MELINTA THERAPEUTICS, INC. /NEW/ - FORM 10-Q

MELINTA THERAPEUTICS, INC. /NEW/ - FORM 10-Q - October 29, 2013

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - MELINTA THERAPEUTICS, INC. /NEW/	Financial_Report.xls
EX-32.2 - EX-32.2 - MELINTA THERAPEUTICS, INC. /NEW/	d590318dex322.htm
EX-31.2 - EX-31.2 - MELINTA THERAPEUTICS, INC. /NEW/	d590318dex312.htm
EX-32.1 - EX-32.1 - MELINTA THERAPEUTICS, INC. /NEW/	d590318dex321.htm
EX-31.1 - EX-31.1 - MELINTA THERAPEUTICS, INC. /NEW/	d590318dex311.htm
EX-10.18 - EX-10.18 - MELINTA THERAPEUTICS, INC. /NEW/	d590318dex1018.htm
EX-10.19 - EX-10.19 - MELINTA THERAPEUTICS, INC. /NEW/	d590318dex1019.htm

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, 2013

¨	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.)

6320 Quadrangle Drive, Suite 360

Chapel Hill, NC 27517

(Address of Principal Executive Offices)

(919) 313-6601

(Telephone Number, Including Area Code)

6340 Quadrangle Drive, Suite 100

Chapel Hill, North Carolina 27517-8149

(Former name, former address and former fiscal year if changed since last report)

Securities Registered Pursuant to Section 12(b) of the Exchange Act:


Title of Each Class		Name of Exchange on which Registered
Common Stock, $0.001 Par Value		Nasdaq Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

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):

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 October 23, 2013 there were 33,192,972 shares of the registrant’s common stock, $0.001 par value, outstanding.

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		20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		31

Item 4.	Controls and Procedures		31

PART II—OTHER INFORMATION			32

Item 6.	Exhibits		32

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CEMPRA, INC.

(A Development Stage Company)

Consolidated Balance Sheets


	December 31, 2012			September 30, 2013
				(Unaudited)
Assets
Current assets
Cash and equivalents	$	70,108,754		$	110,403,348
Receivables		—			974,778
Prepaid expenses		264,981			324,725

Total current assets		70,373,735			111,702,851

Furniture, fixtures and equipment, net		43,217			72,359
Deposits		321,394			322,298

Total assets	$	70,738,346		$	112,097,508

Liabilities
Current liabilities
Accounts payable	$	2,171,633		$	3,888,586
Accrued expenses		341,918			422,795
Accrued payroll and benefits		604,548			714,953
Deferred revenue		—			22,848
Warrant liability		—			821,138
Current portion of long-term debt		2,226,610			1,085,361

Total current liabilities		5,344,709			6,955,681
Deferred revenue		—			5,641,740
Long-term debt		7,623,285			13,435,309

Total liabilities		12,967,994			26,032,730

Commitments and contingencies
Shareholder’s Equity
Common stock; $.001par value; 80,000,000 shares authorized; 24,903,774 and 33,186,656 issued and outstanding at December 31, 2012 and September 30, 2013		24,904			33,187
Additional paid-in capital		178,970,975			235,462,570
Deficit accumulated during the development stage		(121,225,527	)		(149,430,979	)

Total shareholders’ equity		57,770,352			86,064,778

Total liabilities and shareholders’ equity	$	70,738,346		$	112,097,508

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

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			2013			2012			2013			2013
Revenue
Contract research		—			1,172,268			—			1,404,608			1,404,608
License		—			—			—			4,335,412			4,335,412

Total revenue	$	—		$	1,172,268		$	—		$	5,740,020		$	5,740,020

Operating expenses
Research and development		3,156,011			11,919,394			12,456,062			25,617,340			109,344,900
General and administrative		1,494,824			2,167,234			4,244,278			6,895,937			28,458,397

Total operating expenses		4,650,835			14,086,628			16,700,340			32,513,277			137,803,297

Loss from operations		(4,650,835	)		(12,914,360	)		(16,700,340	)		(26,773,257	)		(132,063,277	)

Other income (expense)
Interest income		675			3,152			106,589			16,419			1,489,529
Interest expense		(330,955	)		(736,288	)		(1,065,049	)		(1,448,614	)		(7,087,936	)
Other income		—			—			—			—			488,958

Other income (expense), net		(330,280	)		(733,136	)		(958,460	)		(1,432,195	)		(5,109,449	)

Net loss and comprehensive loss		(4,981,115	)		(13,647,496	)		(17,658,800	)		(28,205,452	)		(137,172,726	)
Accretion of redeemable convertible preferred shares		—			—			(313,588	)		—			(14,002,842	)

Net loss attributable to common shareholders	$	(4,981,115	)	$	(13,647,496	)	$	(17,972,388	)	$	(28,205,452	)	$	(151,175,568	)

Basic and diluted net loss attributable to common shareholders per share	$	(0.24	)	$	(0.41	)	$	(0.97	)	$	(1.00	)

Basic and diluted weighted average shares outstanding		21,038,008			33,184,322			18,450,507			28,187,011

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

CEMPRA, INC.

(A Development Stage Company)

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


																										Deficit			Total
	Series A						Series B				Series C												Additional			During the			Shareholders’
	Preferred Shares						Preferred Shares				Preferred Shares				Common Shares				Common Stock				Paid-In			Development			Equity
	Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital			Stage			(Deficit)
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

CEMPRA, INC.

(A Development Stage Company)

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


																									Deficit			Total
	Series A				Series B				Series C													Additional			During the			Shareholders’
	Preferred Shares				Preferred Shares				Preferred Shares					Common Shares				Common Stock				Paid-In			Development			Equity
	Shares		Amount		Shares		Amount		Shares		Amount			Shares		Amount		Shares		Amount		Capital			Stage			(Deficit)
Net loss		—		—		—		—		—		—			—		—		—		—		—			(8,075,240	)		(8,075,240	)

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	)

CEMPRA, INC.

