Note

— Significant Accounting Policies

The Company

BioCryst Pharmaceuticals, Inc. (the “Company”) is a biotechnology company that designs, optimizes and develops novel small molecule drugs that block key enzymes involved in the pathogenesis of diseases. The Company focuses on oral treatments for rare diseases in which significant unmet medical needs exist and that align with its capabilities and expertise. The Company was incorporated in Delaware in

1986

and its headquarters is located in Durham, North Carolina. The Company integrates the disciplines of biology, crystallography, medicinal chemistry and computer modeling to discover and develop small molecule pharmaceuticals through the process known as structure-guided drug design. BioCryst has incurred losses and negative cash flows from operations since inception.

With the funds available at

September 30, 2017,

the Company believes these resources will be sufficient to fund its operations at least through the

third

quarter of

2019.

The Company has sustained operating losses for the majority of its corporate history and expects that its

2017

expenses will exceed its

2017

revenues. The Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoing operations. The Company’s liquidity needs will be largely determined by the success of operations in regards to the progression of its product candidates in the future. The Company also

may

consider other plans to fund operations beyond the

third

quarter of

2019

including: (

) securing or increasing U.S. Government funding of its programs, including obtaining procurement contracts; (

) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones; (

) raising additional capital through equity or debt financings or from other sources; (

) obtaining additional product candidate regulatory approvals, which would generate revenue, milestones and cash flow; (

) reducing spending on

one

or more research and development programs, including by discontinuing development; and/or (

) restructuring operations to change its overhead structure. The Company

may

issue securities, including common stock, preferred stock, depositary shares, stock purchase contracts, warrants and units, through private placement transactions or registered public offerings in the future. The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, JPR Royalty Sub LLC (“Royalty Sub”) and MDCP, LLC (“MDCP”). Both subsidiaries were formed to facilitate financing transactions for the Company. Royalty Sub was formed in connection with a

$30,000

financing transaction the Company completed on

March

2011.

See Note

Royalty Monetization, for a further description of this transaction. MDCP was formed in connection with a

$23,000

Senior Credit Facility that the Company closed on

September 23, 2016.

See Note

Senior Credit Facility, for a further description of this transaction. All intercompany transactions and balances have been eliminated.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form

-Q and do

not

include all of the information and footnotes required by U.S. GAAP for complete financial statements. Such financial statements reflect all adjustments that are, in management’s opinion, necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, and cash flows. There were

adjustments other than normal recurring adjustments.

These financial statements should be read in conjunction with the financial statements for the year ended

December

31,

2016

and the notes thereto included in the Company’s

2016

Annual Report on Form

-K. Interim operating results are

not

necessarily indicative of operating results for the full year. The balance sheet as of

December

31,

2016

has been derived from the audited consolidated financial statements included in the Company’s most recent Annual Report on Form

-K.

Cash and Cash Equivalents

The Company generally considers cash equivalents to be all cash held in commercial checking accounts, certificates of deposit, money market accounts or investments in debt instruments with maturities of

three

months or less at the time of purchase. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these items.

Restricted Cash

Restricted cash as of

September

30,

2017

reflects

$1,713

in royalty revenue paid by Shionogi & Co., Ltd. (“Shionogi”) designated for interest on the PhaRMA Notes (defined in Note

) and

$1,409

the Company is required to maintain as collateral for a letter of credit associated with the lease execution and build-out of its Birmingham research facilities.

Investments

The Company invests in high credit quality investments in accordance with its investment policy, which is designed to minimize the possibility of loss. The objective of the Company’s investment policy is to ensure the safety and preservation of invested funds, as well as maintaining liquidity sufficient to meet cash flow requirements. The Company places its excess cash with high credit quality financial institutions, commercial companies, and government agencies in order to limit the amount of its credit exposure. In accordance with its policy, the Company is able to invest in marketable debt securities that

may

consist of U.S. Government and government agency securities, money market and mutual fund investments, municipal and corporate notes and bonds, commercial paper and asset or mortgage-backed securities, among others. The Company’s investment policy requires it to purchase high-quality marketable securities with a maximum individual maturity of

three

years and requires an average portfolio maturity of

more than

months. Some of the securities the Company invests in

may

have market risk. This means that a change in prevailing interest rates

may

cause the principal amount of the investment to fluctuate. To minimize this risk, the Company schedules its investments with maturities that coincide with expected cash flow needs, thus avoiding the need to redeem an investment prior to its maturity date. Accordingly, the Company does

not

believe it has a material exposure to interest rate risk arising from its investments. Generally, the Company’s investments are

not

collateralized. The Company has

not

realized any significant losses from its investments.

