Achaogen
Achaogen Inc (Form: 10-Q, Received: 05/08/2017 16:22:50)

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

or

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

For the transition period from                      to                     

Commission File Number: 001-36323

 

ACHAOGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

68-0533693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1 Tower Place, Suite 300

South San Francisco, CA

(Address of principal executive offices)

94080

(Zip Code)

7000 Shoreline Court, Suite 371

South San Francisco, CA 94080

(Former name or former address, if changed since last report)

(650) 800-3636

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company


 

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

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

As of May 3, 2017, there were 35,853,669 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

 


 

ACHAOGEN, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

3

 

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

23

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

Item 4. Controls and Procedures

 

30

 

 

 

PART II—OTHER INFORMATION

 

31

 

 

 

Item 1. Legal Proceedings

 

31

 

 

 

Item 1A. Risk Factors

 

31

 

 

 

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

 

65

 

 

 

Item 3. Defaults Upon Senior Securities

 

65

 

 

 

Item 4. Mine Safety Disclosures

 

65

 

 

 

Item 5. Other Information

 

65

 

 

 

Item 6. Exhibits

 

65

 

 

 

SIGNATURES

 

66

 

 

 

EXHIBIT INDEX

 

67

 

Page 2 of 68


 

PART I—FINANCI AL INFORMATION

Item 1.

Financial Statements.

Achaogen, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,639

 

 

$

118,964

 

Short-term investments

 

 

94,405

 

 

 

26,912

 

Contracts receivable

 

 

5,866

 

 

 

12,151

 

Prepaids and other current assets

 

 

9,037

 

 

 

2,189

 

Restricted cash

 

 

127

 

 

 

127

 

Total current assets

 

 

147,074

 

 

 

160,343

 

Property and equipment, net

 

 

8,449

 

 

 

3,261

 

Restricted cash

 

 

250

 

 

 

250

 

Deposit and other assets

 

 

33

 

 

 

71

 

Total assets

 

$

155,806

 

 

$

163,925

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,585

 

 

$

5,739

 

Accrued liabilities

 

 

6,490

 

 

 

9,698

 

Loan payable, current portion

 

 

7,292

 

 

 

4,167

 

Other current liabilities

 

 

45

 

 

 

104

 

Total current liabilities

 

 

25,412

 

 

 

19,708

 

Loan payable, long-term

 

 

18,192

 

 

 

21,110

 

Warrant liability

 

 

27,289

 

 

 

13,874

 

Derivative liability

 

 

622

 

 

 

602

 

Deferred Rent

 

 

5,654

 

 

 

1,896

 

Total liabilities

 

 

77,169

 

 

 

57,190

 

Commitments and contingencies

 

 

 

 

 

 

 

 

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

   March 31, 2017 and December 31, 2016; 35,846,301 and 35,638,052

   shares issued and outstanding at March 31, 2017 and December 31,

   2016, respectively

 

 

36

 

 

 

35

 

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

   shares issued and outstanding at March 31, 2017 and December 31, 2016

 

 

 

 

 

 

Additional paid-in-capital

 

 

359,139

 

 

 

353,927

 

Accumulated deficit

 

 

(280,479

)

 

 

(247,220

)

Accumulated other comprehensive loss

 

 

(59

)

 

 

(7

)

Total stockholders’ equity

 

 

78,637

 

 

 

106,735

 

Total liabilities and stockholders’ equity

 

$

155,806

 

 

$

163,925

 

 

See accompanying notes to condensed consolidated financial statements.

Page 3 of 68


 

Achaogen, Inc.

Condensed Consolidated Statements of Operations

(In thousands except share and per share data)

(unaudited)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Contract revenue

 

$

7,463

 

 

$

5,849

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

18,597

 

 

 

13,893

 

General and administrative

 

 

6,751

 

 

 

3,777

 

Total operating expenses

 

 

25,348

 

 

 

17,670

 

Loss from operations

 

 

(17,885

)

 

 

(11,821

)

Interest expense

 

 

(706

)

 

 

(438

)

Change in warrant and derivative liabilities

 

 

(14,956

)

 

 

(12

)

Other income, net

 

 

288

 

 

 

74

 

Net Loss

 

$

(33,259

)

 

$

(12,197

)

Basic and diluted net loss per common share

 

$

(0.93

)

 

$

(0.66

)

Weighted-average common shares outstanding used to calculate

   basic and diluted net loss per common share

 

 

35,725,876

 

 

 

18,398,288

 

See accompanying notes to condensed consolidated financial statements.

