UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________________

FORM 10-Q

(Mark One) 

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

For the quarterly period ended September 30, 2014

or

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

For the transition period from                to

Commission File Number 001-35119

___________________________________________________________

Ocera Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	63-1192270
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification No.)
or organization)

525 University Avenue, Suite 610
Palo Alto, CA	94301
(Address of principal executive offices)	(Zip Code)

(650) 475-0150

(Registrant’s telephone number, including area code)

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

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

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

Large Accelerated Filer o	Accelerated Filer o
Non-Accelerated Filer o	Smaller Reporting Company x
(Do not check if a smaller reporting company)

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

The number of shares outstanding of the registrant’s Common Stock as of October 31, 2014, was 19,741,758.

1

FORWARD-LOOKING STATEMENTS 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.

These forward-looking statements include, but are not limited to, statements about:

• the progress, timing and amount of expenses associated with our research, development and commercialization activities; 

• the timing, design, implementation and success of our clinical trials for OCR-002; 

• our ability to obtain U.S. and foreign regulatory approval for OCR-002 and the ability of OCR-002 to meet existing or future regulatory standards; 

• our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; 

• our expectations regarding federal, state and foreign regulatory requirements; 

• the therapeutic benefits, effectiveness and safety of OCR-002; 

• the accuracy of our estimates of the size and characteristics of the markets that may be addressed by OCR-002; 

• our ability to manufacture sufficient amounts of OCR-002 for clinical trials and commercialization activities; 

• our intention to seek, and our ability to establish strategic collaborations or partnerships for the development or sale of OCR-002 and the effectiveness of such collaborations or partnerships; 

• our expectations as to future financial performance, expense levels and liquidity sources; 

• the timing of commercializing OCR-002; 

• our ability to compete with other companies that are or may be developing or selling products that are competitive with OCR-002; 

• anticipated trends and challenges in our potential markets; 

• our ability to attract and retain key personnel; and 

• other risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Unless the context requires otherwise, references in this Quarterly Report to “we,” “us” and “our” refer to Ocera Therapeutics, Inc. and its subsidiaries.

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OCERA THERAPEUTICS, INC.

INDEX

		Page
Part I.	Financial Information	4
Item 1	Unaudited Consolidated Financial Statements	4
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	4
	Consolidated Statements of Operations and Comprehensive Loss for the three and nine month periods ended September 30, 2014 and 2013	5
	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2014 and 2013	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4	Controls and Procedures	24
Part II.	Other Information	25
Item 1	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities	25
Item 3	Defaults Under Senior Securities	25
Item 4	Mine Safety Disclosures	25
Item 5	Other Information	25
Item 6	Exhibits	26
	Signatures	27

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PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

Ocera Therapeutics, Inc. Consolidated Balance Sheets (In Thousands, Except Share and Per Share Amounts)
	September 30,		December 31,
	2014		2013
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,327	$	15,533
Short-term investments, available-for-sale	46,911		30,167
Accounts receivable	32		93
Prepaid expenses and other current assets	1,123		470
Assets of discontinued operations	—		3,029
Current assets	56,393		49,292
Property and equipment, net	69		59
Long-term investments	392		1,513
Other non-current assets	26		26
Intangible assets, net	212		335
Goodwill	595		595
Total assets	$	57,687	$	51,820
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,056	$	1,282
Accrued liabilities	1,914		1,902
Liabilities of discontinued operations	—		3,503
Total current liabilities	2,970		6,687
Other liabilities	2		1
Total liabilities	2,972		6,688
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock - $0.00001 par value, 5,000,000 shares authorized and no shares issued or outstanding at September 30, 2014 and December 31, 2013.	—		—
Common stock - $0.00001 par value, 100,000,000 shares authorized, 19,741,758 and 15,300,214 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively.	—		—
Additional paid-in capital	154,098		126,615
Accumulated other comprehensive income (loss)	(6)		3
Accumulated deficit	(99,377)		(81,486)
Total stockholders' equity	54,715		45,132
Total liabilities and stockholders' equity	$	57,687	$	51,820

See the accompanying notes to the unaudited consolidated financial statements.

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Ocera Therapeutics, Inc. Consolidated Statements of Operations and Comprehensive Loss (In Thousands, Except Share and Per Share Amounts) (unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue:
Licensing revenue	$	200		$	—		$	200		$	—
Royalty revenue	33			33			111			33
Total revenue	233			33			311			33
Operating expenses:
Research and development	4,189			1,351			11,481			1,785
General and administrative	2,682			2,990			7,836			5,213
Amortization of intangibles	41			172			123			172
Impairment of intangibles	—			1,576			—			1,576
Total operating expenses	6,912			6,089			19,440			8,746
Other income (expense):
Interest and other income	18			1			43			1
Interest and other expense	—			(13		)	—			(186		)
Change in fair value of warrant liability	—			3			—			15
Total other income (expense), net	18			(9		)	43			(170		)
Net loss from continuing operations	(6,661		)	(6,065		)	(19,086		)	(8,883		)
Net income (loss) from discontinued operations (including gain on disposal of $- and $1,149 for the three and nine months ended September 30, 2014)	58			(1,337		)	1,195			(1,337		)
Net loss	$	(6,603	)	$	(7,402	)	$	(17,891	)	$	(10,220	)
Net loss per share:
Net loss per share from continuing operations, basic and diluted	$	(0.34	)	$	(0.63	)	$	(1.14	)	$	(2.41	)
Net income (loss) per share from discontinued operations, basic and diluted	—			(0.14		)	0.07			(0.36		)
Net loss per share, basic and diluted	$	(0.34	)	$	(0.77	)	$	(1.07	)	$	(2.77	)
Weighted average number of shares used to compute net loss per share of common stock, basic and diluted	19,330,888			9,669,320			16,778,047			3,683,156
Other comprehensive loss:
Net loss	$	(6,603	)	$	(7,402	)	$	(17,891	)	$	(10,220	)
Unrealized loss on investments	(10		)	—			(9		)	—
Comprehensive loss	$	(6,613	)	$	(7,402	)	$	(17,900	)	$	(10,220	)

See the accompanying notes to the unaudited consolidated financial statements.