(A Development Stage Company)

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


																															Deficit			Total
	Series A						Series B						Series C															Additional			During the			Shareholders’
	Preferred Shares						Preferred Shares						Preferred Shares						Common Shares					Common Stock				Paid-In			Development			Equity
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount		Shares		Amount		Capital			Stage			(Deficit)
Issuance of common shares upon exercise of options		—			—			—			—			—			—			38,815			—		—		—		69,932			—			69,932
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		—			—			—			—			—			—			—			—		10,351		10		34,498			—			34,508
Issuance of common stock upon initial public offering, net of issuance costs of $4.7 million		—			—			—			—			—			—			—			—		9,660,000		9,660		53,184,681			—			53,194,341
Issuance of common stock upon private placement, net of issuance costs of $1.7 million		—			—			—			—			—			—			—			—		3,864,461		3,865		23,508,098			—			23,511,963
Conversion of common shares to common stock		—			—			—			—			—			—			(533,839	)		—		533,839		534		(534	)		—			—
Accretion of redeemable convertible preferred shares		—			2,038			—			533			—			311,017			—			—		—		—		—			(313,588	)		(313,588	)
Conversion of redeemable convertible preferred shares to common stock upon initial public offering		(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		—			—			—			—			—			—			—			—		876,621		876		4,723,658			—			4,724,534
Reclassification of warrant liability to additional paid-in capital		—			—			—			—			—			—			—			—		—		—		1,033,647			—			1,033,647
Share-based compensation		—			—			—			—			—			—			—			—		—		—		1,669,262			—			1,669,262
Net loss		—			—			—			—			—			—			—			—		—		—		—			(24,226,789	)		(24,226,789	)

Balance as of December 31, 2012		—		$	—			—		$	—			—		$	—			—		$	—		24,903,774	$	24,904	$	178,970,975		$	(121,225,527	)	$	57,770,352

CEMPRA, INC.

(A Development Stage Company)

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


Share-based compensation (Unaudited)	—		—	—		—	—		—	—		—	—		—		2,480,137			—			2,480,137
Issuance of common stock upon exercise of warrants (Unaudited)	—		—	—		—	—		—	—		—	8,944		9		53,655			—			53,664
Issuance of common stock upon public offering, net of issuance cost of $3.7 million (Unaudited)	—		—	—		—	—		—	—		—	8,273,938		8,274		54,199,390			—			54,207,664
Relassification of additional paid-in capital to warrant liability (Unaudited)	—		—	—		—	—		—	—		—	—		—		(241,587	)		—			(241,587	)
Net loss (Unaudited)	—		—	—		—	—		—	—		—	—		—		—			(28,205,452	)		(28,205,452	)

Balance as of September 30, 2013 (Unaudited)	—	$	—	—	$	—	—	$	—	—	$	—	33,186,656	$	33,187	$	235,462,570		$	(149,430,979	)	$	86,064,778

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

CEMPRA, INC.

(A Development Stage Company)

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months ended September 30,						Period From November 18, 2005 (Inception) to
	2012			2013			September 30, 2013
Operating activities
Net loss	$	(17,658,800	)	$	(28,205,452	)	$	(137,172,726	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation		41,880			21,546			263,389
Issuance of common shares for service		—			—			14,583
Issuance of common shares for license agreement		—			—			190,418
Share-based compensation		1,189,182			2,480,137			5,172,707
Change in fair value of warrant liabilities		(87,204	)		118,407			3,449,208
Amortization of debt issuance costs		267,949			432,291			1,182,254
Changes in operating assets and liabilities
Receivables		—			(974,778	)		(974,778	)
Prepaid expenses		123,358			(59,744	)		(324,725	)
Deposits		(311,524	)		(904	)		(322,298	)
Accounts payable		(1,654,242	)		1,716,953			3,888,584
Accrued expenses		(52,394	)		80,877			679,740
Accrued payroll and benefits		81,200			110,405			714,952
Deferred revenue		—			5,664,588			5,664,588

Net cash used in operating activities		(18,060,595	)		(18,615,674	)		(117,574,104	)

Investing activities
Purchases of furniture, fixtures and equipment		(8,437	)		(50,688	)		(335,747	)
Purchase of investments		—			—			(14,306,177	)
Proceeds from sale of investments		—			—			14,306,177

Net cash used in investing activities		(8,437	)		(50,688	)		(335,747	)

Financing activities
Proceeds from borrowing on convertible promissory notes		—			—			8,100,000
Proceeds from borrowing on long-term debt		—			5,238,327			15,238,327
Payments on long-term debt		—			(238,327	)		(238,327	)
Proceeds from exercise of stock options and warrants		34,508			53,664			184,887
Proceeds from issuance of common stock, net of underwriting discounts		54,777,800			54,407,814			132,697,576
Payment of offering costs		(702,716	)		(200,150	)		(2,259,307	)
Payment of debt issuance costs		—			(300,372	)		(607,270	)
Proceeds from issuance of redeemable convertible preferred shares		—			—			75,197,313

Net cash provided by financing activities		54,109,592			58,960,956			228,313,199

Net change in cash and equivalents		36,040,560			40,294,594			110,403,348
Cash and equivalents at beginning of the period		15,602,264			70,108,754			—

Cash and equivalents at end of the period	$	51,642,824		$	110,403,348		$	110,403,348

Supplemental cash flow information
Cash paid for interest	$	679,111		$	846,422		$	1,766,936
Non-cash investing and financing activities
Accretion of redeemable convertible preferred shares	$	313,588		$	—		$	14,002,845
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
Allocation of the long-term debt proceeds to warrant	$	—		$	461,144		$	734,238
Conversion of convertible notes payable and accrued interest into common stock	$	—		$	—		$	4,724,534
Conversion of redeemable convertible preferred shares into common stock	$	—		$	—		$	94,827,625
Reclassification of warrant liability to additional paid-in capital	$	—		$	—		$	1,033,647
Reclassification of additional paid-in capital to warrant liability	$	—		$	241,587		$	241,587

The accompanying notes are an integral part of these 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 of September 30, 2013, the Company has incurred losses since inception of $137.2 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, Inc. 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 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, 2012 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 Company’s financial position as of September 30, 2013 and the results of operations and cash flows for the three months and nine months ended September 30, 2012 and 2013. The December 31, 2012 consolidated balance sheet included herein was derived from audited consolidated financial statements, but does not include all disclosures including notes required by 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.