Page 4 of 68


 

Achaogen, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net Loss

 

$

(33,259

)

 

$

(12,197

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

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

 

 

(52

)

 

 

55

 

Total comprehensive loss

 

$

(33,311

)

 

$

(12,142

)

See accompanying notes to condensed consolidated financial statements.

Page 5 of 68


 

Achaogen, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(33,259

)

 

$

(12,197

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

113

 

 

 

121

 

Amortization of premium (discount) on short-term investments

 

 

(42

)

 

 

160

 

Stock-based compensation expense

 

 

2,911

 

 

 

827

 

Change in warrant and derivative liabilities

 

 

14,956

 

 

 

12

 

Non-cash interest expense relating to notes payable

 

 

207

 

 

 

135

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Contracts receivable

 

 

6,285

 

 

 

(27

)

Prepaids and other assets

 

 

(6,810

)

 

 

(1,390

)

Accounts payable and accrued liabilities

 

 

2,316

 

 

 

3,544

 

Other liabilities

 

 

(95

)

 

 

(51

)

Net cash used in operating activities

 

 

(13,418

)

 

 

(8,866

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,185

)

 

 

(269

)

Purchase of short-term investments

 

 

(86,759

)

 

 

 

Maturities of short-term investments

 

 

19,256

 

 

 

8,280

 

Net cash used in investing activities

 

 

(68,688

)

 

 

8,011

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of issuance costs, related to underwritten public offering

 

 

(42

)

 

 

 

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

 

 

535

 

 

 

 

Proceeds from exercise of stock warrants

 

 

288

 

 

 

 

Net cash provided by financing activities

 

 

781

 

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

(81,325

)

 

 

(855

)

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

 

 

119,341

 

 

 

20,414

 

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

 

$

38,016

 

 

$

19,559

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

499

 

 

$

303

 

Supplemental disclosures of noncash investing and financing information

 

 

 

 

 

 

 

 

Reclassification of warrant liability to additional paid-in capital

 

$

1,521

 

 

$

 

Purchases of property plant and equipment included in deferred rent

 

$

3,794

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

Page 6 of 68


 

Achaogen, Inc.

March 31, 2017

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Basis of Presentation and Consolidation

Achaogen, Inc. (together with its consolidated subsidiary, the “Company”) is a late-stage biopharmaceutical company passionately committed to the discovery, development, and commercialization of novel antibacterial treatments against multi-drug resistant gram-negative infections. The Company is developing plazomicin, its lead product candidate, for the treatment of bacterial infections due to multi-drug resistant Enterobacteriaceae, including carbapenem-resistant Enterobacteriaceae (“CRE”). The Company’s Phase 3 study of plazomicin in the treatment of patients with complicated urinary tract infections (“cUTI”) and acute pyelonephritis (“AP”), entitled EPIC (Evaluating Plazomicin In cUTI), is expected to serve as a single pivotal study supporting a new drug application (“NDA”) for plazomicin in the United States. In addition, the Company’s Phase 3 study of plazomicin, the CARE (Combating Antibiotic Resistant Enterobacteriaceae) trial, which is a resistant pathogen-specific trial designed to evaluate the efficacy and safety of plazomicin in patients with 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 its resources to identifying and developing its product candidates, including conducting preclinical studies and clinical trials and providing general and administrative support for these operations.

Reclassifications

The change in derivative liability for the three-month period ended March 31, 2016 has been reclassified to be included in the change in warrant and derivative liabilities to conform to the current year’s presentation. Such reclassifications did not impact the Company’s net loss or financial position.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and 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 period ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year or any other future period. The balance sheet as of December 31, 2016 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. Intercompany accounts and transactions have been eliminated upon consolidation.