The Company classifies all of its investments as available-for-sale. Unrealized gains and losses on investments are recognized in comprehensive loss, unless an unrealized loss is considered to be other than temporary, in which case the unrealized loss is charged to operations. The Company periodically reviews its investments for other than temporary declines in fair value below cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. The Company believes the individual unrealized losses represent temporary declines primarily resulting from interest rate changes. Realized gains and losses are reflected in interest and other income in the Consolidated Statements of Comprehensive Loss and are determined using the specific identification method with transactions recorded on a settlement date basis. Investments with original maturities at date of purchase beyond

three

months and which mature at or less than

months from the balance sheet date are classified as current. Investments with a maturity beyond

months from the balance sheet date are classified as long-term. At

September 30, 2017,

the Company believes that the cost of its investments is recoverable in all material respects.

The following tables summarize the fair value of the Company’s investments by type. The estimated fair values of the Company’s fixed income investments are classified as Level

in the fair value hierarchy as defined in U.S. GAAP. These valuations are based on observable direct and indirect inputs, primarily quoted prices of similar, but

not

identical, instruments in active markets or quoted prices for identical or similar instruments in markets that are

not

active. These fair values are obtained from independent pricing services which utilize Level

inputs.

	September 30, 2017
	Amortized Cost		Accrued Interest		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Obligations of the U.S. Government and its agencies	$	27,897	$	96	$	—	$	(7	)	$	27,986
Corporate debt securities		8,230		39		—		(8	)		8,261
Certificates of deposit		12,108		34		4		(6	)		12,140

Total investments	$	48,235	$	169	$	4	$	(21	)	$	48,387

	December 31, 2016
	Amortized Cost		Accrued Interest		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Obligations of the U.S. Government and its agencies	$	20,266	$	34	$	2	$	(4	)	$	20,298
Corporate debt securities		6,179		26		2		(8	)		6,199
Certificates of deposit		14,962		17		7		(11	)		14,975

Total investments	$	41,407	$	77	$	11	$	(23	)	$	41,472

The following table summarizes the scheduled maturity for the Company’s investments at

September

30,

2017

and

December

31,

2016.

	2017		2016
Maturing in one year or less	$	43,848	$	32,546
Maturing after one year through two years		4,539		8,926

Total investments	$	48,387	$	41,472

Receivables from Collaborations

Receivables from collaborations are recorded for amounts due to the Company related to reimbursable research and development costs from the U.S. Department of Health and Human Services, royalty receivables from Shionogi, Green Cross Corporation (“Green Cross”), Mundipharma International Holdings Limited (“Mundipharma”) and Seqirus UK Limited (“SUL”), and product sales to SUL. These receivables are evaluated to determine if any reserve or allowance should be established at each reporting date. At

September 30, 2017

and

December

31,

2016,

the Company had the following receivables.

	September 30, 2017
	Billed		Unbilled		Total
U.S. Department of Health and Human Services	$	63	$	1,906	$	1,969
Shionogi & Co. Ltd.		653		—		653
Green Cross Corporation		48		—		48
Mundipharma International Holdings Limited		46		—		46
Seqirus UK Limited		5,794		475		6,269

Total receivables	$	6,604	$	2,381	$	8,985

	December 31, 2016
	Billed		Unbilled		Total
U.S. Department of Health and Human Services	$	—	$	3,495	$	3,495
Shionogi & Co. Ltd.		3,451		—		3,451
Green Cross Corporation		686		—		686
Seqirus UK Limited		957		179		1,136

Total receivables	$	5,094	$	3,674	$	8,768

Monthly invoices are submitted to the U.S. Department of Health and Human Services related to reimbursable research and development costs. The Company is also entitled to monthly reimbursement of indirect costs based on rates stipulated in the underlying contract. The Company’s calculations of its indirect cost rates are subject to audit by the U.S. Government.

Receivables from Product Sales

Receivables from product sales are recorded for amounts due to the Company related to sales of RAPIVAB

. These receivables are evaluated to determine if any reserve or allowance should be established at each reporting date.

Inventory

The Company’s inventory consisted primarily of peramivir work in process and is being manufactured for the Company’s partners. Inventory is stated at the lower of cost and net realizable value, determined under the

first

-in,

first

-out (“FIFO”) method, or market. The Company expenses costs related to the production of inventories as research and development expenses in the period incurred until such time it is believed that future economic benefit is expected to be recognized, which generally is reliant upon receipt of regulatory approval. Upon regulatory approval, the Company will capitalize subsequent costs related to the production of inventories.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computer equipment is depreciated over a life of

three

years. Laboratory equipment, office equipment, and software are depreciated over a life of

five

years. Furniture and fixtures are depreciated over a life of

seven

years. Leasehold improvements are amortized over their estimated useful lives or the expected lease term, whichever is less. Property consists of a leased building which did

not

meet the sale-leaseback criteria and is recorded at its fair value, less depreciation. The building is being depreciated over a period equal to the expected term of the related lease.