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Ocera Therapeutics, Inc. Consolidated Statements of Cash Flows (In Thousands) (unaudited)
	Nine Months Ended September 30,
	2014			2013
Operating activities
Net loss	$	(17,891	)	$	(10,220	)
Adjustments to reconcile net loss to net cash used in operating activities:
Net income (loss) from discontinued operations	(1,195		)	1,337
Depreciation	28			15
Amortization of intangibles	123			172
Stock based compensation	3,701			234
Change in valuation of warrant liability	—			(15		)
Impairment of intangible assets	—			1,576
Accretion of premium on investment securities	409			—
Debt discount, net and noncash interest expense	—			92
Changes in operating assets and liabilities:
Accounts receivable	61			72
Prepaid expenses and other assets	(653		)	(316		)
Accounts payable	(239		)	(534		)
Accrued liabilities	(29		)	—
Net cash used in continuing operating activities	(15,685		)	(7,587		)
Net cash used in discontinued operating activities	(444		)	(479		)
Net cash used in operating activities	(16,129		)	(8,066		)
Investing activities
Purchases of property and equipment	(38		)	(6		)
Purchase of investments	(35,586		)	—
Sale and maturities of investments	19,545			—
Cash received from merger transaction	—			7,464
Net cash provided by (used in) continuing investing activities	(16,079		)	7,458
Net cash provided by discontinued investing activities	1,165			—
Net cash provided by (used in) investing activities	(14,914		)	7,458
Financing activities
Proceeds from the sale of common stock, net of underwriting discounts and commissions and offering expenses	23,439			19,973
Proceeds from exercise of common stock options	398			23
Net cash provided by continuing financing activities	23,837			19,996
Net (decrease) increase in cash and cash equivalents	(7,206		)	19,388
Cash and cash equivalents—beginning of period	15,533			2,303
Cash and cash equivalents—end of period	$	8,327		$	21,691
Supplemental schedule of noncash investing and financing activities
Cashless exercise of stock options	$	22		$	—
Unrealized loss on investments	$	9		$	—
Deferred offering costs in accrued expenses and accounts payable	$	55		$	—
Reclassification of warrant liability to additional paid-in-capital	$	—		$	1
Conversion of promissory note and interest to common stock	$	—		$	3,187
Conversion of preferred stock to common stock	$	—		$	61,743
Common stock issued in connection with merger transaction	$	—		$	13,524

See the accompanying notes to the unaudited consolidated financial statements.

6

Ocera Therapeutics, Inc.

Notes to Unaudited Consolidated Financial Statements

1. The Company

Ocera Therapeutics, Inc. (the "Company") is a clinical stage biopharmaceutical company focused on the development and commercialization of OCR-002 (ornithine phenylacetate). OCR-002 is an ammonia scavenger and has been granted orphan drug designation and Fast Track status from the U.S. Food and Drug Administration (FDA) for the treatment of hyperammonemia and resultant hepatic encephalopathy in patients with acute liver failure and acute or chronic liver disease.

On July 15, 2013, Terrapin Acquisition, Inc., a Delaware corporation (“Merger Sub”) and wholly owned subsidiary of Tranzyme, Inc., a Delaware corporation (“Tranzyme”), completed its merger (the “Merger”) with and into Ocera Therapeutics, Inc., a private Delaware corporation (“Private Ocera”).  Private Ocera is considered the acquiring company in the Merger for accounting purposes.  In connection with the Merger, the combined company changed its name to Ocera Therapeutics, Inc. and the name of Private Ocera was changed to Ocera Subsidiary, Inc. 

On July 10, 2014 the Company completed an underwritten public offering of its common stock in which 4,200,000 shares of common stock were sold by the Company. The aggregate gross proceeds from the offering were $25.2 million. After deducting underwriters' discounts and commissions and offering expenses, the aggregate net proceeds received by the Company totaled approximately $23.4 million. The Company expects to use the net proceeds from the offering to continue its clinical development of OCR-002 and for working capital and other general corporate purposes.

The Company has incurred net losses since its inception and, as of September 30, 2014, had an accumulated deficit of $99.4 million and had cash, cash equivalents and investments of $55.6 million.

The Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements are issued.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company has a limited operating history and the sales and income potential of the Company's business and addressable market are unproven. The Company anticipates that it will continue to incur net losses into the foreseeable future as it continues the development and commercialization of its lead drug candidate OCR-002 and expands its corporate infrastructure. Based on the Company's operating plan, the Company believes its current working capital is sufficient to fund its operations through at least the next twelve months.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with United States of America generally accepted accounting principles ("U.S. GAAP") for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements and related notes do not include all information and footnotes required by U.S. GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013. Certain prior year amounts have been reclassified to conform with current year presentation.

Unaudited Interim Financial Information

The accompanying interim consolidated financial statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.

Use of Estimates

The preparation of financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

7

Discontinued Operations

On September 11, 2013, the Board of Directors approved a restructuring plan related to the operations of Tranzyme Pharma Inc. and its Sherbrooke, Quebec facility ("Tranzyme Pharma"), whereby the Company closed the operations of the facility effective as of November 11, 2013. On December 13, 2013, the Company entered into a Technology Transfer and License Agreement to sell the Company’s MATCH discovery platform and license the related intellectual property rights. The Company concluded that since Tranzyme Pharma's operations and the MATCH discovery platform comprised a component with distinct operations and cash flows that would be eliminated from ongoing operations, and the Company would not have significant involvement after the disposal, these components would be accounted for as discontinued operations. The results of operations of the components to be disposed of, related restructuring costs and gain on disposal of assets have been classified as net income (loss) from discontinued operations from their date of acquisition on July 15, 2013 through September 30, 2014. The assets and liabilities of Tranzyme Pharma have been classified as assets and liabilities, respectively, of discontinued operations. Discontinued operations are retroactively applied to all prior periods presented, and the financial statements presented for 2013 are reclassified to recognize the effects of discontinued operations. Unless noted otherwise, discussion in these notes to the financial statements pertain to our continuing operations.