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

In May 2017, the Company entered into an agreement with the Bill & Melinda Gates Foundation (the “Gates Foundation”) to discover drug candidates against gram-negative pathogens intended to prevent neonatal sepsis (the “Grant Agreement”). Pursuant to the Grant Agreement, the Gates Foundation awarded the Company up to approximately $10.5 million in grant funding over a three-year research term, of which approximately $3.2 million will be advanced to the Company within 15 days after signing (the “Advance Funds”). Concurrently with the Grant Agreement, the Company entered into a Common Stock Purchase Agreement with the Gates Foundation, pursuant to which the Company agreed to sell 407,331 shares of its redeemable common stock to the Gates Foundation in a private placement at a purchase price per share equal to $24.55, for gross proceeds to the Company of $10.0 million (“Gates Investment”).

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

Page 7 of 68


 

Access will continue for any products or services developed with funding provided by the Gates Foundation which cont inue to be developed or available in certain developing countries.

On December 19, 2016, the Company completed an underwritten public offering of common stock made under a prospectus supplement and related prospectus pursuant to a Registration Statement on Form S-3 (File No. 333-203282) filed on April 7, 2015 (the “Shelf Registration Statement”). This offering resulted in the sale of 7,475,000 shares, at a price to the public of $13.50 per share, including the full exercise of the underwriters’ option to purchase an additional 975,000 shares of common stock.  The Company received net proceeds from the offering of $94.6 million, after deducting the underwriting discounts and commissions and estimated offering expenses.

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 and aggregate net proceeds of $25.1 million, after deducting the issuance costs, 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 the Shelf Registration Statement, 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. 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 an "at-the-market" ("ATM") equity offering pursuant to a sales agreement with Cowen and Company, LLC. As of March 31, 2017, the Company had sold 1,105,549 shares pursuant to its ATM equity offering program at a weighted-average price of $4.82 per share for aggregate offering proceeds of $5.3 million and aggregate net proceeds of $5.1 million, after deducting the sales commissions and offering expenses.

The Company has incurred losses and negative cash flows from operations every year since its inception.  As of March 31, 2017, the Company had unrestricted cash, cash equivalents and short-term investments of approximately $132.0 million and an accumulated deficit of approximately $280.5 million. Management expects that, based on its current operating plans, the Company’s existing cash, cash equivalents and short-term investments as of March 31, 2017 will be sufficient to fund its current planned operations for at least the next twelve months from the issuance of these financial statements. Management plans to raise additional funds through equity or debt financing arrangements, government contracts, and/or third party collaboration funding in the future to fund its operations, including the commercial launch of plazomicin. However, there can be no assurance that such funding sources will be available at terms acceptable to the Company or at all. If the Company is unable to raise additional funding to meet its working capital needs, it will be forced to delay or reduce the scope of its research programs and/or limit or cease its operations.

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

2. Summary of Significant Accounting Policies

Use of Estimates

The accompanying financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. On an ongoing basis, management evaluates its estimates, including those related to clinical trial accruals, fair value of liabilities, common stock and stock-based awards and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates.

Fair Value of Financial Instruments

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

Page 8 of 68


 

Cash and Cash Equivalents

Cash equivalents include only securities having a maturity of three months or less at the time of purchase. As of March 31, 2017 and December 31, 2016, cash and cash equivalents consisted of bank deposits, cash, commercial paper, cash repurchase agreement investments 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 are included in interest income.

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

Restricted Cash

At March 31, 2017 and December 31, 2016, the Company had restricted cash of $377,000. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):

 

 

March 31, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

 

$

37,639

 

 

$

118,964

 

Restricted cash, current

 

 

127

 

 

 

127

 

Restricted cash, non-current

 

 

250

 

 

 

250

 

Total cash, cash equivalents, and restricted cash

 

$

38,016

 

 

$

119,341

 

The restricted cash, which consists of money market accounts with one of the Company’s financial institutions, serves as collateral for the letters of credit provided as security deposits under the Company’s facility leases. As of March 31, 2017 and December 31, 2016, $127,000 of restricted cash is classified as current assets and relates to the current facility lease that expires on April 14, 2017.

