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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2014

or

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

For the transition period from              to

Commission File Number: 001-34973

Anacor Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in Its Charter)

1020 East Meadow Circle

Palo Alto, California 94303-4230

(Address of Principal Executive Offices) (Zip Code)

(650) 543-7500

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

As of October 30, 2014, there were 42,897,186 shares of the registrant’s common stock outstanding.

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Anacor Pharmaceuticals, Inc.

Form 10-Q

Index

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Anacor Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In Thousands)

(1) Derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

See accompanying notes.

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Anacor Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

See accompanying notes.

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Anacor Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In Thousands)

See accompanying notes.

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Anacor Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

See accompanying notes.

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Anacor Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. The Company

Nature of Operation

Anacor Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from its boron chemistry platform. The Company’s first approved drug, KERYDINTM (tavaborole) topical solution, 5% (formerly known as AN2690), is an oxaborole antifungal approved by the U.S. Food and Drug Administration (FDA) in July 2014 for the topical treatment of onychomycosis of the toenails. In July 2014, the Company entered into an exclusive Distribution and Commercialization Agreement (the Sandoz Agreement) with Sandoz Inc. (together with its affiliates, Sandoz), a Novartis company, pursuant to which Sandoz distributes and commercializes KERYDIN in the United States.  In September 2014, KERYDIN was launched in the United States by Sandoz pursuant to the Sandoz Agreement.  The Company’s lead product candidate is AN2728, an investigational non-steroidal topical PDE-4 inhibitor in development for the potential treatment of mild-to-moderate atopic dermatitis and psoriasis. The Company initiated Phase 3 studies of AN2728 for the treatment of mild-to-moderate atopic dermatitis in the first quarter of 2014. Beyond KERYDIN and AN2728, the Company has discovered three investigational compounds that it has out-licensed for further development. The first compound is licensed to Eli Lilly and Company (Lilly) for the potential treatment of an animal health indication.  The second compound, AN5568, also referred to as SCYX-7158, is licensed to Drugs for Neglected Diseases initiative (DNDi) for the potential treatment of human African trypanosomiasis (HAT, or sleeping sickness) and the third compound is licensed to GlaxoSmithKline LLC (GSK) for development in tuberculosis (TB). The Company also has a pipeline of other internally discovered topical and systemic boron-based compounds in early stages of research and development. These include three wholly-owned investigational product candidates. AN2718 is an investigational topical antifungal, AN2898 is an investigational non-steroidal topical PDE-4 inhibitor and AN3365 is an investigational Gram-negative antibiotic.

As of September 30, 2014, the Company had an accumulated deficit of $207.5 million. The Company may require additional capital to fund research and development activities, including clinical trials for its development programs and preclinical activities for its product candidates. Management believes that the Company’s existing capital resources, including the net proceeds remaining from the Company’s October 2014 issuance of Convertible Notes (as defined below) after repayment of the Loan Agreement (as defined below) (see Note 12), together with the payments it is expected to receive based on sales of KERYDIN under the Sandoz Agreement, will be sufficient to meet its anticipated operating requirements for at least the next twelve months. In the future, the Company may elect to finance its cash needs through public or private equity offerings, debt financings or licensing, collaboration or other similar arrangements, or a combination of these sources.

2. Summary of Significant Accounting Policies

Interim Financial Information

The accompanying condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the results included in the condensed consolidated financial statements for the interim periods presented. The December 31, 2013 balance sheet is derived from the audited financial statements for the year ended December 31, 2013 but does not include all the disclosures necessary for audited financial statements. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to the three and nine month periods are unaudited. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014 or for any other interim period or for any future year.

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These condensed consolidated financial statements follow the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) for annual periods can be condensed or omitted. For more complete financial information, these condensed consolidated financial statements, and the notes hereto, should be read in conjunction with the audited financial statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2014.

The Company’s significant accounting policies are more fully described in Note 2 of the notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Anacor IP Holdings, Ltd., which was incorporated in the Cayman Islands on October 1, 2013. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates and judgments in certain circumstances that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In preparing these condensed consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, fair values of financial instruments in which it invests, inventory, income taxes, preclinical study and clinical trial accruals, accrued compensation, stock compensation and other contingencies. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from these estimates.

Cash and Cash Equivalents, Short-Term Investments, Long-Term Investments and Restricted Investments

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash and cash equivalents. Unless restricted, investments with a maturity date of more than three months, but less than twelve months, from the date of purchase are considered short-term investments and are classified as current assets. Long-term investments have contractual maturities at the date of purchase of over one but less than two years and are classified as noncurrent assets until such time as the time to maturity becomes one year or less, at which time they are reclassified to short-term investments. The Company’s investments in marketable securities are classified as available for sale (see Note 3). Securities available for sale are carried at estimated fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income or loss, a separate component of stockholders’ equity. The Company has estimated the fair value amounts by using available market information. The cost of available for sale securities sold is based on the specific-identification method. Restricted investments are classified as a current or noncurrent asset based upon the terms of the relevant contract and, in some cases, management’s estimate of when the restrictions will be eliminated.

Under its facility lease agreements, the Company is required to deliver letters of credit securing the performance of its obligations thereunder. At both September 30, 2014 and December 31, 2013, these letters of credit were secured by approximately $0.2 million of long-term restricted investments.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, short-term investments, restricted investments, contract receivables and accounts payable, approximate their fair value due to their short maturities.  Based on the borrowing rates available to the Company for loans with similar terms and average maturities, the carrying value of the Company’s long-term notes payable under its Loan Agreement approximate their fair values at September 30, 2014 and December 31, 2013.

