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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2012

 

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

For the Transition Period from              to             

Commission File Number: 001-35405

 

 

CEMPRA, INC.

(Exact name of registrant specified in its charter)

 

 

 

Delaware   2834   45-4440364

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

6340 Quadrangle Drive, Suite 100

Chapel Hill, NC 27517

(Address of Principal Executive Offices)

(919) 313-6601

(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  ¨

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

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

 

Large accelerated filer    ¨   Accelerated filer   ¨
Non-accelerated filer    x (Do not check if a smaller reporting company)   Smaller reporting company   ¨

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

As of November 5, 2012 there were 24,903,774 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 


Table of Contents

CEMPRA, INC.

TABLE OF CONTENTS

 

          Page  

PART I – FINANCIAL INFORMATION

     1   

Item 1.     Financial Statements

     1   

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

     17   

Item 3.      Quantitative and Qualitative Disclosures about Market Risk

     27   

Item 4.     Controls and Procedures

     27   

PART II – OTHER INFORMATION

     28   

Item 6.     Exhibits

     28   

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CEMPRA, INC.

(A Development Stage Company)

Consolidated Balance Sheets

 

     December 31,
2011
    September 30,
2012
 
           (Unaudited)  

Assets

    

Current assets

    

Cash and equivalents

   $ 15,602,264      $ 51,642,824   

Prepaid expenses

     284,040        160,682   

Deferred offering expenses

     880,742        —     
  

 

 

   

 

 

 

Total current assets

     16,767,046        51,803,506   
  

 

 

   

 

 

 

Furniture, fixtures and equipment, net

     81,920        48,477   

Deposits

     9,870        321,394   
  

 

 

   

 

 

 

Total assets

   $ 16,858,836      $ 52,173,377   
  

 

 

   

 

 

 

Liabilities

    

Current liabilities

    

Accounts payable

   $ 2,980,878      $ 1,326,636   

Accrued expenses

     545,300        235,960   

Accrued payroll and benefits

     421,101        502,301   

Warrant liability

     1,120,849        —     

Current portion of long-term debt

     —          1,464,863   
  

 

 

   

 

 

 

Total current liabilities

     5,068,128        3,529,760   
  

 

 

   

 

 

 

Convertible notes payable

     4,457,927        —     

Long-term debt

     9,503,895        8,297,319   
  

 

 

   

 

 

 

Total liabilities

     19,029,950        11,827,079   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Redeemable Convertible Preferred Shares

    

Class A redeemable convertible preferred shares; 21,773,669 shares designated, 2,291,966 shares issued and outstanding (liquidation preference of $2,721,167) at December 31, 2011 and no shares designated, issued and outstanding at September 30, 2012 (liquidation preference of $0)

     25,809,697        —     

Class B redeemable convertible preferred shares; 7,692,308 shares designated, 809,717 shares issued and outstanding (liquidation preference of $1,178,480) at December 31, 2011 and no shares designated, issued and outstanding at September 30, 2012 (liquidation preference of $0)

     11,281,512        —     

Class C redeemable convertible preferred shares; 42,649,063 shares designated, 4,489,375 shares issued and outstanding at December 31, 2011 (liquidation preference of $5,697,455) and no shares designated, issued and outstanding at September 30, 2012 (liquidation preference of $0)

     57,422,827        —     

Shareholder’s Equity (Deficit)

    

Common shares; 100,000,000 shares authorized, no par value; 533,839 shares issued and outstanding at December 31, 2011 and none issued and outstanding at September 30, 2012

     —          —     

Common stock; $.001 par value; none issued and outstanding at December 31, 2011 and 80,000,000 shares authorized; 21,039,313 shares issued and outstanding at September 30, 2012

     —          21,039   

Additional paid-in capital

     —          154,982,797   

Deficit accumulated during the development stage

     (96,685,150     (114,657,538
  

 

 

   

 

 

 

Total shareholders’ equity (deficit)

     (96,685,150     40,346,298   
  

 

 

   

 

 

 

Total liabilities, redeemable convertible preferred shares and shareholders’ equity (deficit)

   $ 16,858,836      $ 52,173,377   
  

 

 

   

 

 

 

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

 

1


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,     Period from November 18,
2005 (Inception) to
September 30,

2012
 
           2011                     2012             2011     2012    

Revenues

   $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

          

Research and development

     6,660,903        3,156,011        15,413,938        12,456,062        79,314,544   

General and administrative

     965,002        1,494,824        2,650,544        4,244,278        19,738,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,625,905        4,650,835        18,064,482        16,700,340        99,052,825   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (7,625,905     (4,650,835     (18,064,482     (16,700,340     (99,052,825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

          

Interest income

     393        675        1,414        106,589        1,472,135   

Interest expense

     (290,577     (330,955     (290,577     (1,065,049     (5,307,553

Other income

     —          —          —          —          488,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (290,184     (330,280     (289,163     (958,460     (3,346,460
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

     (7,916,089     (4,981,115     (18,353,645     (17,658,800     (102,399,285

Accretion of redeemable convertible preferred shares

     (940,768     —          (2,822,296     (313,588     (14,002,842
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (8,856,857   $ (4,981,115   $ (21,175,941     (17,972,388   $ (116,402,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss attributable to common shareholders per share

   $ (16.59   $ (0.24   $ (40.49     (0.97  
  

 

 

   

 

 

   

 

 

   

 

 

   

Basic and diluted weighted average shares outstanding

     533,839        21,038,008        522,943        18,450,507     
  

 

 

   

 

 

   

 

 

   

 

 

   

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

 

2


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Redeemable Preferred Shares and Shareholders’ Equity (Deficit)

 

    Series A
Preferred Shares
    Series B
Preferred Shares
    Series C
Preferred Shares
    Common Shares     Common Stock     Additional
Paid-In

Capital
    Deficit
During the
Development

Stage
    Total
Shareholders’
Equity

(Deficit)
 
  Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount        

Balance as of November 18, 2005 (inception date)

    —        $ —          —        $ —          —        $ —          —        $ —          —        $ —        $ —        $ —        $ —     

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (26,463     (26,463
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2005

    —          —          —          —          —          —          —          —          —          —          —          (26,463     (26,463

Issuance of common shares to founders

    —          —          —          —          —          —          179,825        —          —          —          171        —          171   

Issuance of common shares for service

    —          —          —          —          —          —          30,702        —          —          —          14,583        —          14,583   

Issuance of common shares for license agreement

    —          —          —          —          —          —          64,311        —          —          —          91,362        —          91,362   

Issuance of Series A preferred share, net of share issuance costs of $150,570

    789,191        7,346,745        —          —          —          —          —          —          —          —          —          —          —     

Accretion of redeemable convertible preferred shares

    —          232,782        —          —          —          —          —          —          —          —          (122,443     (110,339     (232,782

Share-based compensation

    —          —          —          —          —          —          —          —          —          —          16,327        —          16,327   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (2,228,948     (2,228,948
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2006

    789,191        7,579,527        —          —          —          —          274,838        —          —          —          —          (2,365,750     (2,365,750

Issuance of common shares upon exercise of options

    —          —          —          —          —          —          8,947        —          —          —          5,250        —          5,250   

Issuance of Series A preferred shares, net of issuance costs of $20,435

    1,557,895        14,779,563        —          —          —          —          —          —          —          —          —          —          —     

Conversion of Series A preferred shares to common shares upon financing participation default

    (55,120     (523,644     —          —          —          —          55,120        —          —          —          523,644        —          523,644   

Issuance of common shares to CEO

    —          —          —          —          —          —          77,368        —          —          —          124,950        —          124,950   