Warrant Liability

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

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 periods ended March 31, 2017 and 2016, the Company’s revenue was 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. The Company’s investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with

Page 9 of 68


 

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 March 31, 2017 and December 31, 2016, the Company had not experienced any credit losses in such accounts or investments.

Revenue Recognition

The Company recognizes revenue when: (i) evidence of an arrangement exists, (ii) fees are fixed or determinable, (iii) services have been delivered, and (iv) collectability is reasonably assured. The Company currently generates revenue 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 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 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. The Company adopted this ASU effective January 1, 2017. The adoption had no impact on the Company’s 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. This ASU is effective beginning January 1, 2017 and the Company assessed that the effects of this ASU had no impact on its consolidated financial statements.

Page 10 of 68


 

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 classifica tion 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, including interim periods. The Company adopted this ASU effective January 1, 2017 and elected to account for forfeitures on an estimated basis. The adoption had no impact on the Company’s 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. This 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 recognized from costs incurred to obtain or fulfill a contract. The Company has not yet finalized its preliminary assessment and conclusions on how the adoption of this ASU will affect its current policies related to revenue recognition. The Company expects to adopt the new revenue standard on January 1, 2018, and through the remainder of 2017, will continue to assess the potential impact of adopting this new standard on any current, new or significantly modified customer contracts. In subsequent quarters, the Company will finalize its selection of transition methods and complete its evaluation of additional disclosures that may be required upon adoption of the new standard.

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 periods ended March 31, 2017 and 2016, 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 March 31, 2017 and 2016:

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Options to purchase common stock

 

 

4,470,187

 

 

 

2,793,404

 

Restricted stock units

 

 

800,658

 

 

 

495,274

 

Warrants to purchase common stock

 

 

1,231,659

 

 

 

30,024

 

Warrants outstanding as of March 31, 2017 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.

Page 11 of 68


 

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

Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. 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 March 31, 2017 and December 31, 2016, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

 

 

March 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

4,779

 

 

$

 

 

$

 

 

$

4,779

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

377

 

 

 

 

 

 

 

 

 

377

 

Money market funds

 

 

14,860

 

 

 

 

 

 

 

 

 

14,860

 

Subtotal

 

 

15,237

 

 

 

 

 

 

 

 

 

15,237

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

31,031

 

 

 

 

 

 

(24

)

 

 

31,007

 

U.S. Treasury bills

 

 

35,033

 

 

 

 

 

 

(35

)

 

 

34,998

 

Commercial paper

 

 

46,400

 

 

 

 

 

 

 

 

 

46,400

 

Subtotal

 

 

112,464

 

 

 

 

 

 

(59

)

 

 

112,405

 

Total

 

$

132,480

 

 

$

 

 

$

(59

)

 

$

132,421

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

37,639

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

94,405

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

27,289

 

Derivative Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

622

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

27,911

 

Page 12 of 68


 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,728

 

 

$

 

 

$

 

 

$

3,728

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash

 

 

377

 

 

 

 

 

 

 

 

 

377

 

Money market funds

 

 

115,236

 

 

 

 

 

 

 

 

 

115,236

 

Subtotal

 

 

115,613

 

 

 

 

 

 

 

 

 

115,613

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

12,969

 

 

 

 

 

 

(7

)

 

 

12,962

 

Commercial paper

 

 

13,950

 

 

 

 

 

 

 

 

 

13,950

 

Subtotal

 

 

26,919

 

 

 

 

 

 

(7

)

 

 

26,912

 

Total

 

$

146,260

 

 

$

 

 

$

(7

)

 

$

146,253

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

118,964

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

26,912

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,874

 

Derivative liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

602

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,476

 

All available-for-sale securities held as of March 31, 2017 had maturities less than one year from the date of acquisition. There were no sales of available-for-sale securities in any of the periods presented. The carrying value of debt securities that were in unrealized loss positions totaled $63.9 million as of March 31, 2017. The Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. The Company anticipates that it will recover the entire amortized cost basis of such debt securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three-month period ended March 31, 2017.