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Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments, long-term investments and restricted investments. Substantially all the Company’s cash and cash equivalents, short-term investments, long-term investments and restricted investments are held by two financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. At both September 30, 2014 and December 31, 2013, approximately 93% of the cash and cash equivalents were held in a money market fund invested in U.S. Treasuries, securities guaranteed as to principal and interest by the U.S. government and repurchase agreements in respect of such securities. At September 30, 2014 and December 31, 2013, approximately 57% and 100%, respectively, of the Company’s short-term investments, long-term investments and restricted investments were held in securities guaranteed as to principal and interest by the U.S. government. The Company has not experienced any losses on its deposits of cash and cash equivalents, short-term investments, long-term investments and restricted investments and management believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity.

Customer Concentration

For the three and nine month periods ended September 30, 2014, the Company’s revenues consisted primarily of research contract revenues from a research agreement with The Bill and Melinda Gates Foundation (Gates Foundation), distribution and commercialization agreement revenues from Sandoz (including revenues from product sales of KERYDIN to Sandoz) (see Note 8), research contract revenues from a contract with the United States Department of Defense, Defense Threat Reduction Agency (DTRA) and, for the nine month period ended September 30, 2014, research contract revenues from a collaboration agreement with Lilly. For the three and nine month periods ended September 30, 2013, the Company also recognized research contract revenues from its collaboration with GSK, which, during the nine month period ended September 30, 2013, accounted for 10% or more of its total revenues. Research collaborators, including the Gates Foundation, GSK and Lilly, have accounted for significant revenues in the past and may not provide research contract revenues in the future under existing agreements and/or new collaboration agreements, which may have a material effect on the Company’s operating results.

The following table shows the percentage of revenues attributable to contracts with customers that accounted for 10% or more of total revenues in the specified periods:

*            less than 10% of total revenue

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Contract Receivables

At September 30, 2014 and December 31, 2013, the Company’s contract receivables included $0.3 million and $0.5 million, respectively, due from DTRA (see Note 8), $0.1 million and $0.7 million, respectively, due from GSK (see Note 8) and $0.4 million and $0.1 million, respectively, due from other contracts. In addition, the Company’s contract receivables at September 30, 2014 included $0.8 million due under a research collaboration agreement with the Global Alliance for Livestock Veterinary Medicine (GALVmed) (see Note 8) and $0.4 million due for product sales of KERYDIN to Sandoz.

The Company’s contract receivables are primarily composed of amounts due under collaboration, research and distribution and commercialization agreements and government contracts and the Company believes that the credit risks associated with the parties to these agreements are not significant. During the three and nine months ended September 30, 2014, the Company has not written-off any contract receivables and, accordingly, does not have an allowance for doubtful accounts as of September 30, 2014.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories, which are valued based on costs calculated for each production batch. The Company periodically evaluates the carrying value of inventory on hand for potential excess quantities and obsolescence. As a result of such evaluations, no charges were recorded in the three or nine months ended September 30, 2014.

Revenue Recognition

For the three and nine month periods ended September 30, 2014, the Company’s research contract revenues were generated primarily through research and development collaboration agreements, which, in addition to providing funding for research and development efforts, may include non-refundable, non-creditable upfront fees, payments for achievement of specified development, regulatory and sales goals and royalties on product sales of licensed products. During these periods, the Company also generated distribution and commercialization agreement revenues from upfront payments and product sales from Sandoz.

The Company recognizes revenue when persuasive evidence of an arrangement exists; transfer of technology has been completed, services are performed or products have been delivered; the fee is fixed or determinable; and collection is reasonably assured.

For arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is generally based on whether the deliverable has stand-alone value to the customer. The selling price used for each unit of accounting will be based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third party evidence is available. Management may be required to exercise considerable judgment in determining whether a deliverable is a separate unit of accounting and in estimating the selling prices of identified units of accounting for new agreements. Where multiple deliverables are combined as a single unit of accounting, revenues are recognized based on the performance requirements of the related agreement.

Upfront payments for licensing the Company’s intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services to be provided by the Company. Typically, the Company has determined that the licenses it has granted to research and development collaborators do not have stand-alone value separate from the value of the research and development services provided. As such, upfront payments are recorded as deferred revenue in the condensed consolidated balance sheets and are recognized as research contract revenue ratably over the contractual or estimated performance period that is consistent with the term of the research and development obligations contained in the research and development collaboration agreement. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are issued.

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Some arrangements involving the licensing of the Company’s intellectual property, the provision of research and development services or both may also include exclusivity clauses whereby the Company agrees that, for a specified period of time, it will not conduct further research on licensed compounds or on compounds that would compete with licensed compounds or that it will do so only on a limited basis. Such provisions may also restrict the future development or commercialization of such compounds. The Company does not treat such exclusivity clauses as a separate element within an arrangement and any upfront payments received related to the exclusivity clause would be allocated to the identified elements in the arrangement and recognized as described in the preceding paragraph.

Payments resulting from the Company’s efforts under research and development agreements or government grants are recognized as the activities are performed and are presented on a gross basis. Revenue is recorded on a gross basis because the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services. The costs associated with these activities are reflected as a component of research and development expense in the condensed consolidated statements of operations and the revenues recognized from such activities approximate these costs.

For certain contingent payments under research or development arrangements, the Company recognizes revenue using the milestone method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive requires estimation and judgment and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement. In making the determination as to whether a milestone is substantive or not, management of the Company considers all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and whether any portion of the milestone consideration is related to future performance or deliverables. The Company has analyzed future contingent payments under existing research or development arrangements and determined that none meet the definition of milestone payments.