In accordance with U.S. GAAP, the Company periodically reviews its property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets

may

not

be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are

not

expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Property and equipment to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Patents and Licenses

The Company seeks patent protection on all internally developed processes and products. All patent related costs are expensed to general and administrative expenses when incurred as recoverability of such expenditures is uncertain.

Accrued Expenses

The Company generally enters into contractual agreements with

third

-party vendors who provide research and development, manufacturing, and other services in the ordinary course of business. Some of these contracts are subject to milestone-based invoicing and services are completed over an extended period of time. The Company records liabilities under these contractual commitments when it determines an obligation has been incurred, regardless of the timing of the invoice. This process involves reviewing open contracts and purchase orders, communicating with applicable Company personnel to identify services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has

not

yet been invoiced or otherwise notified of actual cost. The majority of service providers invoice the Company monthly in arrears for services performed. The Company makes estimates of accrued expenses as of each balance sheet date in its financial statements based on the facts and circumstances. The Company periodically confirms the accuracy of its estimates with its service providers and makes adjustments if necessary. Examples of estimated accrued expenses include:

	•		fees paid to Contract Research Organizations (“CROs”) in connection with preclinical and toxicology studies and clinical trials;

	•		fees paid to investigative sites in connection with clinical trials;

	•		fees paid to contract manufacturers in connection with the production of the Company’s raw materials, drug substance and drug products; and

	•		professional fees.

The Company bases its expenses related to clinical trials on its estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that conduct and manage clinical trials on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and

may

result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. As of

September 30, 2017

and

December 31, 2016,

the carrying value of accrued expenses approximates their fair value due to their short-term settlement.

Income Taxes

The liability method is used in the Company’s accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of unrealized gains and losses on available-for-sale investments and is disclosed as a separate component of stockholders’ equity. Amounts reclassified from accumulated other comprehensive loss are recorded as interest and other income on the Consolidated Statements of Comprehensive Loss.

reclassifications out of accumulated other comprehensive loss were recorded during the

nine

months ended

September 30, 2017.

Realized gains of

$11

were reclassified out of accumulated other comprehensive loss during the

nine

months ended

September 30, 2016.

Revenue Recognition

The Company recognizes revenues from collaborative and other research and development arrangements and royalties when realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.

Collaborative and Other Research and Development Arrangements and Royalties

Revenue from license fees, royalty payments, event payments, and research and development fees are recognized as revenue when the earnings process is complete and the Company has

further continuing performance obligations or the Company has completed the performance obligations under the terms of the agreement. Fees received under licensing agreements that are related to future performance are deferred and recognized over an estimated period determined by management based on the terms of the agreement and the products licensed. Revisions to revenue or profit estimates as a result of changes in the estimated revenue period are recognized prospectively.

Under certain of the Company’s license agreements, the Company receives royalty payments based upon its licensees’ net sales of covered products. The Company recognizes royalty revenues when it can reliably estimate such amounts and 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 price of each deliverable. The estimated selling price of each deliverable is determined using the following hierarchy of values: (i) vendor-specific objective evidence of fair value, (ii)

third

-party evidence of selling price (“TPE”) and (iii) best estimate of selling price (“BESP”). The BESP reflects the Company’s best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis. In most cases the Company expects to use TPE or BESP for allocating consideration to each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is

not

contingent upon future deliverables. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable

may

be an obligation to deliver services, a right or license to use an asset, or another performance obligation.

June 2015,

the Company entered into a License Agreement (the “SUL Agreement”) granting SUL and its affiliates worldwide rights, excluding Israel, Japan, Korea and Taiwan, to develop, manufacture and commercialize RAPIVAB. The SUL Agreement provides for various types of payments, including a non-refundable upfront fee, milestone payments, and future royalties. Analysis of the SUL Agreement identified

three

deliverables: (i) license rights, (ii) inventory and (iii) regulatory support to obtain Canadian and European Union (“EU”) marketing approvals. The Company received an upfront payment of

$33,740

from SUL, of which

$7,000

was determined to be contingent upon EU marketing approval and will be deferred until that time. Approximately

$21,777

of the upfront payment was allocated to the license rights and recognized as revenue in

2015.

Approximately

$3,740

of the upfront payment was allocated to the pending sale of inventory and was recognized in

2015,

when the inventory transfer was completed. Approximately

$1,223

of the revenue from the SUL Agreement will be recognized over the expected period of involvement in these regulatory support activities.