Pursuant to the loan and security agreement with Solar Capital Ltd. (see Note 7), the Company entered into a Success Fee Agreement under which the Company agreed to pay $1.0 million in cash (the "Success Fee") if the Company obtains approval to market plazomicin from the Food and Drug Administration (the "FDA"). If such approval is obtained, the Success Fee shall be due the later of (i) August 5, 2019 or (ii) the date such FDA approval is obtained. The fair value of the Success Fee, approximately $602,000 at December 31, 2016, is recorded as a derivative liability and included in other long-term liabilities on the accompanying condensed consolidated balance sheet. The estimated fair value of the derivative liability as of March 31, 2017 increased by $20,000 to $622,000 from December 31, 2016, as a result of the time value of money, which is presented as change in warrant and derivative liabilities in the Company's condensed consolidated statements of operations for the three-month period ended March 31, 2017.

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 March 31, 2017 would change by approximately $37,000. For the three-month period ended March 31, 2017, there was no change to the key assumptions used in the calculation of the estimated fair value. Any changes in the estimated fair values are presented as changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations.

Page 13 of 68


 

Pursuant to the Private Placement (see Note 2), the Company issued warrants to purchase 1,999,999 shares of common stock at an exercise price of $3.66. The Company classified these warrants as a liability measured at fair value using Black-Scholes. Under certain entity conditions, the holder of a warrant may require the Company to settle the warrant in cash at its estimated fair value using Black-Scholes. On the closing date of the Private Placem ent, June 3, 2016, the $2.6 million initial estimated fair value of the warrants was recorded as a warrant liability on the accompanying condensed consolidated balance sheet. At March 31, 2017 and December 31, 2016, the estimated fair values of the warrant s were approximately $27.3 million and $13.9 million, respectively. The change in the estimated fair value is primarily due to the increase in the Company's stock price and is included in changes in warrant and derivative liabilities in the Company's conde nsed consolidated statements of operations.

In February 2017, certain holders of these warrants exercised warrants to purchase 78,585 shares of common stock. The Company received $0.3 million in proceeds from these warrant exercises. The Company is required to record the exercised warrants at its estimated fair value at the time of exercise, with any change included in changes in warrant and derivative liabilities in the Company’s condensed consolidated statements of operations. The Company estimated the fair value of these exercised warrants at their respective exercise dates to be $1.5 million, an increase of $1.4 million from its initial valuation, at June 3, 2016, of $0.1 million, primarily due to an increase in the Company’s stock price.  

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

 

 

March 31, 2017

 

 

December 31, 2016

 

Expected volatility

 

 

80%

 

 

 

80%

 

Expected term

 

4.2 years

 

 

4.2 years

 

Risk-free interest rate

 

 

1.8%

 

 

 

1.8%

 

Dividend yield

 

 

—%

 

 

 

—%

 

The expected volatility is based on the Company's expected volatility. The expected term is based on the remaining life of the warrants. The risk-free interest rate is obtained from the yields on actively traded U.S. Treasury securities for a period equal to the expected term of the warrants. The dividend yield is zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Should the share price change by 5%, the fair value of the warrant liability as of March 31, 2017 would change by approximately $1.5 million.

Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented as changes in warrant and derivative liabilities in the Company's condensed consolidated statements of operations and were as follows for the three-month period ended March 31, 2017 (in thousands):

 

 

Estimated Fair Value

of Warrant Liability

 

 

Estimated Fair Value

of Derivative Liability

 

Balance of Level 3 Liabilities at December 31, 2016

 

$

13,874

 

 

$

602

 

Change in estimated fair value of warrant liability

 

 

14,936

 

 

 

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

 

 

(1,521

)

 

 

Change in estimated fair value of derivative liability

 

 

 

 

20

 

Balance of Level 3 Liabilities at March 31, 2017

 

$

27,289

 

 

$

622

 

 

4. Balance Sheet Components

Prepaids and other current assets

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

 

 

March 31, 2017

 

 

December 31, 2016

 

Deferred research and development costs

 

$

6,042

 

 

$

660

 

Prepaid expenses

 

 

2,660

 

 

 

1,390

 

Other current assets

 