Issuance of common shares for license agreement

    —          —          —          —          —          —          61,335        —          —          —          99,055        —          99,055   

Issuance of Series B preferred shares, net of issuance costs of $43,682

    —          —          809,717        9,956,318        —          —          —          —          —          —          —          —          —     

Accretion of redeemable convertible preferred shares

    —          1,526,057        —          100,000        —          —          —          —          —          —          (808,919     (817,138     (1,626,057

Share-based compensation

    —          —          —          —          —          —          —          —          —          —          56,020        —          56,020   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (8,075,240     (8,075,240
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

3


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Redeemable Preferred Shares and Shareholders’ Equity (Deficit)

 

    Series A
Preferred Shares
    Series B
Preferred Shares
    Series C
Preferred Shares
    Common Shares     Common Stock     Additional
Paid-In

Capital
    Deficit
During the
Development

Stage
    Total
Shareholders’
Equity

(Deficit)
 
  Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount        

Balance as of December 31, 2007

    2,291,966        23,361,503        809,717        10,056,318        —          —          477,608        —          —          —          —          (11,258,128     (11,258,128

Issuance of common shares upon exercise of options

    —          —          —          —          —          —          13,469        —          —          —          13,113        —          13,113   

Accretion of redeemable convertible preferred shares

    —          1,731,269        —          806,390        —          —          —          —          —          —          (106,124     (2,431,536     (2,537,660

Share-based compensation

    —          —          —          —          —          —          —          —          —          —          93,011        —          93,011   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (14,902,317     (14,902,317
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2008

    2,291,966        25,092,772        809,717        10,862,708        —          —          491,077        —          —          —          —          (28,591,981     (28,591,981

Issuance of Series C preferred shares, net of issuance cost of $251,733

    —          —          —          —          2,488,675        25,248,268        —          —          —          —          —          —          —     

Series C Warrant

    —          —          —          —          —          (5,174,381     —          —          —          —          —          —          —     

Accretion of redeemable convertible preferred shares

    —          667,997        —          301,946        —          1,321,490        —          —          —          —          (123,404     (2,168,029     (2,291,433

Beneficial conversion costs of Series B preferred shares

    —          —          —          73,995        —          —          —          —          —          —          —          (73,995     (73,995

Share-based compensation

    —          —          —          —          —          —          —          —          —          —          123,404        —          123,404   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (18,611,814     (18,611,814
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2009

    2,291,966        25,760,769        809,717        11,238,649        2,488,675        21,395,377        491,077        —          —          —          —          (49,445,819     (49,445,819

Issuance of common shares upon exercise of options

    —          —          —          —          —          —          3,947        —          —          —          8,250        —          8,250   

Issuance of Series C preferred shares, net of issuance cost of $9,279

    —          —          —          —          2,000,700        20,490,721        —          —          —          —          —          —          —     

Series C Warrant

    —          —          —          —          —          8,597,116        —          —          —          —          —          —          —     

Accretion of redeemable convertible preferred shares

    —          24,464        —          6,390        —          3,207,407        —          —          —          —          (174,061     (3,064,202     (3,238,263

Beneficial conversion costs of Series B preferred shares

    —          —          —          30,082        —          —          —          —          —          —          —          (30,082     (30,082

Share-based compensation

    —          —          —          —          —          —          —          —          —          —          165,811        —          165,811   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (19,674,924     (19,674,924
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2010

    2,291,966        25,785,233        809,717        11,275,121        4,489,375        53,690,621        495,024        —          —          —          —          (72,215,027     (72,215,027

Issuance of common shares upon exercise of options

    —          —          —          —          —          —          38,815        —          —          —          69,932        —          69,932   

 

4


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Redeemable Preferred Shares and Shareholders’ Equity (Deficit)

 

    Series A
Preferred Shares
    Series B
Preferred Shares
    Series C
Preferred Shares
    Common Shares     Common Stock     Additional
Paid-In

Capital
    Deficit
During the
Development

Stage
    Total
Shareholders’
Equity

(Deficit)
 
  Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount        

Accretion of redeemable convertible preferred shares

    —          24,464        —          6,391        —          3,732,206        —          —          —          —          (513,717     (3,249,344     (3,763,061

Share-based compensation

    —          —          —          —          —          —          —          —          —          —          443,785        —          443,785   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          (21,220,779     (21,220,779
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

    2,291,966        25,809,697        809,717        11,281,512        4,489,375        57,422,827        533,839        —          —          —          —          (96,685,150     (96,685,150

Issuance of common stock upon exercise of options (unaudited)

    —          —          —          —          —          —          —          —          10,351        10        34,498        —          34,508   

Issuance of common stock upon initial public offering, net of issuance costs of $4.7 million (unaudited)

    —          —          —          —          —          —          —          —          9,660,000        9,660        53,184,681        —          53,194,341   

Conversion of common shares to common stock (unaudited)

    —          —          —          —          —          —          (533,839     —          533,839        534        (534     —          —     

Accretion of redeemable convertible preferred shares (unaudited)

    —          2,038        —          533        —          311,017        —          —          —          —          —          (313,588     (313,588

Conversion of redeemable convertible preferred shares to common stock upon initial public offering (unaudited)

    (2,291,966     (25,811,735     (809,717     (11,282,045     (4,489,375     (57,733,844     —          —          9,958,502        9,959        94,817,665        —          94,827,624   

Conversion of convertible notes payable to common stock upon initial public offering (unaudited)

    —          —          —          —          —          —          —          —          876,621        876        4,723,658        —          4,724,534   

Reclassification of warrant liability to additional paid-in capital (unaudited)

    —          —          —          —          —          —          —          —          —          —          1,033,647        —          1,033,647   

Share-based compensation (unaudited)

    —          —          —          —          —          —          —          —          —          —          1,189,182        —          1,189,182   

Net loss (unaudited)

    —          —          —          —          —          —          —          —          —          —          —          (17,658,800     (17,658,800
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012 (Unaudited)

    —        $ —          —        $ —          —        $ —          —        $ —          21,039,313      $ 21,039      $ 154,982,797      $ (114,657,538   $ 40,346,298   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months ended September 30,     Period from
November 18, 2005
(Inception) to
September 30,
2012
 
     2011     2012    

Operating activities

      

Net loss

   $ (18,353,645   $ (17,658,800   $ (102,399,285

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

      

Depreciation

     57,092        41,880        236,583   

Issuance of common shares for service

     —          —          14,583   

Issuance of common shares for license agreement

     —          —          190,418   

Share-based compensation

     335,331        1,189,182        2,212,490   

Change in fair value of warrant liability

     74,679        (87,204     3,330,801   

Amortization of debt discount

     138,029        267,949        662,249   

Changes in operating assets and liabilities

      

Prepaid expenses

     (203,739     123,358        (160,682

Deposits

     42,963        (311,524     (321,394

Accounts payable

     (677,255     (1,654,242     1,326,634   

Accrued expenses

     2,414,498        (52,394     492,905   

Accrued payroll and benefits

     80,726        81,200        502,300   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (16,091,321     (18,060,595     (93,912,398
  

 

 

   

 

 

   

 

 

 

Investing activities

      

Purchases of furniture, fixtures and equipment

     (10,057     (8,437     (285,059

Purchase of investments

     —          —          (14,306,177

Proceeds from sale of investments

     —          —          14,306,177   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (10,057     (8,437     (285,059
  

 

 

   

 

 

   

 

 

 

Financing activities

      