Milestone payments are recognized as licensing revenue upon the achievement of specified milestones if (i) the milestone is substantive in nature and the achievement of the milestone was

not

reasonably assured at the inception of the agreement; and (ii) the fees are non-refundable. Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.

During the

first

nine

months of

2017,

the Company received a

$2,000

milestone payment related to the approval of RAPIVAB by Health Canada and a

$5,000

milestone payment associated with the U.S. Food and Drug Administration (“FDA”) approval of a supplemental new drug application (“sNDA”) for RAPIVAB extending its availability for the treatment of acute uncomplicated influenza to pediatric patients

two

years and older. The Company evaluated each event based payment under the provisions of ASU

2010

17,

Milestone Method of Revenue Recognition

, and determined that each event based payment met the criteria to be considered substantive and represents a milestone under the milestone method of accounting. Under the terms of the SUL Agreement, the Company

may

receive an additional

$5,000

payment related to the successful marketing approval by the European Medicines Agency (“EMA”) for an adult indication in the EU.

event-based payments were achieved during the

first

nine

months of

2016.

Reimbursements received for direct out-of-pocket expenses related to research and development costs are recorded as revenue in the Consolidated Statements of Comprehensive Loss rather than as a reduction in expenses. Under the Company’s contracts with the Biomedical Advanced Research and Development Authority within the United States Department of Health and Human Services (”BARDA/HHS”) and the National Institute of Allergy and Infectious Diseases (“NIAID/HHS”), revenue is recognized as reimbursable direct and indirect costs are incurred.

The Company recorded the following revenues for the

three

and

nine

months ended

September

30,

2017

and

2016:

	Three Months				Nine Months
	2017		2016		2017		2016
Product sales	$	1,501	$	—	$	1,501	$	—
Royalty revenue		442		3,501		7,252		6,020
Collaborative and other research and development revenues:
U.S. Department of Health and Human Services		1,490		3,813		4,305		9,846
Shionogi & Co. Ltd.		296		296		888		888
Seqirus UK Limited		5,031		153		7,350		616
Total collaborative and other research and development revenues		6,817		4,262		12,543		11,350

Total revenues	$	8,760	$	7,763	$	21,296	$	17,370

Research and Development Expenses

The Company’s research and development costs are charged to expense when incurred. Research and development expenses include all direct and indirect development costs related to the development of the Company’s portfolio of product candidates. Advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as expense when the related goods are delivered or the related services are performed. Research and development expenses include, among other items, personnel costs, including salaries and benefits, manufacturing costs, clinical, regulatory, and toxicology services performed by CROs, materials and supplies, and overhead allocations consisting of various administrative and facilities related costs. Most of the Company’s manufacturing and clinical and preclinical studies are performed by

third

-party CROs. Costs for studies performed by CROs are accrued by the Company over the service periods specified in the contracts and estimates are adjusted, if required, based upon the Company’s on-going review of the level of services actually performed.

Additionally, the Company has license agreements with

third

parties, such as Albert Einstein College of Medicine of Yeshiva University (“AECOM”), Industrial Research, Ltd. (“IRL”), and the University of Alabama at Birmingham (“UAB”), which require fees related to sublicense agreements or maintenance fees. The Company expenses sublicense payments as incurred unless they are related to revenues that have been deferred, in which case the expenses are deferred and recognized over the related revenue recognition period. The Company expenses maintenance payments as incurred.

Deferred collaboration expenses represent sub-license payments, paid to the Company’s academic partners upon receipt of consideration from various commercial partners, and other consideration paid to the Company’s academic partners for modification to existing license agreements. These deferred expenses would

not

have been incurred without receipt of such payments or modifications from the Company’s commercial partners and are being expensed in proportion to the related revenue being recognized. The Company believes that this accounting treatment appropriately matches expenses with the associated revenue.

Stock-Based Compensation

All share-based payments, including grants of stock option awards and restricted stock unit awards, are recognized in the Company’s Consolidated Statements of Comprehensive Loss based on their fair values. The fair value of stock option awards is estimated using the Black-Scholes option pricing model. The fair value of restricted stock unit awards is based on the grant date closing price of the common stock. Stock-based compensation cost is recognized as expense on a straight-line basis over the requisite service period of the award. In addition, we have outstanding performance-based stock options for which

compensation expense is recognized until “performance” is deemed to have occurred.