Revenue Recognition

The Company recognizes revenue from the delivery of collaborative research services, license agreements for the development and commercialization of products and from royalties. During 2013, collaboration research revenue is disclosed as discontinued operations in the Company’s Consolidated Statements of Operation and Comprehensive Loss for all periods presented. For each source of revenue, the Company applies revenue recognition criteria in the following manner:

Multiple element arrangements such as collaboration agreements which may include an upfront license and ongoing services are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single unit of accounting. Deliverables under the agreement will be accounted for as separate units of accounting provided that (i) a delivered item has value to the customer on a stand-alone basis; and (ii) if the agreement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. The allocation of consideration amongst the deliverables under the agreement is derived using a "best estimate of selling price" if vendor specific objective evidence and third-party evidence of fair value is not available. If the delivered element does not have stand-alone value, the arrangement is then accounted for as a single unit of accounting, and the Company will recognize the consideration received under the arrangement as revenue on a straight-line basis over the estimated period of performance.

License fees from license agreements are recognized when the amounts are earned and determinable during the applicable period. The Company recognizes up-front nonrefundable license fees when due under contractual agreements and when the Company does not have a continuing obligation to provide services related to the agreement. Revenue associated with nonrefundable up-front license fees under arrangements where the license fees and research and development activities cannot be accounted for as separate units of accounting is deferred and recognized as revenue on a straight-line basis over the expected term of our continued involvement in the research and development process.

 The Company recognizes royalty payments as revenue when earned. At the end of each accounting period, estimates of royalty amounts due are made based on estimated sales information from the Company's customers.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update, or ASU, No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (topic 360); Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 provides additional requirements to classify a disposal of a component of an entity or a group of components of an entity in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with an option for early adoption. The Company intends to adopt this guidance at the beginning of our first quarter of fiscal year 2015, and does not expect the adoption of this standard will have a material impact on the Company’s financial statements.

On May 28, 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition

8

guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In June 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-10, Development Stage Entities (Topic 915). ASU 2014-10 removes the distinction between development stage entities and other reporting entities in U.S. GAAP and eliminates the requirement to label financial statements as those of a development stage entity and eliminates the requirement to present inception to date information in the statements of income, cash flows and shareholder equity. The guidance is applied retroactively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with an option for early adoption. The Company early adopted this guidance in the second quarter of 2014, and as a result, has removed the label “A Development Stage Company” from its financial statements and accompanying notes and eliminated the inception to date information from the Consolidated Statements of Operations and Comprehensive Loss and Consolidated Statements of Cash Flows. Other than presentation, the adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, companies will have reduced diversity in the timing and content of footnote disclosures than under today’s guidance. ASU 2014-15 is effective for the Company in the first quarter of 2016 with early adoption permitted. The Company does not believe the impact of adopting this standard will be material on the Company's financial statements.

3. Fair Value Measurements

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2014, and December 31, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. As a basis for categorizing inputs, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value from market-based assumptions to entity specific assumptions:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Inputs, other than level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Unobservable inputs that are supported by little or no market activity, which require the Company to develop its own assumptions.

Assets measured at fair value on a recurring basis as of September 30, 2014 are as follows (in thousands):

	Balance as of September 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	7,445	$	7,445	$	—	$	—
Commercial paper	5,250		—		5,250		—
Corporate debt securities	42,053		—		42,053		—
Total assets	$	54,748	$	7,445	$	47,303	$	—

9

Assets measured at fair value on a recurring basis as of December 31, 2013 are as follows (in thousands):

	Balance as of December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	5,774	$	5,774	$	—	$	—
Commercial paper	15,246		—		15,246		—
Corporate debt securities	20,884		—		20,884		—
Total assets	$	41,904	$	5,774	$	36,130	$	—

4. Balance Sheet Components

Investments

The following table summarizes the Company's available for sale investments as of September 30, 2014 (in thousands).

	Maturity (in Years)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Short-term investments:
Commercial paper	1 or less	5,246		4		—			5,250
Corporate debt securities	1 or less	41,671		—		(10		)	41,661
Total		46,917		4		(10		)	46,911
Long-term investments:
Corporate debt securities	More than 1	392		—		—			392
Total		392		—		—			392
Total investments		$	47,309	$	4	$	(10	)	$	47,303

The following table summarizes the Company's available for sale investments as of December 31, 2013 (in thousands).

	Maturity (in Years)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Short-term investments:
Commercial paper	1 or less	$	15,232	$	14	$	—		$	15,246
Corporate debt securities	1 or less	14,930		—		(9		)	14,921
Total		30,162		14		(9		)	30,167
Long-term investments:
Corporate debt securities	More than 1	1,515		—		(2		)	1,513
Total		1,515		—		(2		)	1,513
Total investments		$	31,677	$	14	$	(11	)	$	31,680

At each reporting date, the Company performs an evaluation of impairment to determine if the unrealized losses are other-than-temporary. For debt securities, management determines whether it intends to sell the impaired securities, and if there is no intent or expected requirement to sell, management considers whether it is likely that the amortized cost will be recovered. The Company does not consider unrealized losses on its debt investment securities to be credit-related. These unrealized losses relate to changes in interest rates and market spreads subsequent to purchase. The Company has not made a decision to sell securities with unrealized losses and believes it is more likely than not it would not be required to sell such securities before recovery of its amortized cost. There have been no other than temporary losses recognized in earnings.

10

Property and Equipment

Property and equipment, net were as follows (in thousands):

	Useful Life	September 30,			December 31,
	(in years)	2014			2013
Computer equipment and software	3 years	$	53		$	40
Office furniture and equipment	5 years	68			43
		121			83
Accumulated depreciation		(52		)	(24		)
Property and equipment, net		$	69		$	59

Total depreciation expense was $8,000 and $11,000 for the three months ended September 30, 2014 and 2013, respectively, $28,000 and $15,000 for the nine months ended September 30, 2014 and 2013, respectively. 