Proceeds from borrowing on convertible promissory notes

     5,000,000        —          8,100,000   

Proceeds from borrowing on long-term debt

     —          —          10,000,000   

Proceeds from issuance of common shares

     69,931        34,508        131,223   

Proceeds from issuance of common stock, net of underwriting discounts

     —          54,777,800        54,777,800   

Payment of share issuance costs

     (44,375     —          (475,699

Payment of debt issuance costs

     —          —          (306,898

Payment of offering costs

     —          (702,716     (1,583,458

Proceeds from issuance of Series A redeemable convertible preferred shares

     —          —          19,099,998   

Accrued interest converted into Series A redeemable convertible preferred shares

     —          —          97,315   

Proceeds from issuance of Series B redeemable convertible preferred shares

     —          —          10,000,000   

Proceeds from issuance of Series C redeemable convertible preferred shares

     —          —          46,000,000   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     5,025,556        54,109,592        145,840,281   
  

 

 

   

 

 

   

 

 

 

Net change in cash and equivalents

     (11,075,822     36,040,560        51,642,824   

Cash and equivalents at beginning of the period

     20,047,997        15,602,264        —     
  

 

 

   

 

 

   

 

 

 

Cash and equivalents at end of the period

   $ 8,972,175      $ 51,642,824      $ 51,642,824   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information

      

Cash paid for interest

   $ —        $ 679,111      $ 679,111   

Supplemental disclosure of non-cash investing and financing activities

      

Accretion of Series A redeemable convertible preferred shares

   $ 18,348      $ 2,038      $ 4,209,071   

Accretion of Series B redeemable convertible preferred shares

   $ 4,793      $ 533      $ 1,221,650   

Accretion of Series C redeemable convertible preferred shares

   $ 2,799,155      $ 311,017      $ 8,572,124   

Beneficial conversion costs of Series B preferred shares

   $ —        $ —        $ 104,077   

Notes payable converted into Series A redeemable convertible preferred shares

   $ —        $ —        $ 3,100,000   

Allocation of the Class C proceeds to the Class C Purchase Option

   $ —        $ —        $ 5,174,381   

Conversion of the Class C Purchase Option

   $ —        $ —        $ (8,597,116

Allocation of the convertible note proceeds to warrant

   $ (852,485   $ —        $ 852,485   

Allocation of the long-term debt proceeds to warrant

   $ —        $ —        $ 273,094   

Conversion of convertible notes payable and accrued interest into common stock

   $ —        $ 4,724,534      $ 4,724,534   

Conversion of redeemable convertible preferred shares into common stock

   $ —        $ 94,827,624      $ 94,827,624   

Reclassification of warrant liability to additional paid-in capital

   $ —        $ 1,033,647      $ 1,033,647   

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

 

6


Table of Contents
For the quarterly period ended September 30, 2012

CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

1. Description of Business

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

On February 2, 2012, Cempra Holdings, LLC converted from a Delaware limited liability company to a Delaware corporation and was renamed Cempra, Inc. As a result of the corporate conversion, the holders of both common and preferred shares of Cempra Holdings, LLC became holders of shares of common stock of Cempra, Inc. Holders of options to purchase common shares of Cempra Holdings, LLC became holders of options to purchase shares of common stock of Cempra, Inc. Holders of notes convertible into preferred shares of Cempra Holdings, LLC and associated warrants exercisable for preferred shares of Cempra Holdings, LLC became holders of shares of common stock and warrants to purchase shares of common stock of Cempra, Inc.

The Company is in its development stage as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, Development Stage Entities. The Company’s activities since inception have consisted principally of acquiring product and technology rights, raising capital and performing research and development activities. Since inception, the Company has incurred significant losses from operations and expects losses to continue for the foreseeable future. The Company’s success depends primarily on the successful development and regulatory approval of its product candidates and its ability to obtain adequate financing as discussed below.

The Company completed its initial public offering (“IPO”) in February 2012, issuing 9,660,000 shares of common stock at a price of $6.00 per share, resulting in net proceeds of approximately $53.2 million, net of offering costs.

As of September 30, 2012, the Company has incurred losses since inception of $102.4 million. The Company expects to continue to incur losses and require additional financial resources to advance its products to either the commercial stage or liquidity events.

There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.

2. Basis of Presentation

Principles of Consolidation and Basis of Presentation

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

Unaudited Interim Financial Data

The accompanying interim consolidated financial statements are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2011 contained in the Company’s Annual Report on Form 10-K. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the

 

7


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

Company’s financial position as of September 30, 2012 and the results of operations for the three and nine months ended September 30, 2011 and 2012 and cash flows for the nine months ended September 30, 2011 and 2012 and the period from inception through September 30, 2012. The December 31, 2011 consolidated balance sheet included herein was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for complete financial statements.

Use of Estimates

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

New Accounting Pronouncements

In May 2011, the FASB issued amended guidance on fair value measurements. This amended accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This accounting standard is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard did not impact the Company’s financial position or results of operations.

In June 2011, the authoritative guidance for presentation of comprehensive income was amended to eliminate the option to present other comprehensive income and its components in the statement of changes in shareholders’ deficit. Companies can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. The Company adopted this new guidance on January 1, 2012, as required and it did not have an impact on the Company’s financial position or results of operations.

In December 2011, the FASB issued new guidance impacting the presentation of certain items on the balance sheet. The new guidance requires an entity to disclose both gross and net information about both instruments and transactions that are eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of this guidance is not expected to impact the Company’s consolidated financial position, results of operations or cash flows, but may result in certain additional disclosures.

3. Fair Value of Financial Instruments

The carrying values of cash equivalents, prepaid expenses, and accounts payable at September 30, 2012 approximated their fair values due to the short-term nature of these items. At December 31, 2011, the Company held warrant liabilities that were required to be measured at fair value on a recurring basis. The warrant liability was reclassified to additional paid-in capital upon completion of the Company’s IPO in February 2012.

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

 

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Table of Contents

CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

At December 31, 2011 and September 30, 2012, financial instruments and respective fair values have been classified as follows:

 

     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance at
December 31,
2011
 

Assets:

           

Money Market Funds

   $ 12,634,219       $ —         $ —           12,634,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value:

   $ 12,634,219       $ —         $ —         $ 12,634,219   

Liabilities:

           

Warrant liabilities

   $ —         $ —         $ 1,120,849       $ 1,120,849   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities at Fair Value:

   $ —         $ —         $ 1,120,849       $ 1,120,849   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance at
September 30,
2012
 
                          (Unaudited)  

Assets:

           

Money Market Funds

   $ 48,913,252       $ —         $ —           48,913,252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value:

   $ 48,913,252       $ —         $ —         $ 48,913,252   
  

 

 

    

 

 

    

 

 

    

 

 

 

The change in the fair value measurement using significant unobservable inputs (Level 3) is summarized below:

 

Balance at December 31, 2011

   $ 1,120,849   
  

 

 

 

Change in fair value recorded as interest expense (Unaudited)

     17,461   

Change in fair value recorded as interest income (Unaudited)

     (104,663

Reclassification of August 2011 Warrant to additional paid-in capital (Unaudited)

     (865,216

Reclassification of Hercules Warrant to additional paid-in capital (Unaudited)

     (168,431
  

 

 

 

Balance at September 30, 2012 (Unaudited)

   $ —     
  

 

 

 

 

9


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

The warrant liability represents the Company’s allocation of a portion of the proceeds from the August 2011 Notes and the December 2011 Note (both as defined in Note 6). The allocation of the proceeds from the August 2011 Notes and the December 2011 Note was based on the fair value of the warrant liability on the dates of grant. The Company accounted for the warrant liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity, which requires that a purchase option to acquire redeemable equity (either puttable or mandatorily redeemable) be reported as liabilities. The Company measured the fair value of the warrant liability based upon contemporaneous valuations. The August 2011 Warrants (as defined in Note 6) utilized the Black-Scholes pricing model while the Hercules Warrant (as defined in Note 6) utilized the Binomial model at each balance sheet date. The Company recorded changes in the fair value of the warrant liability as interest expense or interest income, as applicable.