Other contingent payments received for which payment is either contingent solely upon the passage of time or the results of a collaborative partner’s performance (bonus payments) are not accounted for using the milestone method. Such bonus payments will be recognized as revenue when earned and when collectibility is reasonably assured.

Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectibility is reasonably assured. As of September 30, 2014, the Company had not earned any royalty revenue from product sales.

Arrangements under which the Company grants another party distribution and commercialization rights to one of its products and that involve multiple other deliverables are evaluated based on the accounting guidance for multiple-element arrangements to determine whether any of the deliverables qualifies as a separate unit of accounting. If the Company determines that the deliverables do not have stand alone value because each one of them has value only as it relates to maintaining and supporting the other party’s distribution and commercialization rights, then all deliverables are combined as a single unit of accounting, all arrangement consideration is allocated to that combined unit of accounting and revenues are recognized based on the performance requirements of the related agreement.  Upfront payments received under such agreements are recorded as deferred revenue in the condensed consolidated balance sheets and are recognized as distribution and commercialization agreement revenue ratably over the contractual or estimated performance period that is consistent with the term of the Company’s obligations under the agreement. If any deliverable is determined to have stand-alone value to the customer, it will be treated as

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a separate unit of accounting and arrangement consideration will be allocated to that unit of accounting based on its selling price, which will be determined based on vendor-specific objective evidence, if available, third party evidence if vendor-specific objective evidence is not available or estimated selling price if neither vendor-specific nor third party evidence is available. For such separate units of accounting, the allocated arrangement consideration will be recognized as services are performed or products have been delivered, when the fee is fixed or becomes determinable and when collection is reasonably assured.

For product sales under a distribution and commercialization agreement, the Company recognizes revenue from the supply of product to the other party when all four revenue recognition criteria have been met (i.e., persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection is reasonably assured) and when risk of loss and title passes to the customer.

Gross profit sharing or royalty payments based on reported gross profits or sales of products for which distribution and commercialization rights have been granted to another party will be recognized based on contract terms when reported gross profits or sales are reliably measurable and collectibility is reasonably assured.

Preclinical Study and Clinical Trial Accruals and Deferred Advance Payments

The Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct these activities on its behalf. In recording service fees, the Company estimates the time period over which the related services will be performed and compares the level of effort expended through the end of each period to the cumulative expenses recorded and payments made for such services and, as appropriate, accrues additional service fees or defers any non-refundable advance payments until the related services are performed. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust its accrual or deferred advance payment accordingly. If the Company later determines that it no longer expects the services associated with a deferred non-refundable advance payment to be rendered, the deferred advance payment will be charged to expense in the period that such determination is made.

Stock-Based Compensation

Employee stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period). Stock-based compensation expense is allocated among cost of goods sold, research and development and selling, general and administrative expenses, or included in the inventory carrying value and absorbed into inventory, based on the function of the related employee. Stock option awards granted to the Company’s nonemployee directors for their board-related services are included in employee stock-based compensation in accordance with current accounting standards. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its time-based vesting stock option awards and uses the straight-line (single-option) method for expense attribution. The Company uses a Monte Carlo valuation method to estimate the fair value of its market-based vesting performance stock option and restricted stock unit awards. The Company estimates forfeitures and recognizes expense only for those shares expected to vest.

The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options that vest in any given reporting period is affected by changes in the fair value of the Company’s common stock during that period.

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Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares outstanding during the period, without consideration for potentially dilutive shares. Diluted net loss per share includes the effect of all potential shares, consisting of stock options (including performance stock options), restricted stock units (including performance restricted stock units) and warrants outstanding for the period, determined using the treasury-stock method. For purposes of this calculation, potentially dilutive securities consisting of stock options, restricted stock units and warrants are considered to be potential shares and, for each period presented in these financial statements, are excluded in the calculation of diluted net loss per share because their effect would be antidilutive. The following table presents the calculation of basic and diluted net loss per share (in thousands, except share and per share data):

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (FASB) issued an accounting standards update that set forth guidance relating to the evaluation of an entity’s ability to continue as a going concern. The guidance establishes management’s responsibility for evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The guidance also requires certain disclosures about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company will evaluate the guidance under this update and present the required disclosures on the Company’s financial statements at the time of adoption.

In June 2014, the FASB issued a new accounting standard on accounting for share-based payments for performance-based stock awards, which will require that a performance target that affects vesting and that could be achieved after the required service period be treated as a performance condition. The Company does not currently have any performance-based stock awards that meet these conditions. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers, which will require the Company to recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and will permit the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements and related disclosures.

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In July 2013, a new accounting standard was issued that requires the netting of unrecognized tax benefits against a deferred tax asset for a net operating loss carryforward or other carryforward that would apply in the settlement of uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction net operating loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this guidance as of January 1, 2014, and its adoption did not have an effect on the Company’s financial statements.

3. Marketable Securities and Fair Value Measurements

The following tables summarize the estimated fair values of the Company’s financial assets measured on a recurring basis as of the dates indicated below. Such financial assets are comprised solely of available for sale securities with remaining contractual maturities of less than two years.

The input levels used in the fair value measurements, the amortized cost and fair value of marketable securities, with gross unrealized gains and losses, were as follows (in thousands and unaudited):

All cash equivalents, short-term investments and short-term restricted investments held at September 30, 2014 and December 31, 2013 had maturities as of these dates of less than one year. Long-term investments and long-term restricted investments had maturities as of these dates of more than one but less than two years.