Acquired intangible assets

The net book value of acquired intangible assets were as follows (in thousands):

	September 30,			December 31,
Customer Agreements:	2014			2013
Carrying value	$	410		$	410
Accumulated amortization	(198		)	(75		)
Intangible assets, net	$	212		$	335
Weighted average remaining life (in years)	1.3			2.0

On July 15, 2013, the Company capitalized approximately $5.9 million of intangible assets acquired in the Merger. $2.2 million of these intangible assets acquired were reclassified to discontinued operations and assets held for sale. The Company recognized $172,000 as amortization expense on the intangible assets for both three months and nine months ended September 30, 2013. Total amortization expense was $41,000 for the three months ended September 30, 2014 and $123,000 for the nine months ended September 30, 2014.

As of September 30, 2014 expected amortization expense related to our purchased intangible assets is approximately $41,000 over the remainder of 2014 and $171,000 during 2015.

Subsequent to the Merger with Tranzyme, during the third quarter 2013 review of the collaboration agreement with Bristol-Meyers Squibb Company ("BMS"), the Company determined that BMS would terminate its efforts on the development of one of two macrocyclic compounds under development pursuant to an on-going collaboration agreement. As a result, the Company recognized an impairment loss of 50% of the intangible asset value associated with the agreement The Company expensed $1.6 million as a result of this impairment during the three months ended September 30, 2013. No impairment charges were recorded in the three and nine months ended September 30, 2014.

At December 31, 2013 the Company impaired 100% of the intangible asset associated with the agreement as a result of notification from BMS that all development efforts for all macrocyclic compounds would be terminated.

11

Accrued Liabilities

Accrued liabilities were as follows (in thousands):

	September 30,		December 31,
	2014		2013
Accrued clinical trials	$	1,050	$	417
Accrued compensation	449		1,093
Accrued consulting	379		315
Other accrued liabilities	36		77
Total Accrued Liabilities	$	1,914	$	1,902

5. Stockholders' Equity

On July 10, 2014 the Company completed an underwritten public offering of its common stock in which 4,200,000 shares of common stock were sold by the Company. The aggregate gross proceeds from the offering were $25.2 million. After deducting underwriters' discounts and commissions and offering expense, the aggregate net proceeds received by the Company totaled approximately $23.4 million. The Company expects to use the net proceeds from the offering to continue its clinical development of OCR-002 and for working capital and other general corporate purposes.

Stock Based Compensation

The Company’s stock option activity and related information for the nine months ended September 30, 2014 was as follows (in thousands, except share and per share data):

							Weighted-avg.
	Shares				Weighted-avg.		Remaining	Aggregate
	Available		Stock Options		Exercise Price		Contractual	Intrinsic
	for Grant		Outstanding		Per Share		Life (in Years)	Value
Balance at December 31, 2013	762,867		1,909,769		$	8.77	8.58	$	11,818
Stock options granted	(894,000	)	894,000		$	7.44
Stock options cancelled	364,551		(364,551	)	$	15.05
Stock options exercised	—		(243,824	)	$	1.72
Balance at September 30, 2014	233,418		2,195,394		$	7.97	9.16	$	547
At September 30, 2014:
Vested and expected to vest			2,114,917		$	7.98	9.14	$	547
Exercisable			484,723		$	9.16	7.95	$	547

The aggregate intrinsic value of options exercised under all option plans was $2.7 million and $44,000 for the nine months ended September 30, 2014 and 2013, respectively, determined as of the date of option exercise.

The Company recognized stock based compensation expense as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Research and development	$	528	$	2	$	1,359	$	6
General and administrative	921		200		2,342		228
Total	$	1,449	$	202	$	3,701	$	234

As of September 30, 2014, there were unrecognized compensation costs of $13.4 million related to stock options and the Company expects to recognize those costs over a weighted average period of 3.10 years.

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Stock-based compensation cost for stock options is estimated at the grant date based on the fair-value using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following weighted-average assumptions:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Risk-free interest rates	1.85% - 2.00%	—	1.85% - 2.01%	—
Expected life in years	6.08	—	6.08	—
Expected dividend yield	—	—	—	—
Expected volatility	97%	—	97% - 102%	—

6. Discontinued Operations

On September 11, 2013, the Company announced a restructuring plan related to the operations of Tranzyme Pharma. On December 13, 2013, the Company entered into a Technology Transfer and License Agreement with Genentech, Inc. ("Genentech"), and F. Hoffman-La Roche, Ltd. ("Roche") to sell certain Canadian fixed assets and materials, the MATCH technology and rights to the Genentech and Roche customer agreements and related intellectual property through licensing of patents for $4.0 million. The Company concluded that the operations of Tranzyme Pharma and related asset groups sold to Genentech and Roche would be accounted for as discontinued operations as the operations and cash flows of the discontinued component or asset group would be eliminated from ongoing operations of the Company and there would not be significant involvement in the component or asset group after the disposal transaction.

During the nine months ended September 30, 2014, the Company completed its obligations under the Technology Transfer and License Agreement with Genentech and Roche and recognized a gain on disposal of assets of $1.1 million within discontinued operations.

The results of Tranzyme Pharma and related asset groups are disclosed as discontinued operations in the Consolidated Statements of Operations and Comprehensive Loss for the period presented (in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue	$	—		$	167		$	—		$	167
Expenses:
Research and development	—			(503		)	—			(503		)
General and administrative	—			(168		)	—			(168		)
Amortization of intangible assets	—			(93		)	—			(93		)
Restructuring charges	—			(742		)	—			(742		)
Gain on disposal of assets	—			—			1,149			—
Settlement of certain restructuring charges	68			—			68			—
Other income (loss) from discontinued operations	—			2			(6		)	2
Recognition of accumulated translation adjustments upon deconsolidation of subsidiary	(10		)	—			(16		)	—
Net income (loss) from discontinued operations	$	58		$	(1,337	)	$	1,195		$	(1,337	)

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The assets and liabilities of Tranzyme Pharma and related asset groups are presented as held for disposal in the Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013. The carrying amount of assets and liabilities are as follows (in thousands):

	September 30, 2014		December 31, 2013
Prepaid expenses and other current assets	$	—	$	178
Property and equipment, net	—		356
Intangible assets, net	—		2,053
Goodwill	—		442
Assets of discontinued operations	$	—	$	3,029
Accounts payable	$	—	$	106
Deposit on sale of assets	—		3,000
Accrued liabilities	—		397
Liabilities of discontinued operations	$	—	$	3,503

Restructuring of Tranzyme Pharma

Restructuring charges of $742,000 were recorded during the three months ended September 30, 2013. During the nine months ended September 30, 2014, the Company paid and settled all of the remaining liabilities related to the restructuring of Tranzyme Pharma.