The Company used significant assumptions in estimating the fair value of the warrant liability including the estimated volatility, risk free interest rate, estimated fair value of the preferred shares, and the estimated life of the warrant. These assumptions were used to establish an expected set of cash flows which were probability-weighted and discounted to present value to determine a fair value.

The August 2011 Warrant liability and Hercules Warrant liability were reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock, in connection with the Company’s IPO.

The estimated fair value of our August 2011 Notes (see Note 6) at December 31, 2011 was $5.0 million and its carrying value was $4.5 million. Fair value was determined based on available market information and appropriate valuations methodologies. The August 2011 Notes were converted to common stock in February 2012 when the Company completed its IPO.

The December 2011 Note (see Note 6) has a variable interest rate and accordingly, its carrying value approximates its fair value. At December 31, 2011 and September 30, 2012, the carrying value was $9.5 million and $9.8 million, respectively.

4. Research and License Agreements

Optimer Pharmaceuticals, Inc.

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

In exchange for this license, during 2006 and 2007, the Company issued an aggregate of 125,646 common shares with a total fair value of $190,418 to Optimer. These issuances to Optimer were expensed as incurred in research and development expense.

In July 2010, the Company paid a $500,000 milestone payment to Optimer after the successful completion of its first solithromycin (CEM-101) Phase 1 program. In June 2012, the Company received feedback from the FDA on the protocol for the Company’s planned pivotal Phase 3 trial for oral solithromycin. Based on the feedback received, the Company concluded that the next milestone of $1,000,000 due to Optimer was met in June 2012, which was paid in July 2012. Both milestones were expensed as incurred in research and development expense. Under the terms of the Optimer Agreement, the Company will owe Optimer additional payments, contingent upon the achievement of various development, regulatory and commercialization milestone events. The aggregate amount of such milestone payments the Company may need to pay is based in part on the number of products developed under the agreement and would total $27,500,000 (including payments made to date) if four products are developed through FDA approval. The Company will also pay tiered mid-single-digit royalties based on the amount of annual net sales of its approved products.

The Scripps Research Institute

Effective June 12, 2012, the Company entered into a license agreement with The Scripps Research Institute (“TSRI”), whereby TSRI licensed to the Company rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to the Company are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, the Company paid a one-time only, non-refundable license issue fee in the amount of $350,000 which was charged to research and development expense in the second quarter of 2012. The Company’s rights under the agreement are subject to certain customary rights of the U.S. government that arise or result from TSRI’s receipt of research support from the U.S. government.

 

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Table of Contents

CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

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

Under the terms of the agreement, the Company is also required to pay additional fees on royalties, sublicensing and milestone payments if the Company, an affiliate with TSRI, or a sublicensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

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

5. Accrued Expenses

Accrued expenses are comprised of the following as of:

 

     December 31,
2011
     September 30,
2012
 
            (Unaudited)  

Accrued professional fees

     281,907       $ 133,028   

Accrued interest

     236,000         79,583   

Deferred rent

     27,393         23,349   
  

 

 

    

 

 

 

Total accrued expenses

     545,300       $ 235,960   
  

 

 

    

 

 

 

 

11


Table of Contents

CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

6. Unsecured Convertible Promissory Note & Debt

Notes payable and debt consist of:

 

     December 31,
2011
     September 30,
2012
 
            (Unaudited)  

10.0% Convertible Notes due 2016, net of unamortized discount of $542,073 and $0 * at December 31, 2011 and September 30, 2012, respectively

   $ 4,457,927       $ —     

9.55% Long-term Debt due 2015, net of unamortized discount of $896,105 and $637,818 * at December 31, 2011 and September 30, 2012, respectively

     9,503,895         9,762,182   
  

 

 

    

 

 

 

Total notes payable and long-term debt

     13,961,822         9,762,182   

Less:

     

Current maturities

     —           (1,464,863
  

 

 

    

 

 

 

Total

   $ 13,961,822       $ 8,297,319   
  

 

 

    

 

 

 

 

* The fair value of the warrants embedded within the 10.0% Convertible Notes ($847,755) and the 9.55% Long-term Debt ($273,094) is separately classified as a warrant liability at December 31, 2011 in the consolidated balance sheets. Upon the completion of the IPO in February 2012, the fair value of the warrant liability was reclassified to additional paid-in capital.

10% Unsecured Convertible Promissory Note

In August 2011, the Company issued 10.0% unsecured convertible notes (the “August 2011 Notes”) in the original aggregate principal amount of $5,000,000.

Upon completion of the IPO, the August 2011 Notes and accrued interest of $5.3 million converted into 876,621 shares of common stock.

In connection with the issuance of the August 2011 Notes, the Company issued warrants (the “August 2011 Warrants”) that have a term of seven years. The August 2011 Warrants gave holders the right to purchase a certain number of Company shares or securities at a specified exercise price with respect to the first to occur of several scenarios. Upon completion of the IPO, the warrants became exercisable for 208,332 shares of the Company’s common stock at an exercise price of $6.00 per share and the related warrant liability was reclassified to additional paid-in capital.

9.55% Long-term Debt

In December 2011, the Company entered into a $20,000,000 loan and security agreement (the “December 2011 Note”) with Hercules Technology Growth Capital, Inc. (“Hercules”) and borrowed $10,000,000 upon closing. The principal amount outstanding under the $10,000,000 borrowing bears interest at the greater of (i) 9.55%, or (ii) the sum of 9.55% plus the prime lending rate, as published by the Wall Street Journal, minus 3.25% per annum. The terms of the December 2011 Note agreement provided that the Company could, at any time prior to October 1, 2012, request another borrowing in the aggregate amount of $10,000,000. The Company elected not to request the additional borrowing and let the option expire on September 30, 2012. The Company will be required to make interest only payments through

 

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CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

March 31, 2013, which can be extended to June 30, 2013 upon satisfaction of certain conditions. Principal and interest payments will start after March 31, 2013 or any later extended date. The principal balance outstanding on the loan agreement and all accrued but unpaid interest thereunder will be due and payable on December 1, 2015. In addition, on the earliest to occur of (i) the loan maturity date, (ii) the date that the Company prepays all of the outstanding advances and accrued interest, or (iii) the date that all of the advances and interest become due and payable, the Company must pay Hercules a fee of $400,000. The Company granted Hercules a security interest in all of its assets, except intellectual property. The Company’s obligations to Hercules include restrictions on borrowing, asset transfers, placing liens or security interests on the Company’s assets including its intellectual property, mergers and acquisitions and distributions to stockholders.

In connection with the loan agreement, the Company entered into a warrant agreement with Hercules (the “Hercules Warrant”), under which Hercules has the right to purchase 39,038 shares of the Company’s common stock. The exercise price per share is equal to $10.25 per share subject to adjustment in the event of a merger, reclassification, subdivision or combination of shares or stock dividend and subject also to antidilution protection. The Hercules Warrant expires on December 20, 2021. Proceeds equal to the fair value of the Hercules Warrant were recorded as a liability at the date of issuance and the borrowings under the December 2011 Note will be increased to equal the face amount of the borrowings plus interest through interest expense over the term of the loan using the effective interest method.