Receivables

Receivables consist of amounts billed and earned but unbilled under the Company’s contract with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services (“BARDA”). Receivables under the BARDA contract are recorded as qualifying research activities are conducted and invoices from the Company’s vendors are received. Unbilled receivables are also recorded based upon work estimated to be complete for which the Company has not received vendor invoices. The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance based on its history of collections and write-offs and the current status of all receivables. The Company does not accrue interest on trade receivables. If accounts become uncollectible, they will be written off through a charge to the allowance for doubtful accounts. The Company has not recorded an allowance for doubtful accounts as management believes all receivables are fully collectible.

Clinical Trial Accruals

As part of the process of preparing financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with conducting clinical trials. The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company determines accrual estimates through discussion with applicable personnel and outside service providers as to the progress of trials, or the services completed. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. Through September 30, 2013, there had been no material adjustments to the Company’s prior period estimates of accrued expenses for clinical trials. The Company’s clinical trial accrual is dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors.

Revenue Recognition

The Company’s revenue generally consists of research related revenue under federal contracts and licensing revenue related to non-refundable upfront fees, milestone payments and royalites earned under license agreements. Revenue is recognized when the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods and services are delivered, limited to the consideration that is not contingent upon future deliverables. When an arrangement is accounted for as a single unit of accounting, the Company determines the period over which the performance obligations will be performed and revenue recognized.

3. Fair Value of Financial Instruments

The carrying values of cash equivalents, receivables, prepaid expenses, and accounts payable at September 30, 2013 approximated their fair values due to the short-term nature of these items.

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.

At December 31, 2012 and September 30, 2013, these 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, 2012
Assets:
Money Market Funds	$	67,783,021	$	—	$	—		67,783,021

Total assets at fair value:	$	67,783,021	$	—	$	—	$	67,783,021


	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, 2013
Assets:
Money Market Funds	$	106,661,559	$	—	$	—		106,661,559

Total assets at fair value:	$	106,661,559	$	—	$	—	$	106,661,559

Liabilities:
Warrant liabilities	$	—	$	—	$	821,138		821,138

	$	—	$	—	$	821,138	$	821,138

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


Balance at December 31, 2012	$	—

Allocation of long-term debt proceeds to warrant (Unaudited)		461,144
Reclassification of additional paid-in capital to warrant (Unaudited)		241,587
Change in fair value recorded as interest income (Unaudited)		(14,355	)
Change in fair value recorded as interest expense (Unaudited)		132,762

Balance at September 30, 2013 (Unaudited)	$	821,138

The December 2011 Note, which is classified as a level 2 liability (see Note 8) has a variable interest rate and, accordingly, its carrying value approximates its fair value. At September 30, 2013, the carrying value was $14.5 million. There were no transfers between levels of the fair value hierarchy in the three and nine months ended September 30, 2013.

4. Significant Agreements and Contracts

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 Phase 1 program. In July 2012, the Company paid a $1,000,000 milestone after the successful completion of its first solithromycin Phase 2 program. 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

In June 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 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.

Biomedical Advanced Research and Development Authority

In May 2013, the Company entered into an agreement with BARDA, for the evaluation and development of the Company’s lead product candidate solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia.

The agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $17.7 million, and four option work segments that BARDA may request at its sole discretion pursuant to the agreement. If all four option segments are requested, the cumulative value of the agreement would be approximately $58 million. Three of the options are cost plus fixed fee arrangements and one option is a cost sharing arrangement for which the Company would be responsible for a designated portion of the costs associated with that work segment. The estimated period of performance for the base performance segment is May 24, 2013 through May 23, 2015. If all option segments are requested, this estimated period of performance would be extended until approximately May 23, 2018.

Under the agreement, the Company is reimbursed and recognizes revenue as allowable costs are incurred plus a portion of the fixed-fee earned. The Company considers fixed-fees under cost reimbursable agreements to be earned in proportion to the allowable costs incurred in performance of the work as compared to total estimated agreement costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed. For the three-month and nine-month periods ended September 30, 2013, the Company recognized $1.2 million and $1.4 million, respectively in revenue under this agreement.

The agreement provides the U.S. government the ability to terminate the agreement for convenience or to terminate for default if the Company fails to meet its obligations as set forth in the statement of work. The Company believes that if the government were to terminate the agreement for convenience, the costs incurred through the effective date of such termination and any settlement costs resulting from such termination would be allowable costs.

Toyama Chemical Co., Ltd.

In May 2013, Cempra Pharmaceuticals, Inc., the Company’s wholly owned subsidiary, entered into a license agreement with Toyama Chemical Co., Ltd. (“Toyama”), whereby the Company licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin, the Company’s lead compound, as its sole active pharmaceutical ingredient, or API, for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama granted the Company certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

Following execution of the agreement, the Company received a $10.0 million upfront payment from Toyama. Toyama is also obligated to pay the Company up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent, development and commercial milestones. Under the terms of the license agreement, Toyama must also pay the Company a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances.

As part of the license agreement, Toyama and the Company also entered into a supply agreement, whereby the Company will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in Phase 1 and Phase 2 clinical trials in Japan. Pursuant to the supply agreement, which is an exhibit to the license agreement, Toyama will pay the Company for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to the Company’s cost. All API for solithromycin supplied by the Company to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from the Company at prices determined by the Company’s manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. Either party may terminate the supply agreement for uncured material breach or insolvency of the other party, with Toyama’s right to terminate for the Company’s breach subject to certain further conditions in the case of the Company’s failure to supply API for solithromycin or clinical supply, but otherwise the supply agreement will continue until the expiration or termination of the license agreement.

