCAA also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be paid, while such costs already paid must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:
termination of contracts;
forfeiture of profits;
suspension of payments;
fines; and
suspension or prohibition from conducting business with the U.S. government.
In addition, we could suffer serious reputational harm if allegations of impropriety were made against us, which could cause our stock price to decrease.
Laws and regulations affecting government contracts make it more expensive and difficult for us to successfully conduct our business.
We must comply with numerous laws and regulations relating to the formation, administration and performance of government contracts, which can make it more difficult for us to retain our rights under our BARDA contract. These laws and regulations affect how we conduct business with government agencies. Among the most significant government contracting regulations that affect our business are:
the Federal Acquisition Regulations (“FAR”) and agency-specific regulations supplemental to the FAR, which comprehensively regulate the procurement, formation, administration and performance of government contracts;
business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying activities and include other requirements such as the Anti-Kickback Statute and Foreign Corrupt Practices Act;
export and import control laws and regulations; and
laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
Any changes in applicable laws and regulations could restrict our ability to maintain our existing BARDA contract and obtain new contracts, which could limit our ability to conduct our business and materially adversely affect our results of operations.  


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Risks Related to Intellectual Property
If we are unable to obtain and maintain sufficient intellectual property protection for our product candidates, or if the scope of the intellectual property protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our product candidates may be adversely affected.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our technologies. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability. In particular, our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our product candidates. However, we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research and development before it is too late to obtain patent protection.
Further, the patentability of inventions, and the validity, enforceability and scope of patents in the biotechnology and pharmaceutical field involve complex legal and scientific questions and can be uncertain. As a result, patent applications that we own or license may fail to result in issued patents in the United States or in other foreign countries for many reasons. For example, there is no assurance that we were the first to invent or the first to file patent applications in respect of the inventions claimed in our patent applications. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates. We may also be unaware of certain prior art relating to our patent applications and patents, which could prevent a patent from issuing from a pending patent application, or result in an issued patent being invalidated. Even if patents have issued, or do successfully issue, from patent applications, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents and patent applications we hold, license or pursue with respect to our product candidates is threatened, it could threaten our ability to commercialize our product candidates. Further, if we encounter delays in our clinical trials, the period of time during which we could market any of our product candidates under patent protection, if approved, would be reduced. Changes to the patent laws in the United States and other jurisdictions could also diminish the value of our patents and patent applications or narrow the scope of our patent protection.
Furthermore, certain of the patents that we license from the University of Washington ("UW") are co-owned by Novartis AG. The exclusivity of our license from UW is therefore subject to Novartis’ rights to use the licensed patents and technology for its own purposes, and to grant licenses to others to do so. We therefore rely primarily on our owned patent rights to provide patent protection for our LpxC inhibitor compounds. However, none of these owned patent rights have yet issued in the United States, and if these fail to result in issued patents, our competitive position could be adversely affected.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.
In addition to the protection afforded by patents, we rely on confidential proprietary information, including trade secrets, and know-how to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and collaborators. These agreements are designed to protect our proprietary information. However, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Further, the laws of some foreign countries, including China, where we currently source raw materials for plazomicin, do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to


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establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent or delay us from developing or commercializing our product candidates.
There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our technology or product candidates, including interference or derivation proceedings before the U.S. Patent and Trademark Office (“USPTO”). Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The pharmaceutical and biotechnology industries have produced a significant number of patents, and it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving that a patent is invalid is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.
If we are found to infringe a third party’s intellectual property rights, we could be forced, including by court order, to cease developing, manufacturing or commercializing the infringing product candidate or product. Alternatively, we may be required to obtain a license from such third party in order to use the infringing technology and continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. We may also elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to litigation, and any such license agreements may require us to pay royalties and other fees that could be significant. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
We may be involved in lawsuits to protect or enforce our intellectual property rights, which could be expensive, time consuming and unsuccessful.
Competitors may infringe or otherwise violate our patents, the patents of our licensors, or our other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, in whole or in part, or may refuse to stop the other party in such infringement proceeding from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent.
 
Interference or derivation proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may be necessary to determine the priority of inventions or other matters of inventorship with respect to our patents or patent applications. We may also become involved in other proceedings, such as re-examination or opposition proceedings, before the USPTO or its foreign counterparts relating to our intellectual property or the intellectual property rights of others. An unfavorable outcome in any such proceedings could require us to cease using the related technology or to attempt to license rights to it from the prevailing party, or could cause us to lose valuable intellectual property rights. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may also become involved in disputes with others regarding the ownership of intellectual property rights. For example, we jointly develop intellectual property with certain parties, and disagreements may therefore arise as to