The following table summarizes the Company’s restructuring activities during the periods ended September 30, 2014 (in thousands):

	Post- Employment Benefits			Moving and Shipping Costs			Operating Activities			Total
Restructuring charges during three months ended September 30, 2013	$	708		$	—		$	34		$	742
Restructuring charges during three months ended December 31, 2013	(8		)	114			11			117
Cash payments and other settlements	(308		)	(15		)	(34		)	(357		)
Accrued restructuring at December 31, 2013	392			99			11			502
Cash payments and other settlements	(392		)	(31		)	(11		)	(434		)
Settlement of certain restructuring charges	—			(68		)	—			(68		)
Accrued restructuring at September 30, 2014	$	—		$	—		$	—		$	—

7. License Agreements and Acquired Commercialization Rights

Lyric Pharmaceuticals, Inc.

In September 2014, the Company entered into an Asset License and Purchase Agreement for the Sale and License of ulimorelin ("TZP-101"), the former lead compound of Tranzyme Inc., to Lyric Pharmaceuticals, Inc. (“Lyric”). Per the terms of the agreement, the Company received an up-front nonrefundable payment of $200,000 for the transfer of intellectual property and materials associated with TZP-101 and the licensing of associated patents with no further ongoing obligations to be performed by the Company. In addition, Lyric is solely responsible for the preclinical and clinical development of all products arising from the further development of TZP-101.

If successful, the Company could receive future consideration as a percentage of the proceeds received by Lyric upon its sale or license to a third party, and under certain conditions, clinical and regulatory milestones totaling up to $25.0 million plus royalty payments from potential product sales generated by TZP-101.

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8. Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities which include convertible preferred stock, warrants, convertible notes payable and outstanding stock options under the stock option plan have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position. All share and per share amounts for all periods presented in the following table have been adjusted retroactively to reflect the exchange for Tranzyme, shares as of the date of the Merger.

The following table presents the computation of net loss per share (in thousands, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Numerator
Net loss from continuing operations	$	(6,661	)	$	(6,065	)	$	(19,086	)	$	(8,883	)
Net income (loss) from discontinued operations	58			(1,337		)	1,195			(1,337		)
Net loss	$	(6,603	)	$	(7,402	)	$	(17,891	)	$	(10,220	)
Denominator
Weighted average common shares outstanding used to compute net loss per share, basic and diluted	19,330,888			9,669,320			16,778,047			3,683,156
Net loss per share of common stock, basic and diluted
Net loss per share from continuing operations	$	(0.34	)	$	(0.63	)	$	(1.14	)	$	(2.41	)
Net income (loss) per share from discontinued operations	—			(0.14		)	0.07			(0.36		)
Net loss per share	$	(0.34	)	$	(0.77	)	$	(1.07	)	$	(2.77	)

The following weighted average outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Convertible preferred stock	—	736,570	—	3,472,405
Convertible preferred stock warrants	—	2,003	—	14,902
Common stock warrants	938,882	158,939	938,882	140,722
Common stock options	1,985,217	633,163	1,827,527	573,789
Total	2,924,099	1,530,675	2,766,409	4,201,818

In addition to the potentially dilutive securities noted above, the Company had outstanding convertible notes payable and accrued interest that were converted into 186,217 shares of common stock upon completion of the Merger. The Company has excluded these convertible notes payable from the table above.

9. Commitments and Contingencies

From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of its business. Any of these claims could subject the Company to costly legal expenses and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, its insurance carriers may deny coverage or its policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Company's consolidated results

15

of operations and financial position. Additionally, any such claims, whether or not successful, could damage the Company's reputation and business. The Company is currently not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the Company's consolidated results of operations or financial position.

Leases

In August 2014, the Company amended the term of the lease for its North Carolina facility by extending term of the lease through January 2016. Rent expense was approximately $53,000 and $156,000 for the three and nine months ended September 30, 2014 and $79,000 and $153,000 for the three and nine months ended September 30, 2013, respectively.

The following is a schedule of non-cancellable future minimum lease payments for operating leases as of September 30, 2014 (in thousands):

Years ending December 31:
2014 (Remaining Three Months)	$	56
2015	191
2016	14
Total	$	261

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a clinical stage biopharmaceutical company focused on the development and commercialization of a clinical candidate, OCR-002 (ornithine phenylacetate), for the treatment of hepatic encephalopathy, or HE. HE is a serious complication of liver failure marked by mental changes including confusion, impaired motor skills, disorientation in time and space, and, in its more severe form, stupor, coma and even death. Common causes of liver malfunction leading to HE include alcoholism, viral hepatitis and auto-immune diseases, as well as obesity, Type II diabetes, and acetaminophen overdose. OCR-002 is an ammonia scavenger and has been granted orphan drug designation and Fast Track status by the U.S. Food and Drug Administration, or FDA, for the treatment of hyperammonemia and resultant hepatic encephalopathy, or HE, in patients with acute liver failure and acute on chronic liver disease.

Our strategy is to focus clinical development activities on the intravenous form of OCR-002 to treat acute HE in hospitalized patients while continuing formulation work on the oral form of OCR-002 which would focus on acute-to-chronic care of HE patients.