The Company has determined that there are six deliverables under this agreement including (1) the license to develop and commercialize solithromycin in Japan, (2) the obligation of the Company to conduct Phase 3 studies and obtain regulatory approval in the United States and one other territory, (3) participation in a Joint Development Committee, or JDC, (4) participation in a Joint Commercialization Committee, or JCC, (5) the right to use the Company’s trademark, and (6) a supply agreement. The amounts received under the license agreement have been allocated to the deliverables based on their relative fair values and will be recognized into income when the revenue recognition criteria have been achieved. As of September 30, 2013, the license is the only unit of accounting that has been delivered. The Company has recognized $4.3 million in revenue associated with the delivery of the license. The Company has recorded $5.7 million as deferred revenue at September 30, 2013 which will be recorded as revenue when the revenue recognition criteria of each deliverable have been met.

Milestone payments are recognized when earned, provided that (i) the milestone event is substantive; (ii) there is no ongoing performance obligation related to the achievement of the milestone earned; and (iii) it would result in additional payments. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment is non-refundable; achievement of the milestone was not reasonably assured at the inception of the arrangement; substantive effort is involved to achieve the milestone; and the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement, and the related risk associated with the achievement of the milestone. Contingent-based payments the Company may receive under a license agreement will be recognized when received.

Royalties are recorded as earned in accordance with the contract terms when third party sales can be reliably measured and collectability is reasonably assured.

5. Receivables

Receivables consist of billed and unbilled amounts that have been earned under the Company’s licensing agreements or its contract with BARDA. At September 30, 2013, the Company had $974,778 of earned but unbilled receivables under the BARDA agreement.

6. Furniture, Fixtures and Equipment

Furniture, fixtures and equipment consist of the following as of:


	Useful Life (years)		December 31, 2012		September 30, 2013
					(Unaudited)
Computer equipment		2	$	191,889	$	215,104
Software		2		46,594		39,952
Furniture		5		38,792		38,792
Leasehold improvements		3		4,809		13,680

Total furniture, fixtures and equipment				282,084		307,528
Less accumulated depreciation				238,867		235,169

Furniture, fixtures and equipment, net			$	43,217	$	72,359

During the three-month period ended September 30, 2012 and 2013, the Company recorded $5,452 and $7,641 in depreciation expense, respectively. During the nine-month period ended September 30, 2012 and 2013, the Company recorded $41,879 and $21,546 in depreciation expense, respectively. Depreciation expense for the cumulative period from inception through September 30, 2013 was $263,389.

7. Accrued Expenses

Accrued expenses are comprised of the following as of:


	December 31,		September 30,
	2012		2013
			(Unaudited)
Accrued professional fees	$	207,362	$	242,977
Other accrued fees		30,817		45,693
Accrued interest		82,236		119,375
Deferred rent		21,503		14,750

Total accrued expenses	$	341,918	$	422,795

8. 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. In May 2013, the Company amended its December 2011 Note, increasing the intial loan amount to $15,000,000, receiving an additional $5,238,327 upon closing. The Company also extended the date by which it could request the additional $10,000,000 to September 30, 2013. The Company elected not to request the additional borrowing and let the option expire on September 30, 2013. This amendment also provides for the Company to make interest only payments through June 2014. Principal and interest payments will start July 1, 2014 over a 36-month amortization period. The principal balance outstanding on the loan agreement and all accrued but unpaid interest thereunder will be due and payable on June 1, 2017. In addition, the Company is to pay Hercules the following fees:

•

$400,000 on the earliest to occur of (i) December 1, 2015, (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.

•

$495,245 on the earliest to occur of (i) June 1, 2017, (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 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 initial closing of the December 2011 note, the Company entered into a warrant agreement with Hercules (the “First Hercules Warrant”), under which Hercules has the right to purchase 39,038 shares of the Company’s common stock. The exercise price of the First Hercules Warrant was initially $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. In connection with the amendment to the loan agreement, the exercise price of the first Hercules Warrant was reduced to the lower of (a) $6.11, and (b) the effective price per share of the Company’s common stock issued or issuable in any offering of the Company’s equity or equity-linked

securities that occurs prior to June 1, 2014, provided that such offering is effected principally for equity or debt-financing purposes. The First 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 Company’s initial public offering (“IPO”), the warrant liability was reclassified to additional paid-in capital. Since the amendment to the warrant resulted in a variable exercise price, the fair value of the warrant as of the date of the amendment was reclassified from additional paid-in capital to a warrant liability.

Additionally, in connection with the amendment of the December 2011 note, the Company entered into a warrant agreement with Hercules (the “Second Hercules Warrant”), under which Hercules has the right to purchase an aggregate number of shares of the Company’s common stock equal to the quotient derived by dividing $609,533 by the exercise price then in effect, which is defined as the lower of (a) $6.11, and (b) the effective price per share of the Company’s common stock issued or issuable in any offering of the Company’s equity or equity-linked securities that occurs prior to June 1, 2014, provided that such offering is effected principally for equity or debt-financing purposes. The exercise price is 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 Second Hercules Warrant expires on May 31, 2023. Proceeds equal to the fair value of the Second 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.

9. 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.

Private Placement

During October 2012, the Company sold 3,864,461 shares of its common stock at $6.50 per share to certain institutional accredited investors in a private placement financing, raising an aggregate of $25.1 million 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 registered the resale of the shares of common stock issued in the financing.

Public Offering

During June 2013, the Company completed a public offering issuing 8,273,938 shares of common stock, at a price of $7.00 per share, resulting in net proceeds to the Company of approximately $54.2 million after deducting underwriting discounts of $3.5 million and offering costs of $0.2 million.

10. Share 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. As of September 30, 2013, there were options for an aggregate of 702,185 shares issued and outstanding under the 2006 Plan.