Upon completion of the IPO, the Hercules Warrant became exercisable for 39,038 shares of the Company’s common stock at an exercise price of $10.25 per share and the related warrant liability was reclassified to additional paid-in capital.

Scheduled Maturities:

Scheduled maturities of long-term debt are as follows:

 

Year Ending December 31:

  

2012

   $ —     

2013

     2,226,610   

2014

     3,235,386   

2015(1)

     4,938,004   

Total

   $ 10,400,000   
  

 

 

 

Less: Unamortized discount

     (637,818

Less: Current portion of long-term debt

     (1,464,863
  

 

 

 

Long-term debt

   $ 8,297,319   
  

 

 

 

 

(1) On the date that all of the principal and interest of the December 2011 Note become due and payable, the Company must pay Hercules an end of term fee of $400,000, which is represented in year 2015 of the table above.

7. Shareholders’ Equity (Deficit)

Initial Public Offering

During February 2012, the Company completed its IPO issuing 9,660,000 shares of common stock, at a price of $6.00 per share, resulting in net proceeds to the Company of approximately $53.2 million after deducting underwriting discounts of $3.2 million and offering costs of $1.6 million.

In connection with the IPO, all of the Company’s outstanding preferred shares, including accrued yield of $13.7 million, automatically converted into a total of 9,958,502 shares of its common stock and the preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock. In addition, the Company’s August 2011 Notes and related accrued interest converted into 876,621 shares of common stock.

 

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CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

8. Stock Option Plans

The Company adopted the 2006 Stock Plan in January 2006 (“the 2006 Plan”). The 2006 Plan provided for the granting of incentive share options, nonqualified share options and restricted shares to Company employees, representatives and consultants.

The Company’s board of directors adopted the 2011 Equity Incentive Plan in October 2011 (the “2011 Plan”) and authorized the issuance of up to 1,526,316 shares for future issuances under the 2011 Plan. As of September 30, 2012, there were 1,063,399 option shares available under the 2011 Plan.

The 2011 Plan became effective upon the conversion of Cempra Holdings, LLC from a limited liability company to a corporation on February 2, 2012 and was adopted by the Company’s shareholders immediately thereafter. Upon effectiveness of the 2011 Plan, the Company eliminated the authorization for any unissued shares previously reserved under the Company’s 2006 Plan. The stock awards previously issued under the 2006 Plan remain in effect in accordance with the terms of the 2006 Plan.

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

 

    Number of
Options
    Weighted Average
Exercise Price
    Weighted  Average
Contractual

Term (in years)
    Aggregate
Intrinsic Value  (1)
 

Outstanding — December 31, 2011

    715,811        2.00       
 

 

 

       

Granted

    476,671        7.45       

Exercised

    (10,351     3.33       

Forfeited

    (19,529     5.86       

Expired

    —          —         
 

 

 

       

Outstanding — September 30, 2012

    1,162,602        4.18        7.92      $ 3,854,322   
 

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable — September 30, 2012

    570,663        2.67        6.83      $ 2,735,139   
 

 

 

   

 

 

   

 

 

   

 

 

 

Vested and expected to vest at September 30, 2012 (2)

    1,105,742      $ 4.09        7.86      $ 3,754,715   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Intrinsic value is the excess of the fair value of the underlying common shares as of September 30, 2012 over the weighted-average exercise price.
(2) The number of stock options expected to vest takes into account an estimate of expected forfeitures.

The following table summarizes certain information about all options outstanding as of September 30, 2012:

 

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CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

     Options Outstanding      Options Exercisable  

Exercise Price

   Number of Options      Weighted Average
Remaining Contractual
Term (in years)
     Number of
Options
     Weighted Average
Remaining Contractual
Term (in years)
 

$0.48

     33,686         3.67         33,686         3.67   

$1.43

     24,737         3.85         24,737         3.85   

$1.62

     39,265         4.22         39,265         4.22   

$2.09

     450,128         7.58         284,108         7.45   

$2.28

     59,064         8.42         23,569         8.42   

$2.47

     95,305         5.59         95,305         5.59   

$6.72

     66,500         9.64         3,750         9.64   

$7.47

     119,000         9.52         3,750         9.85   

$7.55

     25,000         9.50         12,500         9.50   

$7.62

     249,917         9.47         49,993         9.47   
  

 

 

       

 

 

    
     1,162,602            570,663      
  

 

 

       

 

 

    

During the three-month periods ended September 30, 2011 and 2012, the Company recorded $138,380 and $518,572 in share-based compensation expense, respectively. During the nine-month periods ended September 30, 2011 and 2012, the Company recorded $335,331 and $1,189,182 in share-based compensation expense, respectively. Since inception, the Company has recognized $2,212,489 in share-based compensation expense. As of September 30, 2012, approximately $1,738,000 of total unrecognized compensation cost related to unvested share options is expected to be recognized over a weighted-average period of 1.5 years.

9. Income Taxes

The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2012 as the Company incurred losses for the three and nine-month periods ended September 30, 2012 and is forecasting additional losses through the fourth quarter, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2012. Therefore, no federal or state income taxes are expected and none have been recorded at this time. Income taxes have been accounted for using the liability method in accordance with FASB ASC 740.

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

 

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CEMPRA, INC.

(A Development Stage Company)

September 30, 2012

Notes to Consolidated Financial Statements

 

10. Net Loss Per Share

Basic and diluted net loss per common share was determined by dividing net loss attributable to common shareholders by the weighted average common shares outstanding during the period. The Company’s potentially dilutive shares, which include redeemable convertible preferred shares, convertible debt, warrants and common share options, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

The following table presents the computation of basic and diluted net loss per common share:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011             2012             2011     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net loss attributable to common shareholders

   $ (8,856,857   $ (4,981,115   $ (21,175,941     (17,972,388

Weighted average common shares outstanding, basic and diluted

     533,839        21,038,008        522,943        18,450,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common shareholders, basic and diluted

   $ (16.59   $ (0.24   $ (40.49   $ (0.97
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2011      2012      2011      2012  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Redeemable convertible preferred shares

     7,670,733         —           7,670,733         923,847   

Convertible debt

     495,566         —           102,028         59,685   

Warrants outstanding

     104,232         247,370         21,381         236,217   

Stock options outstanding

     754,595         1,157,545         767,593         1,011,738   
  

 

 

    

 

 

    

 

 

    

 

 

 
     9,025,126         1,404,915         8,561,735         2,231,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

11. Subsequent Event

On October 24, 2012, the Company sold 3,864,461 shares of its common stock for $6.50 per share to certain institutional and accredited investors in a private placement financing, raising an aggregate of $25,118,997 before sales agency fees and offering costs of approximately $1.7 million. In connection with this financing, the Company entered into a registration rights agreement, pursuant to which it agreed to register the resale of the shares of common stock issued in the financing.