OCR-002 Development

We are conducting a randomized, placebo-controlled double blind Phase 2b clinical trial to evaluate the efficacy of intravenous administration of OCR-002 in reducing the severity of HE symptoms among hospitalized HE patients. We expect to complete trial enrollment in mid-2015. We also expect that an interim analysis to evaluate futility and sample size will be conducted in the first quarter of 2015. In addition, there are two investigator-sponsored Phase 2a clinical trials underway, one in Spain studying ammonia levels in a double blind trial of patients with upper gastrointestinal bleeding, which is fully enrolled, and the other an open label NIH-sponsored trial of the safety of OCR-002 in patients with hyperammonemia and HE due to acute liver failure or injury, which is still enrolling.

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"Stop HE" Phase 2b Trial

  We are currently conducting a randomized, placebo-controlled double blind Phase 2b clinical trial in 140 patients to evaluate the efficacy of intravenously administered OCR-002 in reducing the severity of HE symptoms among hospitalized HE patients. We commenced this trial in the fourth quarter of 2013 and enrolled our first patient in January 2014. We plan to conduct the trial at approximately 100 sites in the United States and Europe. To increase the pace of enrollment, we amended our trial protocol in March 2014 to broaden the eligible patient selection criteria. In April 2014, we further amended the protocol to increase patient dosage to 20 grams per day based on our review of preliminary pharmacokinetic data from the two ongoing Phase 2a trials discussed below. This increased dosage level remains below the maximum tolerated dose of 40 grams per day observed in our Phase 1 trial. The primary efficacy endpoint of this trial is time to clinically meaningful improvement in HE symptoms. Secondary endpoints include severity of HE, ammonia reduction, length of hospital stay and time in the intensive care unit, among others. We expect to complete trial enrollment in mid-2015. This expectation is based on a projection of enrollment in Europe that is comparable to what has been experienced in the United States to date. We expect to announce the results from this study in the second half of 2015.

Investigator Sponsored Phase 2a Trials

In addition, there are two investigator-sponsored Phase 2a trials of OCR-002 underway. One of these trials is being conducted in Spain, to assess ammonia lowering in patients with upper gastrointestinal bleeding. The first phase of this trial was conducted on an open label basis and has been completed. The investigators observed a rapid decline in ammonia in the 10 patients who received OCR-002 at 10 grams per day in addition to the standard of care. The second phase of the trial is a double-blind placebo controlled study of 38 patients, all of which have now been enrolled. The second trial, which is currently enrolling, sponsored by National Institutes of Health, or NIH, is a pilot open label dose ranging study of up to 10 grams per day, assessing safety and pharmacokinetics of OCR-002 in patients with acute liver failure/injury and hyperammonemia.

Phase 1 Pharmacokinetic Trial

 We completed Phase 1 pharmacokinetic and safety trials of OCR-002 in a parallel ascending dose clinical trial of 48 healthy volunteers and 43 stable cirrhotic patients. No serious adverse events, deaths or discontinuations were reported. The most common dose-related toxicities included dizziness, headache, nausea and blurred vision. Through this trial, we established the pharmacokinetic profile of OCR-002 and identified safety margins.    

Pre-clinical Studies

            Preclinical studies of OCR-002 were performed in two animal models, rat with bile duct ligation as a model for chronic liver disease and pig with hepatic artery ligation as a model for acute liver failure. In the rat model, OCR-002 significantly reduced arterial ammonia, and in the pig model, OCR-002 significantly reduced arterial ammonia, brain ammonia and intracranial pressure.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to each of our critical accounting areas. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within our Annual Report on Form 10-K for the year ended December 31, 2013. Other than those discussed below, there have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K.

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Merger with Tranzyme, Inc.

On July 15, 2013, Terrapin Acquisition, Inc., a Delaware corporation (“Merger Sub”) and wholly owned subsidiary of Tranzyme, Inc., a Delaware corporation (“Tranzyme”), completed its merger (the “Merger”) with and into Ocera Therapeutics, Inc., a private Delaware corporation (“Private Ocera”).  Private Ocera is considered the acquiring company in the Merger for accounting purposes.  In connection with the Merger, the combined company changed its name to Ocera Therapeutics, Inc. and the name of Private Ocera was changed to Ocera Subsidiary, Inc. 

Discontinued Operations

The results of operations of the components to be disposed of, related restructuring costs and gain on disposal of assets have been classified as net income (loss) from discontinued operations from their acquisition on July 15, 2013 through September 30, 2014. The assets and liabilities of Tranzyme Pharma have been classified as assets and liabilities, respectively, of discontinued operations.

Revenue Recognition

We recognized revenues from the delivery of collaborative research services, license agreements for the development and commercialization of products and from royalties. During 2013, collaboration research revenue is disclosed as discontinued operations in our Consolidated Statements of Operation and Comprehensive Loss for all periods presented. For each source of revenue, we apply revenue recognition criteria in the following manner:

Multiple element arrangements such as collaboration agreements which may include an upfront license and ongoing services are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single unit of accounting. Deliverables under the agreement will be accounted for as separate units of accounting provided that (i) a delivered item has value to the customer on a stand-alone basis; and (ii) if the agreement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. The allocation of consideration amongst the deliverables under the agreement is derived using a "best estimate of selling price" if vendor specific objective evidence and third-party evidence of fair value is not available. If the delivered element does not have stand-alone value, the arrangement is then accounted for as a single unit of accounting, and we will recognize the consideration received under the arrangement as revenue on a straight-line basis over the estimated period of performance.

License fees from our license agreements are recognized when the amounts are earned and determinable during the applicable period. We recognize up-front nonrefundable license fees when due under contractual agreements and when we do not have a continuing obligation to provide services related to the agreement. Revenue associated with nonrefundable up-front license fees under arrangements where the license fees and research and development activities cannot be accounted for as separate units of accounting is deferred and recognized as revenue on a straight-line basis over the expected term of our continued involvement in the research and development process.