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the ownership of the intellectual property developed pursuant to these relationships. If we are unable to resolve these disputes, we could lose valuable intellectual property rights.
We may not be able to prevent misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and/or management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the United States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions, including China, where we currently source raw materials for plazomicin. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates from third parties, we could lose license rights that are important to our business.
While the primary patent family covering plazomicin is Achaogen-owned, our development and commercialization of plazomicin is subject to our license agreement with Ionis Pharmaceuticals, Inc. (formerly known as Isis Pharmaceuticals, Inc.), and a portion of the patent portfolio for our LpxC inhibitor program is in-licensed from UW. Under our existing license agreements, we are subject to various obligations, including diligence obligations with respect to development and commercialization activities, payment obligations for achievement of certain milestones and royalties on product sales, as well as other material obligations. If we fail to comply with any of these obligations or otherwise breach our license agreements, our licensing collaborators may have the right to terminate the applicable license in whole or in part. The loss of our license agreement with Ionis Pharmaceuticals, Inc. could materially adversely affect our ability to proceed with the development or potential commercialization of plazomicin as currently planned, while the loss of our license agreement with UW could materially adversely affect our ability to proceed with any development or potential commercialization of our LpxC inhibitor program.
The risks described elsewhere pertaining to our patents and other intellectual property rights also apply to the intellectual property rights that we license, and any failure by us or our licensors to obtain, maintain and enforce these rights could have a material adverse effect on our business. In some cases, we do not have control over the prosecution, maintenance or enforcement of the patents that we license, and may not have sufficient ability to consult and input into the patent prosecution and maintenance process with respect to such patents, and our licensors may fail to take the steps that we believe are necessary or desirable in order to obtain, maintain and enforce the licensed patents.


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Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:
others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we own or license;
we or our licensors or collaborators might not have been the first to make the inventions covered by an issued patent or pending patent application that we own or license;
we or our licensors or collaborators might not have been the first to file patent applications covering an invention;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
pending patent applications that we own or license may not lead to issued patents;
issued patents that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
we may not develop or in-license additional proprietary technologies that are patentable; and
the patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to use our technologies and this circumstance would have a material adverse effect on our business.  
Provisions in our U.S. government contracts, including our contract with BARDA, may affect our intellectual property rights.
Certain of our activities have been funded, and may in the future be funded, by the U.S. government, including our contract with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use or allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, U.S. government-funded inventions must be reported to the government, U.S. government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
On September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”) was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has promulgated regulations and developed


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procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not come into effect until March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
We may be subject to claims that our employees or consultants have wrongfully used or disclosed alleged trade secrets of former or other employers.
Many of our employees and consultants, including our senior management, have been employed or retained by other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees or consultants have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s or consultant’s former or other employer. We are not aware of any material threatened or pending claims related to these matters, but in the future litigation may be necessary to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
If we do not obtain patent term extension in the United States under the Hatch-Waxman Act and in foreign countries under similar legislation, thereby potentially extending the term of our marketing exclusivity for our product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, if any, one or more of our U.S. patents covering our approved product(s) or the use thereof may be eligible for up to five years of patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be extended per FDA approved product. Patent term extension also may be available in certain foreign countries upon regulatory approval of our product candidates. Nevertheless, we may not be granted patent term extension either in the United States or in any foreign country because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority could be less than we request.
If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.  
Risks Related to Government Regulation
The regulatory approval process is expensive, time consuming and uncertain and may prevent us from obtaining, or cause delays in obtaining, approvals for the commercialization of some or all of our product candidates, which will materially impair our ability to generate revenue.
The design, development, research, testing, manufacturing, labeling, storage, recordkeeping, approval, selling, import, export, advertising, promotion, and distribution of drug products are subject to extensive and evolving regulation by federal, state and local governmental authorities in the United States, principally by the FDA, and foreign regulatory authorities, with regulations differing from country to country. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. Neither we nor any future collaboration partner is permitted to market plazomicin or any other product candidate in the United States until we receive regulatory approval of an NDA from the FDA.
We have not submitted an application or obtained marketing approval for plazomicin or any other product candidate anywhere in the world. An NDA must include extensive preclinical and clinical data and supporting information to establish to the FDA’s satisfaction the product candidate’s safety and efficacy for each desired indication. The NDA must also include significant information regarding the chemistry, manufacturing and controls for the product candidate. Obtaining regulatory approval of an NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable U.S. and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions, including:
warning letters;
civil and criminal penalties;


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injunctions;
withdrawal of approved products;
product seizure or detention;
product recalls;
total or partial suspension of production; and
refusal to approve pending NDAs or supplements to approved NDAs.
Prior to receiving approval to commercialize any of our product candidates in the United States or abroad, we and any applicable collaboration partners must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities abroad, that such product candidates are safe and effective for their intended uses. Preclinical testing and clinical trials are long, expensive and uncertain processes. We may spend several years completing our testing for any particular product candidate, and failure can occur at any stage. Negative or inconclusive results or adverse medical events during a clinical trial could also cause the FDA or us to terminate a clinical trial or require that we repeat it or conduct additional clinical trials. Additionally, data obtained from preclinical studies and clinical trials can be interpreted in different ways and the FDA or other regulatory authorities may interpret the results of our studies and trials less favorably than we do. Even if we believe the preclinical or clinical data for a product candidate is promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering any product candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials of such product candidates and result in the FDA or other regulatory authorities denying approval of such product candidates for any or all targeted indications. The FDA or other regulatory authorities may determine that plazomicin or any other product candidate that we develop is not effective, or is only moderately effective, or has undesirable or unintended side effects, toxicities, safety profile or other characteristics that preclude marketing approval or prevent or limit commercial use. In addition, any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
The regulatory approval process is expensive and may take several years to complete. The FDA and foreign regulatory entities have substantial discretion in the approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will be required for FDA approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address, and the regulations applicable to any particular product candidate. The FDA can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to, the following:
product candidate may not be deemed safe or effective;