None of the available for sale securities held as of September 30, 2014 has been in a continuous unrealized loss position for more than one year. As of September 30, 2014, unrealized losses on available for sale investments are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

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Management does not intend to sell these securities and believes that the Company will be able to hold these securities to maturity and recover their amortized cost bases. There were no realized gains or losses recognized from the sale of marketable securities for the three and nine months ended September 30, 2014 and 2013.

In measuring fair value, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

·                  Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis;

·                  Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are either directly or indirectly observable; and

·                  Level 3—Unobservable inputs that reflect management’s assumptions and best estimates of inputs that market participants would use in pricing the asset or liability at the reporting date.

During the three and nine months ended September 30, 2014 and September 30, 2013, there were no transfers between Level 1 and Level 2 financial assets. At September 30, 2014 and December 31, 2013, the Company utilized the market approach to measure fair value for its marketable securities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable instruments. The fair values of the money market fund (Level 1) were based on quoted market prices in an active market. Federal agency securities, commercial paper and corporate debt securities (Level 2) are valued using third party pricing sources that apply applicable inputs and other relevant data, such as quoted prices, interest rates and yield curves, into their models to estimate fair value.

4. Inventory

In the three months ended September 30, 2014, the Company recorded inventory related to the manufacturing of its KERYDIN drug product. Inventories consist of the following (in thousands):

The Company obtained FDA approval of KERYDIN in July 2014 and began to capitalize inventory costs on the balance sheet during that month. As of September 30, 2014, all inventories were related to KERYDIN drug product.

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5. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

6. Commitments and Contingencies

Indemnification Obligations

The Company, as permitted under Delaware law and in accordance with its bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, if the officer or director is or was serving in such capacity at the Company’s request at the time of the event or occurrence. The term of the indemnification period is equal to the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

The Company has certain agreements with collaboration partners, contract research organizations and other parties with which it does business that contain indemnification provisions pursuant to which the Company typically agrees to indemnify the party against certain types of third party claims. The Company accrues for known indemnification claims when a loss is probable and can be reasonably estimated. The Company would also accrue for estimated incurred but unidentified indemnification claims based on historical activity. There were no accruals for, or expenses related to, indemnification claims for any period presented.

Legal Proceedings

The Company is not a party to any material legal proceedings at this time. From time to time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business.

7. Notes Payable (Loan Agreement)

On June 7, 2013, the Company entered into a loan and security agreement (the Loan Agreement) with Hercules Technology Growth Capital, Inc. as collateral agent and a lender and Hercules Technology III, L.P. as a lender (the lenders, or together Hercules), providing for loans to the Company of up to $45.0 million in three tranches of $30.0 million, $10.0 million and $5.0 million.

The first $30.0 million tranche was drawn at the closing of the transaction, at which time the Company repaid $22.6 million in remaining obligations associated with its then-existing loan facility. The Company elected not to draw the second tranche of $10.0 million, which was available to the Company from the closing date of the Loan Agreement until December 5, 2013. The Company also elected not to draw the third tranche of $5.0 million, which was available to the Company from the date of FDA approval of KERYDIN until August 6, 2014. The interest rate applicable to the loans outstanding under the Loan Agreement was a variable rate based upon the greater of either (i) 11.65% and (ii) the sum of (a) the Prime Rate (as defined in the Loan Agreement) as reported in The Wall Street Journal minus 5.25%, plus (b) 11.65%; with a maximum interest rate of 14.90%. As a result of the FDA’s approval of KERYDIN in July 2014, the end of the interest only period for payments under the Loan Agreement was automatically extended from January 1, 2015 to July 1, 2015. Equal monthly payments of principal and interest were scheduled to begin at that time and continue through the scheduled maturity date of July 1, 2017.

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Through September 30, 2014, the Company paid Hercules financing and amendment fees of $0.6 million and incurred other debt issuance costs, including legal fees, of $0.5 million in connection with the Loan Agreement. These fees were accounted for as a debt discount and deferred debt issuance costs, respectively. Any repayment of all or a portion of the loan prior to maturity, required the Company to pay Hercules a prepayment penalty fee, based on a percentage of the then outstanding principal balance, equal to 2% if the prepayment occurred prior to June 7, 2015 or 1% if the prepayment occurred after such date but prior to July 1, 2017.

The Loan Agreement included customary affirmative and restrictive covenants, and was amended in December 2013 to include a liquidity covenant requiring the Company to maintain certain minimum balances in its United States bank and investment accounts while at the same time increasing the amount of investments the Company was permitted to make in its foreign subsidiaries. The Loan Agreement also included standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Hercules’ security interest in or the value of the collateral and a material impairment of the prospect of repayment of the Company’s obligations under the Loan Agreement.

Upon an occurrence and during the continuance of an event of default, a default interest rate of an additional 5% would have applied to the outstanding loan balances, and Hercules would have been permitted to declare all outstanding obligations immediately due and payable and take such other actions as were set forth in the Loan Agreement.

As of September 30, 2014, the Company’s obligations under the Loan Agreement were secured by substantially all of the assets of the Company except intellectual property. The Company’s intellectual and other property was subject to certain negative pledge and other restrictions set forth in the Loan Agreement, subject to certain exceptions.

In connection with the Loan Agreement, the Company issued warrants to Hercules to purchase 528,375 shares of the Company’s common stock at an exercise price of $5.11 per share (the Warrants).

The fair value of the warrants issued was approximately $1.8 million and was calculated using a Black-Scholes valuation model with assumptions based upon observed risk-free interest rates appropriate for the expected term of the warrants; expected volatility based on the average historical volatilities of a peer group of publicly-traded companies within the Company’s industry; expected term equal to the contractual life of the warrants; and a dividend yield of 0%. The Company recorded a debt discount of $1.8 million in connection with the issuance of the Warrants.