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. During January 2013, the authorized shares under the 2011 Plan automatically increased by 105,263 shares. During May 2013, the Company’s shareholders approved an increase of 1,500,000 shares reserved under the 2011 Plan. As of September 30, 2013, there were 2,024,728 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 Plan and 2011 Plan activity:


	Number of Options			Weighted Average Exercise Price		Weighted Average Contractual Term (in years)		Aggregate Intrinsic Value ⁽¹⁾
Outstanding—December 31, 2012		1,162,602		$	4.18

Granted		698,473			6.73
Exercised		—			—
Forfeited		(54,539	)		7.62
Expired		—			—

Outstanding—September 30, 2013		1,806,536			5.07		7.83	$	11,622,016

Exercisable—September 30, 2013		1,376,922			4.79		7.48	$	9,245,384

Vested and expected to vest at September 30, 2013 ⁽²⁾		1,763,647		$	5.04		7.8	$	11,384,658

⁽¹⁾	Intrinsic value is the excess of the fair value of the underlying common shares as of September 30, 2013 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, 2013:


	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—$1.71		97,688		2.94		97,688		2.94
$1.71—$2.94		604,497		6.35		526,148		6.22
$5.40—$7.86		1,104,351		9.07		753,086		8.94

		1,806,536				1,376,922

During the three-month period ended September 30, 2012 and 2013, the Company recorded $518,572 and $861,392 in share-based compensation expense, respectively. During the nine-month period ended September 30, 2012 and 2013, the Company recorded $1,189,182 and $2,480,137 in share-based compensation expense, respectively. Since inception, the Company has recognized $5,172,708 in share-based compensation expense. As of September 30, 2013, approximately $1,741,000 of total unrecognized compensation cost related to unvested share options is expected to be recognized over a weighted-average period of 1.8 years.

11. Income Taxes

The Company estimates an annual effective tax rate of 0% for the year ending December 31, 2013 as the Company incurred losses for the nine-month period ended September 30, 2013 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, 2013. 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.

12. 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 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,
	2012		2013		2012		2013
	(Unaudited)				(Unaudited)
Redeemable convertible preferred shares		—		—		923,847		—
Convertible debt		—		—		59,685		—
Warrants outstanding		247,370		340,519		236,217		289,723
Stock options outstanding		1,157,545		1,815,830		1,011,738		1,699,525

		1,404,915		2,156,349		2,231,487		1,989,248

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, 2012, 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, 2012. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, 2012, and in our Form 10-Q for the quarter ended June 30, 2013, 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 infections and chronic staphylococcal infections. Our lead program, solithromycin, which we are developing in both oral and IV formulations initially for the treatment of CABP, one of the most serious infections of the respiratory tract, is in a pivotal Phase 3 clinical trial of the oral formulation for the treatment of CABP in a global multi-center double-blinded study. The U.S. Food and Drug Administration (FDA) has designated both oral and intravenous solithromycin (CEM-101), as Qualified Infectious Disease Products (QIDP) for the indiciation of community-acquired bacterial pneumonia. The QIDP designation is expected to enable Cempra to benefit from certain incentives for the development of new antibiotics, including priority review, and a five year extension of new chemistry entity (NCE) exclusivity. We are also developing a suspension formulation for pediatric use. We have also completed a Phase 2 study of solithromycin in uncomplicated gonorrhea. Our second program is Taksta, which we are developing in the U.S. as an oral treatment for prosthetic joint infections caused by S. aureus, including MRSA.We are conducting a Phase 2 trial for Taksta in patients with prosthetic joint infections.

We acquired worldwide rights (exclusive of ASEAN countries) to a library of over 500 macrolide compounds, including solithromycin, from Optimer Pharmaceuticals, Inc. in March 2006. We entered into a long-term supply arrangement with Ercros, S.A. in March 2011, pursuant to which we have the exclusive right to acquire fusidic acid for the production of Taksta. We believe Ercros is one of only two currently known manufacturers that can produce fusidic acid compliant with the purity required for human use. The United States Patent and Trademark Office (USPTO) issued our patent, entitled “Fusidic Acid Dosgin Regimens for Treatement of Bacterial Infections,” on May 28, 2013 with claims directed to the company’s novel loading dose regiment for Taksta. This patent provides protection until 2029, excluding possible patent term extenstions.

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 product sales. From inception in November 2005 through September 30, 2013, we raised a total of $239.5 million from the issuance of debt, sale of convertible notes, convertible preferred shares, common shares and common stock, including $58.0 million from the sale of common stock in our initial public offering, or IPO, in February 2012, $25.1 million from the sale of common stock in a private placement in October 2012 and $57.9 million from the sale of common stock in a public offering in June 2013. As more fully discussed below, in May 2013, we licensed rights to solithromycin in Japan to Toyama Chemical Co., Ltd., or Toyama and received a $10.0 million, non refundable, upfront license fee.

We have incurred losses in each year since our inception in November 2005. Our net losses were approximately $5.0 million and $13.7 million for the three months ended September 30, 2012 and September 30, 2013, respectively, and $17.7 million and $28.2 million for the nine months ended September 30, 2012 and September 30, 2013, respectively. As of September 30, 2013, we had an accumulated deficit of approximately $149.4 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;

•

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.

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. All of our revenue to date has been derived from (1) a government contract and (2) the receipt of up-front proceeds under our license agreement withToyama, a portion of which has been recognized in accordance with US GAAP.

In May 2013, we entered into an agreement with the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services, or BARDA, for the evaluation and development of solithromycin for the treatment of bacterial infections in pediatric populations and infections caused by bioterror threat pathogens, specifically anthrax and tularemia.

The agreement is a cost plus fixed fee development contract, with a base performance segment valued at approximately $17.7 million, and four option work segments that BARDA may request in its sole discretion pursuant to the agreement. If all four option segments are requested, the cumulative value of the agreement would be approximately $58 million. Three of the options are cost plus fixed fee arrangements and one option is a cost sharing arrangement for which we would be responsible for a designated portion of the costs associated with that work segment. The estimated period of performance for the base performance segment is May 24, 2013 through May 23, 2015. If all option segments are requested, this estimated period of performance would be extended until approximately May 23, 2018.