 

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

The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2011, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2011. 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 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties, including those set forth under “Part I. Item 1. Business—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, and elsewhere in this report, that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage pharmaceutical company focused on developing antibiotics to meet critical medical needs in the treatment of bacterial infectious diseases, particularly respiratory tract and bacterial urethritis infections and chronic staphylococcal infections. We are developing our lead program, solithromycin (CEM-101), in both oral and IV formulations for the treatment of community acquired bacterial pneumonia, or CABP, one of the most serious infections of the respiratory tract. We have successfully completed an oral Phase 2 clinical trial for the treatment of CABP demonstrating comparable efficacy to the current standard of care, levofloxacin, with a favorable safety and tolerability profile. In the first half of 2012, we submitted the Phase 2 data and our protocol for the pivotal Phase 3 oral clinical trial to the FDA. The protocol accomodates the proposed draft guidance discussed by the U.S. Food and Drug Administration, or FDA, for the conduct and approval of CABP trials. This is to be a global study, involving over 100 clinical sites, and will test moxifloxacin, another fluoroquinolone, like levofloxacin that we used in the Phase 2 trial, as the comparator. Since this is a global study we chose moxifloxacin as the comparator because it is approved at the same dose throughout the world whereas levofloxacin is used at higher doses in the U.S. versus the rest of the world. Comments received from the FDA have been incorporated into the protocol, with no fundamental change to the proposed study design. We expect to initiate the pivotal Phase 3 trial for oral solithromycin in patients with CABP in the fourth quarter of 2012.

We recently reported that our Phase 1 trial for the IV formulation of solithromycin demonstrated that IV solithromycin was well tolerated, showed a favorable pharmacokinetic, or PK, profile and achieved relevant plasma concentrations. Based on this study, we have selected a therapeutic dose of 400 mg administered once daily for up to seven days for our planned Phase 3 IV-to-oral step down trial. We plan to finalize the overall development program for solithromycin for CABP with the FDA at our end of Phase 2 meeting for oral solithromycin, which we expect will occur in the first half of 2013, and to initiate the trial in 2013, subject to available resources.

In addition, we are studying solithromycin for the treatment of uncomplicated gonorrhea. The current standard of treatment for gonorrhea is a single intramuscular injection of ceftriaxone. Until recently, cefixime (marketed under the brand name Suprax) has been approved for oral treatment for patients as well as for treatment of their potentially infected partners. However, as of August 2012, the Centers for Disease Control, or CDC, no longer recommends cefixime for the treatment of gonorrhea, which leaves no oral treatment option. In our preclinical studies, solithromycin has demonstrated in vitro activity against most drug-resistant gonococcal bacteria. In our Phase 2 open-label study begun in the second quarter of 2012 and that has enrolled 25 patients with suspected gonococcal infection, a single oral dose solithromycin was administered. The primary endpoint of bacterial eradication as measured by conversion from positive baseline urethral or cervical cultures to negative at seven days was achieved in 100% of evaluable patients (22 patients with positive baseline cultures). Pharyngeal and rectal infections were also cleared in this study. Based on existing FDA guidance, we anticipate that a single Phase 3 trial in uncomplicated gonorrhea will be sufficient for approval for this indication.

 

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Our second program is Taksta, which is a novel dosing regimen of fusidic acid we are developing for use in the U.S. We conducted a Phase 2 acute bacterial skin and skin structure infections, or ABSSSI, clinical trial to demonstrate its activity against current strains of methicillin-resistant S. aureus, or MRSA, in the U.S. as well as to show tolerability to our proposed dosing regimen. In this study, Taksta showed a favorable safety and tolerability profile and comparable efficacy to linezolid, the only FDA-approved oral antibiotic for treatment of MRSA. Based on these Phase 2 results, we are developing Taksta in the U.S. as an oral long-term treatment for bacterial infections caused by Staphylococcus aureus, including MRSA, in prosthetic joint infections, or PJI, which is an unmet need. We expect to initiate in the fourth quarter of 2012 a Phase 2 clinical trial in patients with PJI to demonstrate Taksta’s utility in chronic treatment of staphylococcal infections.

We have devoted substantially all of our resources to our drug development efforts, including conducting clinical trials of our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from any source. From inception in November 2005 through September 30, 2012, we raised a total of $151.3 million from the issuance of debt, sale of convertible notes, convertible preferred shares and common shares, including $58.0 million from the sale of common stock in our initial public offering, or IPO, in February 2012.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $7.9 million and $5.0 million for the three months ended September 30, 2011 and September 30, 2012, respectively, and $18.4 million and $17.6 million for the nine months ended September 30, 2011 and September 30, 2012, respectively. As of September 30, 2012, we had an accumulated deficit of approximately $114.6 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

 

   

initiate or continue our clinical trials of solithromycin and Taksta and our other product candidates;

 

   

operate as a public company;

 

   

seek regulatory approvals for our product candidates that successfully complete clinical trials;

 

   

build appropriate manufacturing facilities for the manufacture of, or outsource the manufacture of, any products for which we may obtain regulatory approval;

 

   

establish our own sales force, or contract with third parties, for the sales, marketing and distribution of any products for which we obtain regulatory approval;

 

   

maintain, expand and protect our intellectual property portfolio;

 

   

continue our other research and development efforts;

 

   

hire additional clinical, quality control, scientific and management personnel; and

 

   

add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

We do not expect to generate product revenue unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the commercialization of solithromycin and Taksta or any of our other product candidates. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operating activities through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds when needed on favorable 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 develop our product candidates.

 

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Our Board of Directors approved a 1-for-9.5 reverse stock split of our common and preferred shares on January 12, 2012, which became effective on January 29, 2012. All references to common stock, common shares outstanding, average number of common shares outstanding and per share amounts in our consolidated financial statements and notes to consolidated financial statements have been restated to reflect the 1-for-9.5 reverse stock split on a retroactive basis.

Financial Overview

Revenue

To date, we have not generated revenue from the sale of any products or from any other source. In the future, we anticipate generating revenue from a combination of sales of our products, if approved, whether through our own or a third-party sales force, and license fees, milestone payments and royalties in connection with strategic collaborations regarding any of our product candidates. We expect that any revenue we generate will fluctuate from quarter to quarter. If we or our strategic partners fail to complete the development of solithromycin or Taksta in a timely manner or obtain regulatory approval for them, or if we fail to develop our own sales force or find one or more strategic partners for the commercialization of approved products, our ability to generate future revenue and our financial condition and results of operations would be materially adversely affected.

Research and Development Expenses

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

 

   

employee-related expenses, which include salaries, benefits and share-based compensation expense, for personnel in research and development functions;

 

   

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

 

   

costs related to acquiring and manufacturing clinical trial materials;

 

   

costs related to compliance with regulatory requirements;

 

   

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

 

   

research supplies; and

 

   

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

From inception through September 30, 2012, we have incurred $79.3 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we seek to complete development of solithromycin for CABP and urethritis and Taksta for PJI and to further advance our other product candidates.

Our direct research and development expenses consist principally of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials, and related clinical trial fees. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are advancing, in parallel, solithromycin for CABP and urethritis and Taksta for PJI, as well as for other indications. Through our pre-clinical development programs, we are seeking to develop macrolide product candidates for non-antibacterial indications.

The following table sets forth costs incurred on a program-specific basis for solithromycin and Taksta, excluding personnel-related costs. Macrolide research includes costs for discovery programs. All employee-related expenses for those employees working in research and development functions are included in “Research and

 

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development personnel cost” in the table, including salary, bonus, employee benefits and share-based compensation. We do not allocate insurance or other indirect costs related to our research and development function to specific product candidates. Those expenses are included in “Indirect research and development expense” in the table.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
         2011              2012              2011              2012      
     (Unaudited, in thousands)      (Unaudited, in thousands)  

Direct research and development expense by program:

           

Solithromycin

   $ 5,967       $ 1,995       $ 13,203       $ 9,601   

Taksta

     100         317         227         611   

Macrolide research

     18         12         111         33   

Research and development personnel cost

     491         696         1,483         1,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total direct research and development expense

     6,576         3,020         15,024         12,243   

Indirect research and development expense

     85         136         390         213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expense

   $ 6,661       $ 3,156       $ 15,414       $ 12,456   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

   

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

 

   

future clinical trial results; and

 

   

the receipt and timing of regulatory approvals.