The Warrants were net exercised on a cashless basis in December 2013, resulting in the issuance of 361,995 shares of the Company’s common stock to Hercules. The par value of the shares issued was reclassified from additional paid-in capital to common stock.

The interest on the loans outstanding under the Loan Agreement was calculated using the interest method with the debt issuance costs paid directly to Hercules (financing, amendment and legal fees) and the fair value of the warrants issued to Hercules treated as a discount on the debt. The Company’s debt issuance costs for legal fees and other debt-related expenses are included as other assets in the condensed consolidated balance sheet. The amortization of the debt discount is recorded as a noncash interest expense and the amortization of the debt issuance costs is recorded as other expense in the condensed consolidated statements of operations.

In June 2013, the Company recorded a loss of approximately $1.4 million on the early extinguishment of its then-existing loan facility. This loss was recorded as a loss on early extinguishment of debt in the condensed consolidated statements of operations for the nine months ended September 30, 2013.

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Future payments as of September 30, 2014 were as follows (in thousands):

The Company recorded interest expense related to all borrowings of $1.1 million and $1.1 million for the three months ended September 30, 2014 and 2013, respectively, and $3.3 million and $2.9 million for the nine months ended September  30, 2014 and 2013,  respectively. Included in interest expense for these periods was $0.2 million and $0.2 million, respectively, for the three months ended September 30, 2014 and 2013, and $0.6 million and $0.5 million, respectively, for the nine months ended September 30, 2014 and 2013, for the amortization of the financing fees and debt discounts. As of September 30, 2014, the annual effective interest rate on amounts borrowed under the Loan Agreement, including the amortization of the debt discounts, was 16.29%.

On October 16, 2014, the Company used approximately $30.8 million of the net proceeds from the sale of Convertible Notes (as defined below) (see Note 12) to repay in full its outstanding indebtedness under, and terminate, the Loan Agreement.  As the Convertible Notes have a maturity date of October 15, 2021, with no scheduled payments of principal prior thereto, the otherwise current portion of notes payable under the Loan Agreement at September 30, 2014 was classified as long-term as the Convertible Notes were deemed to be a refinancing of the Loan Agreement.

8. License, Research, Development, Distribution and Commercialization Agreements

Sandoz Agreement

In July 2014, the FDA approved the New Drug Application for KERYDINTM (tavaborole) topical solution, 5% for the topical treatment of onychomycosis of the toenails. In July 2014, the Company entered into the Sandoz Agreement with Sandoz, pursuant to which Sandoz distributes and commercializes KERYDIN in the United States on an exclusive basis.  PharmaDerm, the branded dermatology business of Sandoz, is responsible for the sales and marketing of KERYDIN. In September 2014, KERYDIN was launched in the United States by Sandoz pursuant to the Sandoz Agreement.

The Company received two upfront payments totaling $40.0 million pursuant to the Sandoz Agreement during the three months ended September 30, 2014. The Company also expects to receive a payment of $25.0 million in January 2015 (the Launch Payment).

Under the Sandoz Agreement, the Company is entitled to 50% of the gross profits (defined as net sales less cost of goods sold) accrued by Sandoz on sales of KERYDIN, except that in 2015 the Company will start receiving gross profit sharing payments after the first $50.0 million of gross profits have been accrued by Sandoz as the Company will effectively receive its 50% share of such gross profits as a result of the Launch Payment. The gross profit sharing arrangement entitles the Company to cumulative minimum gross profit sharing payments totaling $45.0 million for 2016. The Company is not entitled to cumulative minimum gross profit sharing payments in any other year under the Sandoz Agreement.

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Under the terms of the Sandoz Agreement, the Company holds the New Drug Application for, and is responsible for any further development of, KERYDIN. In addition, the Company is responsible for maintaining regulatory approvals, reporting safety-related information to the FDA and conducting any additional clinical trials required by the FDA with respect to KERYDIN. Sandoz is responsible for setting the price for KERYDIN and for all of its selling, marketing, distribution, general and administrative costs related to the commercialization of KERYDIN. The Sandoz Agreement also grants the Company an option to repurchase all rights in KERYDIN from Sandoz on the later of three years from the first commercial sale of KERYDIN or December 31, 2017, at a price to be determined pursuant to the Sandoz Agreement. The Sandoz Agreement will continue for an initial term of 5 years and is subject to automatic 5-year renewal terms, unless terminated for certain events specified in the Sandoz Agreement. Either party may terminate the Sandoz Agreement for uncured material breaches by the other party, bankruptcy, force majeure events that remain unabated, withdrawal of KERYDIN from the market or mass tort liability actions.  In addition, Sandoz may terminate the Sandoz Agreement for convenience upon 180 days prior written notice, subject to the payment to the Company (to the extent then unpaid) of the Launch Payment and minimum gross profit sharing amounts, and in the event the Company settles, or an injunction is entered in, a third-party infringement action that prevents the Company from supplying KERYDIN to Sandoz.  The Company also has the right to terminate the Sandoz Agreement upon the expiration of all patents covering KERYDIN.