Under the contract, we are reimbursed and recognize revenue as allowable costs are incurred plus a portion of the fixed-fee earned. We consider fixed-fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the work as compared to total estimated contract costs, with such costs incurred representing a reasonable measurement of the proportional performance of the work completed. Through September 30, 2013, we recognized $1.4 million in revenue under this agreement.

In May 2013, Cempra Pharmaceuticals, Inc., our wholly owned subsidiary, entered into a license agreement with Toyama, whereby we licensed to Toyama the exclusive right, with the right to sublicense, to make, use and sell any product in Japan that incorporates solithromycin as its sole active pharmaceutical ingredient, or API, for human therapeutic uses, other than for ophthalmic indications or any condition, disease or affliction of the ophthalmic tissues. Toyama also has a nonexclusive license in Japan and certain other countries, with the right to sublicense, to manufacture or have manufactured API for solithromycin for use in manufacturing such products, subject to limitations and obligations of the concurrently executed supply agreement discussed below. Toyama has granted us certain rights to intellectual property generated by Toyama under the license agreement with respect to solithromycin or licensed products for use with such products outside Japan or with other solithromycin-based products inside or outside Japan.

Following execution of the agreement, we received a $10.0 million upfront payment from Toyama. Toyama is also obligated to pay us up to an aggregate of $60.0 million in milestone payments, depending on the achievement of various regulatory, patent, development and commercial milestones. Under the terms of the license agreement, Toyama must also pay us a royalty equal to a low-to-high first double decimal digit percentage of net sales, subject to downward adjustment in certain circumstances. Through September 30, 2013, we recognized $4.3 million in revenue under this agreement and the remainder which is deferred will be recognized when earned

As part of the license agreement, we also entered into a supply agreement with Toyama, whereby we will be the exclusive supplier (with certain limitations) to Toyama and its sublicensees of API for solithromycin for use in licensed products in Japan, as well as the exclusive supplier to Toyama and its sublicensees of finished forms of solithromycin to be used in its clinical trials in Japan. Pursuant to the supply agreement, Toyama will pay us for such clinical supply of finished product and all supplies of API for solithromycin for any purpose, other than the manufacture of products for commercial sale in Japan, at prices equal to our costs. All API for solithromycin supplied by us to Toyama for use in the manufacture of finished product for commercial sale in Japan will be ordered from us at prices determined by our manufacturing costs, and which may, depending on such costs, equal, exceed, or be less than such costs. Either party may terminate the supply agreement for uncured material breach or insolvency of the other party, with Toyama’s right to terminate for our breach subject to certain further conditions in the case of our failure to supply API for solithromycin or clinical supply, but otherwise the supply agreement will continue until the expiration or termination of the license agreement.

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 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, 2013, we have incurred $109.3 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 Taksta for prosthetic joint infections 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 solithromycin and Taksta in parallel primarily for the treatment of CABP and prosthetic joint infections, respectively, 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 development personnel” 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,
	2012		2013		2012		2013
	(Unaudited, in thousands)				(Unaudited, in thousands)
Direct research and development expense by program:
Solithromycin	$	1,995	$	10,187	$	9,601	$	20,339
Taksta		317		174		611		1,161
Macrolide research		12		8		33		47
Research and development personnel cost		696		1,289		1,998		3,551

Total direct research and development expense		3,020		11,658		12,243		25,098
Indirect research and development expense		136		261		213		519

Total research and development expense	$	3,156	$	11,919	$	12,456	$	25,617

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 required and other research and development activities;

•

future clinical trial results; and

•

the 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 are conducting our pivotal trial program for solithromycin, which we believe will require two Phase 3 trials, including one trial with oral solithromycin and one trial with IV solithromycin stepping down to oral solithromycin. Both of these trials will be randomized, double-blinded studies 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. Using feedback received from the FDA, we began the Phase 3 trial with oral solithromycin in December 2012. We finalized the overall development program for solithromycin for CABP with the FDA at our end of Phase 2 meeting for solithromycin, which occurred in May 2013, and plan to initiate the IV-to-oral trial in the fourth quarter of 2013. In 2010, we successfully completed a Phase 2 clinical trial with Taksta in ABSSSI patients. In this trial, the Taksta loading dose regimen demonstrated efficacy, safety and tolerability that was comparable to linezolid. Like ABSSSI, prosthetic joint infections are often caused by S. aureus, including MRSA. At this time, however, we do not intend to pursue Taksta as a treatment for ABSSSI. In December 2012, we initiated a Phase 2 trial of Taksta in patients with prosthetic joint infections.

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.

We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates. We believe that these increases will likely include increased costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Other Income (Expense), Net

Interest income consists of interest earned on our cash and equivalents as well as decreases in fair value of warrants issued in connection with the note issued to Hercules Technology Growth Capital, Inc., or Hercules, in December 2011, referred to as the December 2011 Note, and the warrants issued in connection with the May 31, 2013 amendment to the December 2011 Note.

Interest expense consists of interest incurred on the notes issued in August 2011 to various investors and that converted to common stock at the close of our IPO in February 2012 and the December 2011 Note as well as increases in fair value of warrants issued in connection with the notes.

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 was increased by periodic accretion so that the amount reflected on the balance sheet would equal the aggregate redemption price at the redemption date.

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 since May 13, 2009. 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 increased the carrying value of the preferred shares and was charged against additional paid-in capital to the extent available or shareholders’ equity (deficit).

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.

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, 2012 filed with the Securities Exchange Commission, or SEC, on March 7, 2013. The only material changes to our accounting policies since December 31, 2012 are as follows:

Revenue Recognition

The Company’s revenue generally consists of research related revenue under federal contracts and licensing revenue related to non-refundable upfront fees, milestone payments and royalties earned under license agreements. Revenue is recognized when the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.