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

We expect to begin the Phase 3 trial with oral solithromycin before the end of 2012. We plan to request an end-of-Phase 2 meeting with the FDA where we will propose a single IV-to-oral Phase 3 trial as part of the regulatory path to the NDA for both the IV and oral formulations. This Phase 3 trial is planned as an IV-to-oral trial and is expected to begin in 2013, subject to available resources. The IV-to-oral Phase 3 trial will be a randomized, double-blinded study conducted against a comparator drug agreed upon with the FDA, for which we will have to show non-inferiority from an efficacy perspective and acceptable safety and tolerability.

We have successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated a favorable safety and tolerability profile and efficacy that was comparable to linezolid. Based on these Phase 2 results, we are developing Taksta in the US as an oral long-term treatment for PJI. We plan to initiate a Phase 2 trial with Taksta in patients with PJI in the fourth quarter of 2012.

 

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General and Administrative Expenses

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

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents as well as changes in fair value of warrants issued in connection with the December 2011 Note. Our interest income has increased in 2012 and we expect it to continue to increase for 2012 as we invested the net proceeds from the IPO pending their use in our operations.

Interest expense consists of interest incurred on the August 2011 Notes and December 2011 Note as well as changes in fair value of warrants issued in connection with the notes. Our interest expense has increased in 2012 and we expect it to during 2012 due to the outstanding December 2011 Note.

Accretion of Redeemable Preferred Shares

Our redeemable convertible preferred shares were initially recorded on our balance sheet at their cost, less associated issuance costs. The amount reflected on the balance sheet for our convertible preferred shares is increased by periodic accretion so that the amount reflected on the balance sheet will equal the aggregate redemption price at the redemption date. Upon completion of our IPO, all of our outstanding preferred shares, including $13.7 million of accrued yield, converted into a total of 9,958,502 shares of common stock.

Yield was cumulative and payable to the holders of preferred shares in advance of any distributions on common shares but only when, if and as declared by our board of directors. The holders of Class C preferred shares earned an annual yield at a rate of 8.0% of the original purchase price from May 13, 2009 through February 8, 2012. Through May 13, 2009, the holders of Class A preferred shares and Class B preferred shares earned an annual yield at a rate of 8.0% of the original purchase price. Yield was recorded through periodic accretions which increase the carrying value of the preferred shares and is charged against additional paid-in capital to the extent available or shareholders’ equity (deficit).

Critical Accounting Policies and Estimates

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

For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. There have been no material changes in any of our accounting policies since December 31, 2011.

 

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Results of Operations

The following table summarizes the results of our operations for each of three-month and nine-month periods ended September 30, 2011 and 2012, together with the changes in those items:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2012     Increase/
(Decrease)
    2011     2012     Increase/
(Decrease)
 
     (Unaudited, in thousands)     (Unaudited, in thousands)  

Revenue

   $ —        $ —        $ —        $ —        $ —        $ —     

Research and development expense (1)

     6,661        3,156        (3,505     15,414        12,456        (2,958

General and administrative expense (1)

     965        1,495        530        2,651        4,244        1,593   

Other income (expense), net

     (290     (330     (40     (289     (958     (669

(1)    Includes the following stock-based compensation expenses:

       

Research and development expense

   $ 52      $ 158      $ 106      $ 124      $ 379      $ 255   

General and administrative expense

     86        360        274        211        810        599   

Comparison of the Three Months Ended September 30, 2011 and September 30, 2012

Revenue

We did not recognize any revenue for the three months ended September 30, 2011 and 2012.

Research and Development Expense

Research and development expense decreased by $3.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 as a result of a $3.7 million decrease in expenses incurred for solithromycin and a $0.2 million increase in expenses incurred for Taksta.

Expenses incurred for solithromycin decreased primarily as a result of $3.2 million from the chemical manufacturing of solithromycin in the third quarter of 2011 which did not recur in the third quarter of 2012. Additionally, there was a decrease of $0.5 million as we were in the planning phase of our oral Phase 3 trial in the third quarter of 2012 as compared to the third quarter of 2011 when we were winding down the Phase 2 trial.

General and Administrative Expense

General and administrative expense increased $0.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 as a result of increased employee expense of $0.4 million and director and officer insurance of $0.1 million.

Other Income (Expense), Net

Other income (expense), net remained consistent in the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Comparison of the Nine Months Ended September 30, 2011 and September 30, 2012

Revenue

We did not recognize any revenue for the nine months ended September 30, 2011 and 2012.

 

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Research and Development Expense

Research and development expense decreased by $3.0 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 as a result of a $3.4 million decrease in expenses incurred for solithromycin and a $0.4 million increase in expenses incurred for Taksta.

The $3.4 million decrease in expenses related to solithromycin for the first nine months of 2012 as compared to the first nine of 2011 resulted primarily from a decrease of clinical trial related costs of $1.0 million and chemical manufacturing and toxicology costs of $3.8 million in the first nine months of 2012 as compared to the first nine months of 2011 which were partially offset by increases in costs related to the achievement and payment of the Phase 2 milestone with Optimer Pharmaceuticals resulting in a $1.0 million charge to expense and our entry into a licensing agreement with The Scripps Research Institute resulting in a $0.4 million charge to expense in the first nine months of 2012. The $1.0 million decrease in clinical trial related costs resulted from $3.7 million decrease in costs related to the oral Phase 2 trial that completed enrollment in the first nine months of 2011 as partially offset by a $2.7 million increase in costs as we began incurring start up costs related to our oral Phase 3 trial in the first nine months of 2012.

General and Administrative Expense

General and administrative expense increased $1.6 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 as a result of increased employee expense of $1.0 million, director and officer insurance of $0.2 million and professional service fees of $0.4 million.

Other Income (Expense), Net

Other income (expense), net decreased by $0.7 million in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 as a result of a $0.1 million increase in fair value adjustments recorded as interest income and a $0.6 million increase in interest expense related to the August and December 2011 Notes.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through September 30, 2012, we have funded our operations primarily with $151.3 million from debt, the sale of convertible notes, convertible preferred shares and common stock.

The gross proceeds we have received from the issuance and sale of our convertible notes, preferred shares and common stock are as follows:

 

Issue    Year      Number
of
Shares
     Gross
Proceeds
 
                   (in thousands)  

Class A

     2006         789,191       $ 7,497  (1)

Class A

     2007         1,557,895         14,800   

Class B

     2007         809,717         10,000   

Class C

     2009         2,488,686         25,500   

Class C

     2010         2,000,700         20,500   

August 2011 Notes

     2011         —           5,000   

December 2011 Note

     2011         —           10,000   

Common Stock / Initial Public Offering

     2012         9,660,000         57,960   

 

(1) Includes $3,197 of converted notes payable and accrued interest.

As of September 30, 2012, we had cash and equivalents of approximately $51.6 million.