 We recognize royalty as revenue when earned. At the end of each accounting period, estimates of royalty amounts due are made based on estimated sales information from the customers

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Results of Operations

Three and Nine Months Ended September 30, 2014 and 2013 (in thousands):

	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2014			2013						2014			2013
Revenue:
Licensing revenue	$	200		$	—		$	200		$	200		$	—		$	200
Royalty revenue	33			33			—			111			33			78
Total Revenue	233			33			200			311			33			278
Operating expenses:
Research and development	4,189			1,351			2,838			11,481			1,785			9,696
General and administrative	2,682			2,990			(308		)	7,836			5,213			2,623
Amortization of intangibles	41			172			(131		)	123			172			(49		)
Impairment of intangibles	—			1,576			(1,576		)	—			1,576			(1,576		)
Total operating expenses	6,912			6,089			823			19,440			8,746			10,694
Total other income (expense), net	18			(9		)	27			43			(170		)	213
Net loss from continuing operations	(6,661		)	(6,065		)	(596		)	(19,086		)	(8,883		)	(10,203		)
Net income (loss) from discontinued operations	58			(1,337		)	1,395			1,195			(1,337		)	2,532
Net loss	(6,603		)	(7,402		)	799			(17,891		)	(10,220		)	(7,671		)
Unrealized loss on investments	(10		)	—			(10		)	(9		)	—			(9		)
Comprehensive loss	$	(6,613	)	$	(7,402	)	$	789		$	(17,900	)	$	(10,220	)	$	(7,680	)

Revenues

Licensing revenue for each of the three and nine months ended September 30, 2014 was $200,000, consisting of an up-front nonrefundable payment for the transfer of intellectual property and materials associated with TZP-101to Lyric Pharmaceuticals, Inc.

Royalty revenue from a licensing agreement for the three and nine months ended September 30, 2014 was $33,000 and $111,000 respectively. Royalty revenue of $33,000 was reported during each of the three and nine months ended September 30, 2013 attributable to a license agreement, which was acquired in connection with the Merger in July 2013.

Costs and Expenses

Research and Development Expenses

Our research and development expenses increased by $2.8 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. This increase was due primarily to costs associated with our clinical development of OCR-002, an increase in headcount related to the Merger and an increase in stock compensation expense.

Our research and development expenses increased by $9.7 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. This increase was also due primarily to costs associated with our clinical development of OCR-002 and an increase in stock compensation expense.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

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Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, we cannot reasonably estimate the cost to complete projects and development timelines for their completion. Enrollment in clinical trials might be delayed or occur faster than anticipated for reasons beyond our control, requiring additional cost and time or accelerating spending. Results from clinical trials might not be favorable, or might require us to perform additional unplanned clinical trials, accelerating spending, requiring additional cost and time, or resulting in termination of the project. Regulatory reviews can also be delayed. Process development and manufacturing scale-up for production of clinical and commercial product supplies might take longer and cost more than our forecasts. As a result, clinical development and regulatory programs are subject to risks and changes that might significantly impact cost projections and timelines. We will need to raise additional money to advance development and commercialization of OCR-002 which may include entering into strategic alliances.

General and Administrative Expenses

Our general and administrative expenses decreased by $0.3 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was due primarily to a decrease in costs related to employee severance, professional fees including legal and accounting expenses partially offset by an increase in stock compensation expense.

Our general and administrative expenses increased by $2.6 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase was due primarily to an increase in stock compensation expense, professional fees including legal and accounting expenses and other expenses associated with our corporate governance including directors and officer insurance and rent. These increases were partially offset by a decrease in costs related to expenses incurred in connection with the Merger, including employee severance costs.

We expect that our general and administrative expenses may increase in the future as we expand our operating activities, maintain and expand our patent portfolio and potentially expand our infrastructure.

Amortization of intangibles

For the three and nine months ended September 30, 2014, we recognized $41,000 and $123,000, respectively, for amortization of intangibles. For both the three and nine month periods ended September 30, 2013, we recorded $172,000 of amortization of intangibles.

Impairment of Intangibles

Subsequent to the Merger with Tranzyme, during the third quarter 2013 review of the collaboration agreement with BMS, we determined that BMS would terminate its efforts on the development of certain macrocyclic compounds under development pursuant to the on-going collaboration agreement. As a result, we recognized an impairment loss of $1.6 million during the three months ended September 30, 2013. No impairment charges were recorded in the three and nine months ended September 30, 2014.

Other Income (Expense), Net

For the three and nine months ended September 30, 2014, we recognized $18,000 and $43,000, respectively, of other income (expense), net, which was attributable to interest income earned on our investment portfolio. For the three and nine months ended September 30, 2013, we recognized $(9,000) and $(170,000), respectively, of other income (expense), net, which primarily consisted of interest accrued and amortization of debt issuance costs on convertible notes payable and change in fair value of warrant liability. No interest and other expense was recorded in the three and nine months ended September 30, 2014 due to the conversion of convertible notes payable to common stock as a result of the Merger in July 2013.

Net income (loss) from discontinued operations

During the nine months ended September 30, 2014, we completed our obligations under the Technology Transfer and License Agreement with Genentech, Inc. and F. Hoffman-La Roche, Ltd., and recognized a gain on disposal of assets of $1.1 million within discontinued operations. During the three months ended September 30, 2014, we recognized a gain of $68,000 within discontinued operations attributed to the settlement of certain restructuring charges related to the subsidiary operations of Tranzyme Pharma.

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The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2014 and September 30, 2013 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue	$	—		$	167		$	—		$	167
Expenses:
Research and development	—			(503		)	—			(503		)
General and administrative	—			(168		)	—			(168		)
Amortization of intangible assets	—			(93		)	—			(93		)
Restructuring charges	—			(742		)	—			(742		)
Gain on disposal of assets	—			—			(1,149		)	—
Other income (loss) from discontinued operations	(68		)	(2		)	(62		)	(2		)
Recognition of accumulated translation adjustments upon deconsolidation of subsidiary	10			—			16			—
Net income (loss) from discontinued operations	$	(58	)	$	(1,337	)	$	(1,195	)	$	(1,337	)

Liquidity and Capital Resources

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2014 and 2013 (in thousands):

	Nine Months Ended September 30,
	2014			2013
Cash flow from:
Continuing operating activities	$	(15,685	)	$	(7,587	)
Discontinued operating activities	(444		)	(479		)
Continuing investing activities	(16,079		)	7,458
Discontinued investing activities	1,165			—
Continuing financing activities	23,837			19,996
Net decrease in cash and cash equivalents	$	(7,206	)	$	19,388

Comparison of the Nine Months Ended September 30, 2014 and 2013

The primary use of cash in continuing operating activities for the nine months ended September 30, 2014 was the result of our net loss from continuing operations of $19.1 million plus changes in working capital of $0.9 million. These changes were partially offset by non-cash charges of $4.3 million including depreciation expense, share-based compensation expense, accretion of premium on investment securities and amortization of intangible assets acquired in the Merger. Cash used in continuing operating activities for the nine months ended September 30, 2013 was related primarily to our net loss from continuing operations of $8.9 million plus changes in working capital of $0.8 million. These changes were partially offset by non-cash charges of $2.1 million including depreciation expense, share-based compensation expense and non-cash debt and investment related expenses.