For arrangements that involve the delivery of more than one element, each product, service and/or right to use assets is evaluated to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has “stand-alone value” to the customer. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling prices of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods and services are delivered, limited to the consideration that is not contingent upon future deliverables.When an arrangement is accounted for as a single unit of accounting, the Company determines the period over which the performance obligations will be performed and revenue recognized. Management exercises significant judgment in the determination of whether a deliverable has stand-alone value, is considered to be a separate unit of accounting, and in estimating the relative fair value of each deliverable in the arrangement.

Results of Operations

The following table summarizes the results of our operations for the three-month and nine-month periods ended September 30, 2012 and 2013, together with the changes in those items in dollars:


	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2013			Change			2012			2013			Change
	(Unaudited, in thousands)									(Unaudited, in thousands)
Revenue:
Contract research	$	—		$	1,172			1,172		$	—		$	1,405			1,405
License		—			—			—			—			4,335			4,335

Total revenue		—			1,172			1,172			—			5,740			5,740
Operating expenses:
Research and development expense (1)		3,156			11,919			8,763			12,456			25,617			13,161
General and administrative expense (1)		1,495			2,167			672			4,244			6,896			2,652

Loss from operations		(4,651	)		(12,914	)		(8,263	)		(16,700	)		(26,773	)		(10,073	)
Other income (expense), net		(330	)		(733	)		(403	)		(959	)		(1,432	)		(473	)

Net income (loss)		(4,981	)		(13,647	)		(8,666	)		(17,659	)		(28,205	)		(10,546	)


(1) Includes the following stock-based compensation expenses:
Research and development expense	$	158		$	259		$	101		$	379		$	744		$	365
General and administrative expense		360			602			242			810			1,736			926

Comparison of the Three Months Ended September 30, 2012 and September 30, 2013

Contract and license revenue

For the three months ended September 30, 2013, total revenue increased to $1.2 million compared to the three months ended September 30, 2012. Contract research revenue increased $1.2 million as we initiated our BARDA contract in May 2013. We expect contract research revenue to continue to increase as the base performance segment of the contract progresses. We did not recognize any license revenue for the three months ended September 30, 2013.

Research and Development Expense

Research and development expense increased $8.8 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 as a result of an $8.2 million increase in expenses incurred for solithromycin and a $0.6 million increase in employee expense, primarily stock compensation expense.

Expenses incurred for solithromycin increased primarily as a result of $5.7 million from our ongoing phase 3 trial and $1.8 million from the production of clinical trial drug product and acquisition of comparator products used in the clinical trials during the third quarter of 2013 which did not occur in the third quarter of 2012. Additionally, there was an increase of $0.7 million due to our performance under the BARDA contract during the third quarter of 2013 which did not occur in the third quarter of 2012.

General and Administrative Expense

General and administrative expense increased by $0.7 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 as a result of increased professional service fees of $0.4 million and employee expenses of $0.3 million, primarily related to stock compensation expense.

Other Income (Expense), Net

Other income (expense), net increased $0.4 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increases were primarily resulting from fair value warrant adjustments and the increase in interest expense due to the increase in the loan balance of the December 2011 Note.

Comparison of the Nine Months Ended September 30, 2012 and September 30, 2013

Contract and license revenue

For the nine months ended September 30, 2013, total revenue increased to $5.7 million compared to the nine months ended September 30, 2012. Contract research revenue increased by $1.4 million as we initiated our BARDA agreement in May 2013. We expect contract research revenue to continue to increase as the base performance segment of the BARDA agreement progresses. License revenue increased $4.3 million due to revenue recognized upon receipt of the $10.0 million upfront payment from the execution of the Toyama license agreement in May 2013.

Research and Development Expense

Research and development expense increased $13.1 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 as a result of a $10.7 million increase in expenses incurred for solithromycin, a $0.5 million increase in expenses incurred for Taksta and a $1.9 million increase in employee expense.

Expenses incurred for solithromycin increased primarily as a result of $7.2 million from our ongoing phase 3 trial and $2.8 million from the production of clinical trial drug product and acquisition of comparator products used in the clinical trials during the first nine months of 2013 which did not occur in the first nine months of 2012. Additionally, there was an increase of $0.7 million due to the initiation of our performance under the BARDA contract during the first nine months of 2013 which did not occur in the first nine months of 2012.

Expenses incurred for research and development personnel increased $1.9 million primarily as a result of an increase in the number of employees and stock compensation expenses during the first nine months of 2013 which did not occur in the first nine months of 2012.

General and Administrative Expense

General and administrative expense increased by $2.7 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 as a result of increased stock compensation expense of $1.3 million, franchise tax of $0.4 million and professional service fees of $1.0 million.

Other Income (Expense), Net

Other income (expense), net increased $0.5 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The increases were primarily resulting from fair value warrant adjustments and the increase in interest expense due to the increase in the loan balance of the December 2011 Note.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in November 2005 through September 30, 2013, we have funded our operations primarily with $239.5 million from a combination of debt and the sale of convertible notes, convertible preferred shares, common shares and common stock.

The gross proceeds we have received from the issuance and sale of our convertible notes and preferred and common shares are as follows (dollars in thousands):


		Number of		Gross
Issue		Shares		Proceeds
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
Common Stock / Private Placement	2012		3,864,461		25,119
December 2011 Note Amendment	2013		—		5,238
Common Stock / Public Offering	2013		8,273,938		57,918

In addition to the financing activities listed above, we received $10.0 million of up-front proceeds under our license agreement with Toyama in May 2013 and $0.4 million under our BARDA agreement.

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

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
	2012			2013
	(Unaudited, in thousands)
Net cash provided by (used in):
Operating activities	$	(18,061	)	$	(18,615	)
Investing activities		(8	)		(51	)
Financing activities		54,109			58,961

Net increase (decrease) in cash and equivalents	$	36,040		$	40,295

Operating Activities. 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 changes in operating assets and liabilities of $1.8 million offset by non-cash items of $1.4 million. Cash used in operating activities of $18.6 million for the nine months ended September 30, 2013 was primarily a result of our $28.2 million net loss offset by cash provided by changes in operating assets and liabilities of $6.5 million and non-cash items of $3.1 million.