 

335

 

 

 

139

 

 

 

$

9,037

 

 

$

2,189

 

Page 14 of 68


 

Property and Equipment, net

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

 

 

March 31, 2017

 

 

December 31, 2016

 

Office equipment

 

$

1,071

 

 

$

644

 

Laboratory equipment

 

 

3,989

 

 

 

4,038

 

Leasehold improvements

 

 

1,072

 

 

 

1,072

 

Construction-in-progress

 

 

6,751

 

 

 

1,896

 

 

 

 

12,883

 

 

 

7,650

 

Less: accumulated depreciation and amortization

 

 

(4,434

)

 

 

(4,389

)

Property and equipment, net

 

$

8,449

 

 

$

3,261

 

Depreciation and amortization expense for the three-month periods ended March 31, 2017 and 2016 was $113,000 and $121,000, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

March 31, 2017

 

 

December 31, 2016

 

Accrued clinical and development expenses

 

$

2,394

 

 

$

3,681

 

Payroll and related bonus expenses

 

 

2,788

 

 

 

4,941

 

Other

 

 

1,308

 

 

 

1,076

 

 

 

$

6,490

 

 

$

9,698

 

 

5. License and Collaboration Agreements

Thermo Fisher Scientific, Inc.

In April 2016, the Company entered into an agreement with its collaboration partner, Microgenics Corporation (“Thermo Fisher”), a wholly owned subsidiary of Thermo Fisher Scientific, Inc., to develop and commercialize an assay to support plazomicin. If approved, the Company and Thermo Fisher plan to have a commercial assay for plazomicin available at launch to enable health care professionals to make decisions on safe and efficacious doses of plazomicin. In accordance with the terms of the agreement, the Company is required to make 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 $6,453,000. In further consideration of this agreement, in the event of a successful commercialization of the assay, the Company is required to pay a minimum threshold annual revenue to Thermo Fisher.

As of March 31, 2017, the Company has incurred $1,433,000 in milestone payments and the cost was fully recorded as research and development expense. The Company recorded $915,000 and zero of research and development expense during the three-month periods ending March 31, 2017 and 2016, respectively, under this agreement. In February 2017, the Company announced the achievement of a strategic milestone in its ongoing collaboration to develop an assay enabling therapeutic drug management of plazomicin.

Crystal Biosciences, Inc.

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, technology access fees and research funding were recorded as research and development expense. 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

Page 15 of 68


 

aminoglycoside products. As an up-front fee, the Company issued 97,402 share s 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 agreem ent, 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 perce ntage of annual worldwide net sales of all licensed products, including, if applicable, plazomicin.

Through March 31, 2017, the Company had compensated Ionis $7,000,000 in connection with the first three milestones under the license for the first aminoglycoside product candidate. As of March 31, 2017, 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 $7,114,000 and $5,270,000 under this agreement during the three-month periods ended March 31, 2017 and 2016, respectively.

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 $349,000 and $579,000 under these agreements during the three-month periods ended March 31, 2017 and 2016, 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

Page 16 of 68


 

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 applie d 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 Agreemen t 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 o f 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.

Future principal debt payments on the currently outstanding term loan are payable as follows (in thousands):

 

 

 

March 31, 2017

 

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

 

 

(1,516

)

Less current portion

 

 

(7,292

)

Loan payable, long-term

 

$

18,192

 

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 $0.7 million and $0.4 million for the three-month periods ended March 31, 2017 and 2016, 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 March 31, 2017, the Company had sold 1,105,549 shares of common stock under the Sales Agreement, at a weighted-average price of approximately $4.82 per share for aggregate gross proceeds of $5.3 million and net proceeds of $5.1 million after deducting the sales commissions and offering expenses. As of March 31, 2017, $24.7 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. Issuance costs of $0.3 million were offset against equity as a reduction from gross proceeds.

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 March 31, 2017, using Black-Scholes, the Company estimated the fair value of the remaining warrants outstanding to be $27.3 million and recorded a charge of $11.3 million and $13.4 million, for the increase in the liability, in the condensed consolidated statements of operations, for the year ended December 31, 2016 and three-month period ended March 31, 2017 , respectively.