The Company evaluated the Sandoz Agreement under the accounting guidance for multiple-element arrangements and identified the following deliverables: the exclusive distribution rights for KERYDIN within the United States, providing KERYDIN finished product to Sandoz, maintaining regulatory approvals and related filings, reporting safety-related information to the FDA, conducting any post-approval clinical trials required by the FDA and participating in the joint steering committee. The Company determined that these deliverables do not have stand alone value because each one of them has value only as it relates to maintaining and supporting Sandoz’s rights and ability to distribute and commercialize KERYDIN in the United States. The Company also determined that the level of effort required of the Company to meet its obligations under the Sandoz Agreement is not expected to vary significantly over the life of the Sandoz Agreement. Accordingly, the Company combined these deliverables into a single unit of accounting and allocated the entire arrangement consideration to that combined unit of accounting. The upfront payments totaling $40.0 million are being recognized on a straight line basis over the life of the last-expiring patent covering KERYDIN, a period of about 13 years. As of September 30, 2014, the Company has current and long-term deferred revenue related to the upfront payments of $3.1 million and $36.3 million, respectively. Under the Sandoz Agreement, the Company is responsible for supplying KERYDIN to Sandoz at a price equal to the Company’s manufacturing costs therefor (as calculated pursuant to the Sandoz Agreement).  The Company is currently supplying Sandoz with KERYDIN finished product manufactured by the Company’s contract manufacturers. Revenues from such product sales are being recognized at the price specified by the Sandoz Agreement when the product is picked up by Sandoz at the Company’s contract manufacturer’s facility since title passes to Sandoz and Sandoz bears the risk of loss at that time. The Company’s gross profit sharing payments under the Sandoz Agreement will be recognized when they are reliably measurable and are reported to the Company by Sandoz, typically expected to be one quarter in arrears of the related sales. The expected Launch Payment of $25.0 million will be recorded as deferred revenue when received and will be recognized in 2015, one quarter in arrears of sales, in amounts equal to 50% of the quarterly gross profits reported to the Company by Sandoz, with any remaining amount being recognized at the end of 2015. Should KERYDIN gross profits for 2015 exceed the first $50.0 million to be retained by Sandoz, the Company’s 50% share of any excess 2015 gross profits will be recognized when reliably measurable and reported to the Company by Sandoz. The $45.0 million of cumulative minimum gross profit sharing payments for 2016 will be recognized as Sandoz reports quarterly gross profits to the Company, one quarter in arrears of sales, with any remaining amount recognized at the end of 2016. Should the Company’s 50% share of KERYDIN gross profits for 2016 exceed $45.0 million, the Company’s 50% share of any excess 2016 gross profits will be recognized when reliably measurable and reported to the Company by Sandoz.

Revenues recognized under the Sandoz Agreement were as follows (in thousands):

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GALVmed

Effective in July 2014, the Company entered into a collaboration agreement with GALVmed for further development of certain drug candidates that had been developed for the treatment and prevention of African trypanosomiasis in cattle under earlier research agreements between the two parties. The GALVmed agreement provides for up to $2.5 million of research funding to be paid to the Company in installments over a research period of 19 months, expected to end in March 2016. The research will be conducted in stages and, if and when GALVmed decides to commence research on each stage, it will pay the Company’s budgeted research costs for such stage in advance. The Company will record such advance payments as deferred revenue and recognize the related research contract revenues as it performs the research for each stage. Upon execution of the GALVmed agreement, the Company was entitled to receive advance payments totaling $0.8 million for the first stages of research and recorded this amount as deferred revenue. As of September 30, 2014, the Company had current deferred revenue related to these advance payments of $0.6 million.

Revenues recognized under the GALVmed collaboration agreement were as follows (in thousands):

DTRA

In October 2013, the Company entered into a research agreement with DTRA to design and discover new classes of systemic antibiotics. A drug discovery consortium led by the Company is conducting the research over a period of up to three and a half years. The work is funded by an award of up to $13.5 million from DTRA’s R&D Innovation and Systems Engineering Office, which was established to search for and execute strategic investments in innovative technologies for combating weapons of mass destruction. Under this award, the Company will apply its boron chemistry to discover rationally designed novel antibiotics that target DTRA-priority pathogens known to exhibit resistance to existing antibiotics. The award was initially available to the consortium to fund $2.7 million of research reimbursements for the eleven month period through September 15, 2014, with an additional $5.0 million and $5.7 million becoming available subject to the exercise by DTRA of options to fund the research for subsequent twelve and nineteen month periods, respectively. In August 2014, DTRA exercised the first option to fund the twelve month research extension.

Revenues recognized under the research agreement were as follows (in thousands):

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Gates Foundation

In April 2013, the Company entered into a research agreement with the Gates Foundation to discover drug candidates intended to treat two filarial worm diseases (onchocerciasis, or river blindness, and lymphatic filariasis, commonly known as elephantiasis) and TB (the Gates Research Agreement). Under the Gates Research Agreement, the Gates Foundation will pay the Company up to $17.7 million over a three-year research term (the Research Funding) to conduct research activities directed at discovering potential neglected disease drug candidates in accordance with an agreed upon research plan. As part of the funded research activities, the Company is also responsible for creating, during the first 18 months following execution of the Gates Research Agreement, an expanded library of boron compounds to screen for additional potential drug candidates to treat neglected diseases (the Library). Once the Library is completed, the Company is responsible for storing the Library compounds and making them accessible to the Gates Foundation and other parties to which the Gates Foundation grants access (the Library Access Services) for the subsequent five-year period.

Upon signing the Gates Research Agreement, the Company received an advance payment of $1.75 million of Research Funding (the Advance Funds). These Advance Funds are replenished by the Gates Foundation each quarter following the Company’s submission of a quarterly report of the expenses incurred for the research activities conducted in the prior quarter. In addition, the Gates Foundation paid the Company a total of $0.8 million as reimbursement for the costs of filarial worm research that was included in the agreed upon research plan, which the Company conducted prior to the April 5, 2013 effective date of the Gates Research Agreement (the Pre-Contract Reimbursements). These Pre-Contract Reimbursements are non-refundable, non-creditable payments and were included in the $17.7 million of Research Funding.