Investing Activities. Net cash used in investing activities was $8,000 for the nine months ended September 30, 2012 and $51,000 for the nine months ended September 30, 2013. Cash used in investing activities during each of these periods reflected our purchases of equipment.

Financing Activities. 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. Net cash provided by financing activities of $59.0 million for the nine months ended September 30, 2013 consisted of gross proceeds of $57.9 million from the public offering in June 2013 offset by $3.5 million of underwriting discounts and $0.2 million of offering costs, $5.2 million from proceeds from the amendment of the December 2011 Note offset by $0.3 million of issuance costs less principal payments of $0.2 million to the December 2011 Note and proceeds of $0.1 million from warrant exercise.

Funding Requirements

To date, we have not generated any product revenue from our development stage product candidates. All of our revenue has been derived from a government contract and the receipt of up-front proceeds under our license agreement with Toyama. We do not know when, or if, we will generate any product revenue. We do not expect to generate product revenue unless and 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.

Based on our estimates of costs and timelines for the development of solithromycin for the treatment of CABP and our resources as of September 30, 2013, we expect that we have sufficient funds in hand to complete all studies and trials currently expected to be necessary for submission of an NDA to the FDA. We will need to obtain additional financing for the continued development of solithromycin outside of CABP, 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 ongoing oral solithromycin Phase 3 trial, the results of our end-of-Phase 2 meeting with the FDA for the planned Phase 3 IV-to-oral trial for solithromycin, our ongoing Taksta Phase 2 trial and any future trials for solithromycin and Taksta;

•

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

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

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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;

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

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

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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, such as currently imposed under the loan from Hercules. 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.

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, 2013, there were no material changes to our contractual obligations and commitments outside the ordinary course of business from those specified in our 2012 Annual Report on Form 10-K, except for:

December 2011 Note

In December 2011, we entered into the $20,000,000 the December 2011 Note with 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 we could, at any time prior to October 1, 2012, request another borrowing in the aggregate amount of $10,000,000. We elected not to request the additional borrowing and let the option expire on September 30, 2012. In May 2013, we amended the December 2011 Note, increasing the intial loan amount to $15,000,000, receiving an additional $5,238,327 upon closing. We also extended the date by which we could request the additional $10,000,000 to September 30, 2013. We elected not to request the additional borrowing and let the option expire on September 30, 2013. This amendment also provides for us to make interest only payments through June 2014. Principal and interest payments will start July 1, 2014 over a 36-month amortization period. The principal balance outstanding on the loan agreement and all accrued but unpaid interest thereunder will be due and payable on June 1, 2017. In addition, we are to pay Hercules the following fees:

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$400,000 on the earliest to occur of (i) December 1, 2015, (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.

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$495,245 on the earliest to occur of (i) June 1, 2017, (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 granted Hercules a security interest in all of our assets, except intellectual property. Our obligations to Hercules include restrictions on borrowing, asset transfers, placing liens or security interests on our assets including its intellectual property, mergers and acquisitions and distributions to stockholders.

In connection with the initial closing of the December 2011 Note, we entered into a warrant agreement with Hercules, referred to as the First Hercules Warrant, under which Hercules has the right to purchase 39,038 shares of our common stock. The exercise price of the First Hercules Warrant was initially $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. In connection with the amendment to the December 2011 Note, the exercise price of the First Hercules Warrant was reduced to the lower of (a) $6.11, and (b) the effective price per share of our common stock issued or issuable in any offering of our equity or equity-linked securities that occurs prior to June 1, 2014, provided that such offering is effected principally for equity or debt-financing purposes, The First Hercules Warrant expires on December 20, 2021. Proceeds equal to the fair value of the First 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 our IPO, the warrant liability was reclassified to additional paid-in capital. Since the amendment to the First Hercules Warrant resulted in a variable exercise price, the fair value of the First Hercules Warrant as of the date of the amendment was reclassified from additional paid-in capital to a warrant liability.

Additionally, in connection with the amendment of the Decmber 2011 Note, we entered into a warrant agreement with Hercules, referred to as the Second Hercules Warrant, under which Hercules has the right to purchase an aggregate number of shares of our common stock equal to the quotient derived by dividing $609,533 by the exercise price then in effect, which is defined as the lower of (a) $6.11, and (b) the effective price per share of the common stock issued or issuable in any offering of the our equity or equity-linked securities that occurs prior to June 1, 2014, provided that such offering is effected principally for equity or debt-financing purposes. The exercise price is 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 Second Hercules Warrant expires on May 31, 2023. Proceeds equal to the fair value of the Second 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 December 2011 Note using the effective interest method.

Operating Lease

In May 2013, we amended our operating lease agreement for office space in Chapel Hill, North Carolina. The new lease provides for aggregate lease payments of $1.3 million paid over a 68 month term.

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.

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, 2013. For additional information regarding market risk, refer to “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our 2012 Annual Report on Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act), 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.

PART II – OTHER INFORMATION

Item 6.

Exhibits


Exhibit Number	Description of Document	Registrant’s Form	Dated	Exhibit Number	Filed Herewith

10.18*	Development and Supply Agreement by and between Cempra Pharmaceuticals, Inc. and Hospira Worldwide, Inc. effective as of July 1, 2013.				X

10.19	Amendment No. 1, effective as of September 26, 2013 to Exclusive License And Development Agreement by and between Cempra Pharmaceuticals, Inc. and Toyama Chemical Co., Ltd, dated May 8, 2013.				X

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

*	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

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: October 29, 2013		By:	/s/ Prabhavathi Fernandes, Ph.D.
		Prabhavathi Fernandes, Ph.D.
		President and Chief Executive Officer

Dated: October 29, 2013		By:	/s/ Mark W. Hahn
		Mark W. Hahn
		Chief Financial Officer

Large accelerated filer

Accelerated filer

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Smaller reporting company