Page 17 of 68


 

Equity Incentive Plans

2014 Equity Incentive Award 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, 2017, the compensation committee of the board of directors approved an evergreen increase of 1,425,522 shares that may be granted in accordance with the terms of the 2014 Plan. As of March 31, 2017, 909,040 shares were available for future issuance under the 2014 Plan.

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 March 31, 2017, a total of 1,600,000 shares of common stock have been authorized under the Inducement Plan, including the additional 450,000 shares that became available resulting from an amendment adopted by the board of directors as of February 22, 2017.  As of March 31, 2017, 356,588 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, 2017, the compensation committee of the board of directors approved an evergreen increase of 178,190 shares that may be granted in accordance with the terms of the ESPP. As of March 31, 2017, 225,261 shares of common stock have been issued to employees participating in the ESPP, and 461,406 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 March 31, 2017 and December 31, 2016 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 March 31, 2017, a total of 862,720 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.

Page 18 of 68


 

The following table summarizes sto ck 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, December 31, 2016

 

 

639,374

 

 

 

3,540,293

 

 

$

6.31

 

 

 

7.98

 

Additional shares authorized

 

 

1,875,522

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(1,067,657

)

 

 

1,067,657

 

 

$

23.23

 

 

 

 

 

Options exercised

 

 

 

 

 

(54,585

)

 

$

9.79

 

 

 

 

 

Options cancelled

 

 

83,178

 

 

 

(83,178

)

 

$

6.61

 

 

 

 

 

RSUs granted

 

 

(288,064

)

 

 

 

 

 

 

 

 

 

 

 

RSUs cancelled

 

 

23,275

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

 

1,265,628

 

 

 

4,470,187

 

 

$

10.31

 

 

 

7.90

 

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 Months Ended March 31,

 

 

 

2017

 

 

2016

 

Research and development

 

$

1,602

 

 

$

454

 

General and administrative

 

 

1,090

 

 

 

373

 

Total

 

$

2,692

 

 

$

827

 

Stock based compensation expense for the three-month period ended March 31, 2017 includes $0.7 million of expense that relate to stock options and restricted stock units held by the former Chief Medical Officer, which were modified upon his resignation in March 2017, including $0.7 million related to such modifications.

As of March 31, 2017, approximately $20,534,000 of total unrecognized stock-based compensation expense related to unvested stock options is expected to be recognized over a weighted-average period of 3.37 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 March 31,

 

 

 

2017

 

 

2016

 

Expected term

 

6.0 years

 

 

6.0 years

 

Expected volatility

 

80%–81%

 

 

 

73%

 

Risk-free interest rate

 

2.0%–2.1%

 

 

 

1.4%

 

Expected dividend yield

 

 

—%

 

 

 

—%

 

 

Stock Options Granted to Non-Employees

During the three-month periods ended March 31, 2017 and 2016, the Company did not grant any stock options to non-employees. The Company recorded non-employee stock-based compensation expense of approximately $219,000 and zero for the three-month periods ended March 31, 2017 and 2016, respectively. The Company measures the estimated fair value of the award for each period until the award is fully vested. The non-employee stock-based compensation expense, during the three-month period ended March 31, 2017 , was estimated using Black-Scholes with the following assumptions:

 

 

Three Months Ended March 31,

 

 

 

2017

 

Expected term

 

0.51 years

 

Expected volatility

 

 

77%

 

Risk-free interest rate

 

 

0.9%

 

Expected dividend yield

 

 

—%

 

Page 19 of 68


 

Restricted Stock Units Granted to Employees

During the three-month period ended March 31, 2017, the Company granted RSUs to employees to receive 288,064 shares of common stock under the Company's stock plans with a weighted-average estimated grant-date fair value of $21.90 per share. RSUs generally vest annually over a 4-year service period and vesting is contingent on continued service. As of March 31, 2017, there were unrecognized compensation costs of $8,401,000 related to outstanding RSUs, which are expected to be recognized over a weighted-average period of 3.33 years.

A summary of RSU activity is as follows:

 

 

RSU Awards Outstanding