Under the terms of the agreement, the Gates Foundation will have the exclusive right to commercialize selected drug candidates in specified neglected diseases in specified developing countries. The Company retains the exclusive right to commercialize any selected drug candidate outside of the specified neglected diseases as well as with respect to the specified neglected diseases in specified developed countries and would be obligated to pay the Gates Foundation royalties on specified license revenue received. The Gates Research Agreement will continue in effect until the later of five years from the effective date or the expiration of the Company’s specified obligation to provide access to the Library. Either party may terminate the Gates Research Agreement for the other party’s uncured material breach of the Gates Research Agreement.

In connection with the Gates Research Agreement, the Company entered into a Common Stock Purchase Agreement (the Purchase Agreement) pursuant to which the Company issued 809,061 shares of potentially redeemable common stock to the Gates Foundation for net proceeds of approximately $5.0 million (the Stock Proceeds)  (see Note 9). In addition, in connection with both the Gates Research Agreement and the Purchase Agreement, the Company and the Gates Foundation entered into a letter agreement (the Letter Agreement) that, among other things, restricts the Company’s use of both the Research Funding and the Stock Proceeds to expenditures, including an allocation of overhead and administrative expenses, that are reasonably attributable to the activities that are required to support the research projects funded by the Gates Foundation. As a result of such restrictions, in its September 30, 2014 condensed consolidated balance sheet, the Company classified $2.1 million of the Stock Proceeds as long-term restricted investments and $1.0 million of the Stock Proceeds plus the unspent portion of the Advance Funds, approximately $0.1 million, as short-term restricted investments.

The Company evaluated the Gates Research Agreement under the accounting guidance for multiple-element arrangements and identified three deliverables: the research activities, the 5-year Library Access Services and the obligation to participate in the joint steering committee. Although participation in the joint steering committee has stand-alone value, it will be delivered as the research activities are performed and has a similar pattern of performance. Accordingly, the Company has combined this deliverable with the research activities deliverable as a single unit of accounting. The Company developed its best estimates of selling prices (BESP) for each deliverable in order to allocate the arrangement consideration to the two units of accounting. The Company determined the BESP for the research activities based on factors such as estimated direct expenses and other costs involved in providing these services, the contractually agreed reimbursement rates for the services and the rates it has charged and the margins it has realized under its other contracts involving the provision of and reimbursement for research services. The Company determined the BESP for the Library Access Services based on the projected costs that would be incurred to have a third party store and distribute the library compounds and the estimated costs

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that would be incurred to provide the Library Access Services for the required 5-year period, plus a reasonable margin, and concluded that the BESP of such services is insignificant. As a result, the entire arrangement consideration was allocated to the research activities and joint steering committee combined unit of accounting. The Company will recognize revenue related to this unit of accounting on a proportional performance basis and the revenue that is recognized as future research services are performed will reduce the Advance Funds. The unspent portion of the Advance Funds will be recorded as deferred revenue in the Company’s condensed consolidated balance sheets.

The Company also evaluated the accounting treatment for the $0.8 million of Pre-Contract Reimbursements, noting that the research activities that gave rise to such reimbursements were conducted prior to the signing of the Gates Research Agreement. The Company concluded that activities performed prior to commencing delivery of the contracted services should not be considered in effort-expended measures of performance when revenue is recognized for services using a proportional performance method and, accordingly, the Company will recognize revenue from the Pre-Contract Reimbursements over the three-year research term on a proportional performance basis. As of September 30, 2014, the Company has deferred revenue of $0.1 million related to the unspent Advance Funds and $0.3 million related to the Pre-Contract Reimbursements.

Revenues recognized under the Gates Research Agreement were as follows (in thousands):

GSK

In September 2011, the Company amended and expanded its 2007 research and development collaboration with GSK (the Master Amendment) to, among other things, give effect to certain rights in AN3365 that would be acquired by the U.S. government in connection with GSK’s contract for government funding to support GSK’s further development of AN3365, provide GSK the option to extend its rights around the bacterial enzyme target leucyl-tRNA synthetase (LeuRS), as well as to add new programs for tuberculosis (TB) and malaria using the Company’s boron chemistry platform. As a result of the Master Amendment, the Company received a $5.0 million upfront payment in September 2011 and was eligible to receive additional milestone payments, bonus payments and research funding as described below, all of which, if earned, will be non-refundable and non-creditable. The Company is also eligible to receive royalties on future sales of resulting products. The Master Amendment also terminated any research and development obligations that the Company had with respect to the original agreement.

Under the terms of the Master Amendment, GSK retained sole responsibility for the further development and commercialization of AN3365. In October 2012, GSK advised the Company that it had discontinued further development of AN3365; accordingly, all rights to the compound have reverted to the Company.

The Master Amendment added a new program for TB, pursuant to which GSK funded the Company’s TB research activities up until candidate selection. Once TB compounds met specified candidate selection criteria, GSK had the option to license such compounds and, upon exercise of such option, would become responsible for all further development and commercialization of such compounds.

In September 2013, GSK selected a compound that resulted from the TB program which is currently in preclinical development. The research period under the collaboration agreement with GSK has expired. GSK will be responsible for all further development and commercialization of the TB compound previously selected by it, and the Company may receive contingent payments, if certain regulatory events occur and/or if certain sales levels are achieved for resulting TB products, and may also receive royalties on sales of such resulting products. As of September 30, 2014, the Company has no deferred revenue associated with the GSK collaboration agreement.