    Cash used in discontinued operating activities for the nine months ended September 30, 2014 was due primarily to payment of accrued liabilities of discontinued operations.

Cash used by continuing investing activities for the nine months ended September 30, 2014 related to purchases of commercial paper and corporate debt securities totaling $35.6 million, partially offset by maturities of such investments of $19.5 million. For the nine months ended September 30, 2013, net cash provided by continuing investing activities related to the $7.5 million of cash received in connection with the Merger.

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Cash provided by discontinued investing activities represents cash proceeds related to the Technology Transfer and License Agreement with the Genentech and Roche Group for rights to the MATCHdiscovery platform and collection of other receivables.

Net cash provided by continuing financing activities for the nine months ended September 30, 2014 related to net proceeds of $23.4 million generated from our public offering completed on July 10, 2014, as well as proceeds from the exercise of stock options of $0.4 million. For the nine months ended September 30, 2013, net cash provided by financing activities related primarily to proceeds of $20.0 million generated from the sale of common stock in connection with the Merger.

Capital Resources and Funding Requirements

We will require additional funds to support future operations including our development activities associated with the IV and oral forms of OCR-002. Our future funding requirements depends on many factors, including, but not limited to the progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to enroll patients on a timely basis in our ongoing and potential future clinical trials, the time and cost necessary to respond to technological, market or governmental developments, and the cost of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights.

We expect to fund expenses from our current cash and cash equivalents, possible strategic opportunities and potential additional financing transactions. We believe that our current cash and cash equivalents, including proceeds from our July 2014 public offering of common stock, will be sufficient to fund our operations for at least the next twelve months.

We have based our estimates of our cash needs on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our OCR-002 Phase 2b clinical trial may cost more than we expect, or development of the oral formulation of OCR-002 may involve the license of proprietary technology. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidate, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for OCR-002.

Our ability to finance operations beyond our current resources will depend heavily on our ability to obtain favorable results in clinical trials of OCR-002 and to develop and commercialize OCR-002 successfully. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. We may seek to raise additional capital through a combination of private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends.

On July 10, 2014 we completed an underwritten public offering of our common stock in which 4,200,000 shares of common stock were sold. The aggregate gross proceeds from the offering were $25.2 million. After deducting underwriters' discounts and commissions and offering expenses, the aggregate net proceeds received totaled approximately $23.4 million. We expect to use the net proceeds from the offering to continue our clinical development of OCR-002 and for working capital and other general corporate purposes.

Contractual Obligations

In August 2014, we amended the term of the lease for our North Carolina facility and extended its term through January 2016. The following is a summary of our non-cancellable future minimum lease payments for operating leases at September 30, 2014 (in thousands):

Years ending December 31:
2014 (Remaining Three Months)	$	56
2015	191
2016	14
Total	$	261

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In the normal course of business, we enter into various firm purchase commitments related to active pharmaceutical ingredients, clinical studies and research studies. As of September 30, 2014, we have approximately $5.6 million in non-cancellable contractual obligations and commitments.

Off-Balance Sheet Arrangements

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

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We have historically contracted with third-party providers to manufacture drug substance and to conduct clinical trials and perform other research and development activities in Europe. Accordingly, we are exposed to fluctuations in foreign currency exchange rates in connection with the liabilities incurred by us in these relationships. We do not currently hedge our exposures to foreign currency fluctuations.

    Market Risk

Our cash and cash equivalents and investments as of September 30, 2014, consisted of cash, money market funds, commercial paper and corporate debt securities. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. However, because of the relative short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures as of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial and accounting officer concluded that, as of September 30, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A.Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. During the quarterly period covered by this Quarterly Report on Form 10-Q, there were no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6.    Exhibits

(a) Exhibits required by Item 601 of Regulation S-K.

Exhibit Number	Description
10.1*	First Amendment to the Lease Agreement dated August 29, 2014 by and between James Campbell, LLC and Ocera Therapeutics, Inc.
10.2	Employment Agreement dated August 5, 2014 by and between Ocera Therapeutics, Inc. and Rajiv Patni, M.D. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 11, 2014).
10.3	Employment Agreement dated June 17, 2014 by and between Ocera Therapeutics, Inc. and Michael Byrnes (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 22, 2014).
10.4	Ocera Therapeutics, Inc. Amended and Restated Non-Employee Director Compensation Policy (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 22, 2014).
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+	XBRL Instance Document
101.SCH+	XBRL Taxonomy Extension Schema Document
101.CAL+	XBRL Taxonomy  Calculation Linkbase Document
101.LAB+	XBRL Taxonomy Label Linkbase Document
101.PRE+	XBRL Taxonomy Presentation Linkbase Document
101.DEF+	XBRL Taxonomy Definitions Linkbase Document

*Filed herewith

**Furnished herewith 

+ Attached as Exhibits 101 to this report are the following financial statements from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows and (iv) related notes to these financial statements tagged as blocks of text. 

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SIGNATURES

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

OCERA THERAPEUTICS, INC.

(Registrant)

Date:	November 13, 2014	By:	/s/ Linda S. Grais, M.D.
			Linda S. Grais, M.D.
			President and Chief Executive Officer
Date:	November 13, 2014	By:	/s/ Sharon Tetlow
			Sharon Tetlow
			Acting Chief Financial Officer

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