 

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In December 2011, we entered into a $20.0 million loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules, pursuant to which we borrowed $10.0 million upon closing. The principal amount outstanding under the initial $10.0 million advance bears interest at the greater of (i) 9.55%, or (ii) the sum of 9.55% plus the prime lending rate, as published by the Wall Street Journal, minus 3.25% per annum. Prior to October 1, 2012, we had the ability to request an additional advance in the amount of $10.0 million. We elected not to request the additional borrowing and let the option expire. We will be required to make interest only payments through March 2013, which can be extended to June 30, 2013 upon satisfaction of certain conditions. Principal and interest payments will start after March 31, 2013 or any later extended date. The principal balance outstanding on the loan agreement and all accrued but unpaid interest thereunder will be due and payable on December 1, 2015. In addition, on the earliest to occur of (i) the loan maturity date, (ii) the date that we prepay all of the outstanding advances and accrued interest, or (iii) the date that all of the advances and interest become due and payable, we must pay Hercules a fee of $400,000. We granted Hercules a security interest in all of our assets, except for our intellectual property. Our obligations to Hercules include restrictions on borrowing, asset transfers, placing liens or security interests on our assets, including our intellectual property, mergers and acquisitions and distributions to stockholders.

In connection with the loan agreement, we entered into a warrant agreement with Hercules, under which Hercules has the right to purchase 39,038 shares of our common stock. The exercise price per share is equal to $10.25 per share subject to adjustment in the event of a merger, reclassification, subdivision or combination of shares or stock dividend and subject also to antidilution protection. The warrant expires on December 20, 2021.

During February 2012, we completed our IPO, issuing 9,660,000 shares of common stock, at a price of $6.00 per share, resulting in net proceeds of approximately $53.2 million after deducting underwriting discounts of $3.2 million and offering costs of $1.6 million.

Upon the completion of the IPO, all of our outstanding preferred shares, including accrued yield of $13.7 million, automatically converted into a total of 9,958,502 shares of common stock and the preferred stock warrant liability was reclassified to additional paid-in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock. In addition, our August 2011 Notes and related accrued interest of $0.3 million converted into 876,621 shares of common stock.

On October 24, 2012, we sold 3,864,461 shares of our common stock for $6.50 per share to certain institutional and accredited investors in a private placement financing, raising an aggregate of $25,118,997 before sales agency fees and offering costs of approximately $1.7 million.

Cash Flows

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

 

     Nine Months Ended
September 30
 
     2011     2012  
     (Unaudited, in thousands)  

Net cash provided by (used in):

    

Operating activities

   $ (16,091   $ (18,061

Investing activities

     (10     (8

Financing activities

     5,026       54,109  
  

 

 

   

 

 

 

Net increase (decrease) in cash and equivalents

   $ (11,075 )   $ 36,040  
  

 

 

   

 

 

 

Operating Activities. Cash used in operating activities of $16.1 million during the nine months ended September 30, 2011 was primarily a result of our $18.4 million net loss, coupled with changes in operating assets and liabilities of $1.7 million, partially offset by non-cash items of $0.6 million. Cash used in operating activities of $18.1 million for the nine months ended September 30, 2012 was primarily a result of our $17.7 million net loss and cash used by changes in operating assets and liabilities of $1.8 million, partially offset by non-cash items of $1.4 million.

 

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Investing Activities. Net cash used in investing activities of $10,000 for the nine months ended September 30, 2011 and $8,000 for the nine months ended September 30, 2012 were related to purchases of equipment.

Financing Activities. Net cash provided by financing activities of $5.0 million for the nine months ended September 30, 2011 resulted from the sale of $5.0 million of August 2011 Notes, net of $44,000 issuance costs and $70,000 from the exercise of stock options. Net cash provided by financing activities of $54.1 million for the nine months ended September 30, 2012 consisted primarily of gross proceeds of $58.0 million from the IPO, offset by $3.2 million of underwriting discounts and $0.7 million of offering costs.

Funding Requirements

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

We expect that our existing cash and equivalents, including interest thereon, will enable us to fund our operating expenses and capital expenditure requirements including the proceeds of our recently completed private placement financing, into 2015. We will need to obtain additional financing for the continued development of solithromycin, Taksta and our other product candidates and prior to the commercialization of any of these product candidates. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Due to the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our product candidates.

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

 

   

the progress, costs and results of our planned solithromycin Phase 3 trials, completion of our ongoing Phase 1 trial for the IV formulation of solithromycin, the results of our planned end-of-Phase 2 meeting with the FDA for the planned Phase 3 IV-to-oral trial for solithromycin, our Phase 2 bacterial urethritis trial for solithromycin and our planned Taksta Phase 2 trial;

 

   

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

 

   

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

 

   

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

 

   

our ability to establish collaborations on favorable terms;

 

   

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

 

   

revenue if any, received from sales of our product candidates, if approved by the FDA;

 

   

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

 

   

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

Until we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of any securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

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We plan to seek partners or other sources of third-party funding, including government grants, for the continued development of solithromycin and Taksta and our other product candidates. If we are unable to raise additional funds when needed, whether on favorable terms or not, we may be required to delay, limit, reduce or terminate our development of our product candidates, or our commercialization efforts, or to grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

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

During the nine months ended September 30, 2012, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those specified in our 2011 Annual Report on Form 10-K, except for:

Effective June 12, 2012, Cempra Pharmaceuticals, Inc., our wholly owned subsidiary, entered into a license agreement with The Scripps Research Institute, or TSRI, whereby TSRI licensed to us rights, with rights of sublicense, to make, use, sell, and import products for human or animal therapeutic use that use or incorporate one or more macrolides as an active pharmaceutical ingredient and is covered by certain patent rights owned by TSRI claiming technology related to copper-catalysed ligation of azides and acetylenes. The rights licensed to us are exclusive as to the People’s Republic of China (excluding Hong Kong), South Korea and Australia, and are non-exclusive in all other countries worldwide, except the member-nations of the Association of Southeast Asian Nations, which are not included in the territory of the license. Under the terms of the agreement with TSRI, we paid a one-time only, non-refundable license issue fee in the amount of $350,000. Our rights under the agreement are subject to certain customary rights of the U.S. government that arise or result from TSRI’s receipt of research support from the U.S. government.

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

Under the terms of the TSRI agreement, we are also required to pay additional fees on royalties, sublicensing and milestone payments if we, an affiliate, or a sublicensee challenges the validity or enforceability of any of the patents licensed under the agreement. Such increased payments would be required until all patent claims subject to challenge are invalidated in the particular country where such challenge was mounted.

 

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

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board, or FASB, issued amended guidance on fair value measurements. This amended accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This accounting standard is effective on a prospective basis for interim and annual reporting periods beginning on or after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard did not impact our financial position or results of operations.

In June 2011, the authoritative guidance for presentation of comprehensive income was amended to eliminate the option to present other comprehensive income and its components in the statement of changes in shareholders’ deficit. Companies can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. We adopted this new guidance on January 1, 2012, as required, and it did not have an impact on our financial position or results of operations.

In December 2011, the FASB issued new guidance impacting the presentation of certain items on the balance sheet. The new guidance requires an entity to disclose both gross and net information about both instruments and transactions that are eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of this guidance is not expected to impact our consolidated financial position, results of operations or cash flows, but may result in certain additional disclosures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have not been any material changes to our exposure to market risk during the quarter ended September 30, 2012. For additional information regarding market risk, refer to “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our 2011 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that information to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide the reasonable assurance discussed above.

Changes in Internal Control over Financial Reporting

No change to our internal control over financial reporting occurred during the last fiscal quarter 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 6. Exhibits

 

Exhibit

Number

  

Description of Document

   Registrant’s
Form
   Dated    Exhibit
Number
   Filed
Herewith
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             X
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             X
32.1    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             X
32.2    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             X
101    Financials in XBRL format.             X

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    CEMPRA, INC.
Dated: November 8 , 2012     By:  

/s/ Prabhavathi Fernandes, Ph.D.

    Prabhavathi Fernandes, Ph.D.
    President and Chief Executive Officer