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Revenues recognized under this agreement were as follows (in thousands):

Lilly

In August 2010, the Company entered into a research, license and commercialization agreement with Lilly to collaborate on the discovery of products for a variety of animal health applications. Lilly will be responsible for worldwide development and commercialization of compounds advancing from these efforts. The Company received an upfront payment of $3.5 million in September 2010, which it had been recognizing over the expected four-year research term on a straight-line basis. The agreement allowed for termination by Lilly upon written notice, with certain additional payments to the Company and a notice period that had a duration dependent on whether the notice was delivered prior to or after the first regulatory approval of a product under the agreement.

In January 2014, Lilly notified the Company of the termination of the research term of the agreement. The termination of the funding for the agreement became effective 90 days after the Company’s receipt of the termination notice and ended Lilly’s obligation to make quarterly research payments. As a result of the termination notice, the Company revised the expected research term to end in April 2014, approximately five months earlier than estimated at the inception of the agreement. The remainder of the agreement remains in effect and Lilly retained its exclusive rights to the development of one of the two compounds it licensed from the Company (as described further below).

In 2011 and 2012, Lilly licensed two development compounds from the Company and the Company was eligible to receive additional payments upon the occurrence of specified development and regulatory events for these compounds. The Company has determined that none of these contingent payments are substantive milestones. To date, no products have been approved and therefore no royalties have been earned under this agreement. In September 2013, Lilly notified the Company that it was ceasing further development of one of the two previously licensed compounds; Lilly granted the Company a fully paid, sublicenseable, perpetual, irrevocable, exclusive license to the related technology and patents.

As of September 30, 2014, the Company has no deferred revenue related to the upfront fee or research term funding.

Revenues recognized under the agreement and for other research services were as follows (in thousands):

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Medicines for Malaria Venture

In March 2011, the Company entered into a three-year development agreement with Medicines for Malaria Venture (MMV) to collaborate on the development of compounds for the treatment of malaria through human proof-of-concept studies. This development agreement was preceded by a 2010 research agreement between the two parties. In August 2011, the Company and MMV amended the development agreement to, among other things, specify that any advance payments in excess of the actual costs incurred by the Company for the research and development activities under the agreement are either refundable or creditable against future payments, at MMV’s option. In January 2014, the research agreement was amended and extended through December 31, 2014. Under the amended agreement, MMV reimburses the Company quarterly in arrears for expenses incurred. As of September 30, 2014, the Company had no deferred revenue associated with its agreements with MMV.

Revenues recognized under the MMV research and development agreement were as follows (in thousands):

9. Potentially Redeemable Common Stock and Stockholders’ Equity

Potentially Redeemable Common Stock

In connection with the Gates Research Agreement (see Note 8), the Company entered into the Purchase Agreement with the Gates Foundation pursuant to which the Company issued 809,061 shares of its common stock at a purchase price of $6.18 per share on April 5, 2013. Net proceeds to the Company from this offering were approximately $5.0 million, after deducting offering expenses of $48,000. On June 28, 2013, the Company filed a registration statement on Form S-3 with the SEC, which became effective on July 11, 2013, to register the resale of the 809,061 shares of common stock. In the event of termination of the Gates Research Agreement by the Gates Foundation for certain specified uncured material breaches by the Company (the Triggering Events), the Company will be obligated, among other remedies, to redeem for cash the Company’s common stock purchased in connection with the Gates Research Agreement, facilitate the purchase of such common stock by a third party or elect to register the resale of such common stock into the public markets unless certain specified conditions are satisfied. The redemption price per share would be the fair value per share of the Company’s common stock on the redemption date or, under certain circumstances, the greater of (i) the fair value per share and (ii) the purchase price of $6.18 per share plus interest at 5% compounded annually from April 5, 2013, the stock purchase date. In connection with both the Gates Research Agreement and the Purchase Agreement, the Company and the Gates Foundation also entered into the Letter Agreement that, among other things, places certain restrictions on the use of both the Research Funding and the Stock Proceeds (see Note 8).

The Company concluded that certain of these Triggering Events are not solely within the control of the Company and, accordingly, has classified the potentially redeemable securities outside of permanent equity in temporary equity. The 809,061 shares of common stock issued were recorded as potentially redeemable common stock at an initial carrying amount equal to the net proceeds of approximately $5.0 million, which approximates their issuance date fair value.

The Company has determined that the 809,061 shares of potentially redeemable common stock are not currently redeemable and that none of the Triggering Events are currently probable. Accordingly, the carrying amount of the potentially redeemable common stock remains at approximately $5.0 million as of September 30, 2014. Only if, and when, a Triggering Event becomes probable will the Company record a change in the carrying amount to adjust it to the redemption value of the potentially redeemable common stock. At the time of such an occurrence, the potentially redeemable common stock will be immediately adjusted, by a credit or charge to other income or expense, to equal the redemption value and will continue to be adjusted to reflect any change in the redemption value as of the end of each reporting period.

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Shelf Registration Statement

In August 2013, the Company filed a shelf registration statement on Form S-3 with the SEC (the Shelf Registration Statement). The Shelf Registration Statement was declared effective by the SEC and permits the Company to sell, from time to time, up to $50.0 million of common stock, preferred stock, debt securities and warrants.

Preferred Stock

In November 2010, the Company amended and restated its certificate of incorporation to authorize 10,000,000 shares of preferred stock upon the completion of its Initial Public Offering (IPO). As of September 30, 2014 and December 31, 2013, no shares of preferred stock were outstanding.

10. Stock-Based Compensation

The Company recorded stock-based compensation expense for the three and nine months ended September 30, 2014 and 2013 as follows (in thousands):