Interest Expense and Deferred Financing Costs

Interest expense for the

three

months ended

September

30,

2017

and

2016

was

$2,140

and

$1,465,

respectively, and for the

nine

months ended

September 30, 2017

and

2016

was

$6,334

and

$4,356,

respectively, and primarily relates to the issuance of the PhaRMA Notes (defined in Note

) and the Senior Credit Facility (defined in Note

). Costs directly associated with the issuance of the PhaRMA Notes and the Senior Credit Facility have been capitalized and are netted against the PhaRMA Notes and Senior Credit Facility on the Consolidated Balance Sheets. These costs are being amortized to interest expense over the terms of the PhaRMA Notes and the Senior Credit Facility using the effective interest rate method. Amortization of deferred financing costs and original issue discount included in interest expense was

$219

and

$116

for each of the

three

months ended

September

30,

2017

and

2016,

respectively, and

$658

and

$335

for each of the

nine

months ended

September

30,

2017

and

2016,

respectively.

Lease Financing Obligation

Based on the terms of the lease agreement for the research facility in Birmingham, Alabama, the Company had construction period risks during the construction period and the Company was deemed the owner of the building (for accounting purposes only) during the construction period. Accordingly, the Company recorded an asset of

$1,589

December 31, 2015,

representing the Company’s leased portion of the building and recorded a corresponding liability. Upon completion of leasehold improvement construction, which ended in

2016,

the Company did

not

meet the sale-leaseback criteria for de-recognition of the building asset and liability. Therefore, the lease is accounted for as a financing obligation. The asset will be depreciated over the expected duration of the lease of

20.5

years, and rental payments will be treated as principal and interest payments on the lease financing obligation liability. The underlying accounting for this transaction has

impact on cash flows associated with the underlying lease or construction in process. Interest expense for the

three

months ended

September

30,

2017

and

2016

includes

$82

and

$86,

respectively, and for the

nine

months ended

September 30, 2017

and

2016

includes

$217

and

$300,

respectively, related to the lease financing obligation.

At each of

September 30, 2017

and

December 31, 2016,

the lease financing obligation balance was

$2,704

and was recorded as a long term liability on the consolidated balance sheets. At

September 30, 2017

the remaining future minimum payments under the lease financing obligation are

$4,444.

Currency Hedge Agreement

In connection with the issuance by Royalty Sub of the PhaRMA Notes, the Company entered into a Currency Hedge Agreement to hedge certain risks associated with changes in the value of the Japanese yen relative to the U.S. dollar. The Currency Hedge Agreement does

not

qualify for hedge accounting treatment; therefore mark to market adjustments are recognized in the Company’s Consolidated Statements of Comprehensive Loss. Cumulative mark to market adjustments for the

nine

months ended

September

30,

2017

and

2016

resulted in losses of

$1,858

and

$7,372,

respectively. Mark to market adjustments are determined by a

third

party pricing model that uses quoted prices in markets that are

not

actively traded and for which significant inputs are observable directly or indirectly, representing Level

in the fair value hierarchy as defined by U.S. GAAP. In addition, the Company realized currency exchange gains of

$966

and

$811

during the

first

nine

months of

2017

and

2016,

respectively, associated with the exercise of a U.S. dollar/Japanese yen currency option under the Currency Hedge Agreement. The Company is also required to post collateral in connection with the mark to market adjustments based on thresholds defined in the Currency Hedge Agreement. As of

September

30,

2017

and

December 31, 2016,

hedge collateral was posted under the agreement.

Net Loss Per Share

Net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted loss per share is equivalent to basic net loss per share for all periods presented herein because common equivalent shares from unexercised stock options and common shares expected to be issued under the Company’s employee stock purchase plan were anti-dilutive. The calculation of diluted earnings per share for the

three

months ended

September

30,

2017

and

2016

does

not

include

1,996

and

1,291,

respectively, of such potential common shares, as their impact would be anti-dilutive. The calculation of diluted earnings per share for the

nine

months ended

September

30,

2017

and

2016

does

not

include

2,519

and

1,190,

respectively, of such potential common shares, as their impact would be anti-dilutive.

Use of Estimates

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

Significant Customers and Other Risks

Significant Customers

All peramivir sales (i.e., RAPIVAB, RAPIACTA, and PERAMIFLU) are made by the Company’s partners and the Company will be reliant on these partners to generate sales and remit cash to satisfy receivables.

Other than royalty revenues, the Company’s primary source of revenue that has an underlying cash flow stream is the reimbursement of galidesivir (formerly

BCX4430

) development expenses earned under cost-plus-fixed-fee contracts with BARDA/HHS and NIAID/HHS. The Company relies on BARDA/HHS and NIAID/HHS to reimburse predominantly all of the development costs for its galidesivir program. Accordingly, reimbursement of these expenses represents a significant portion of the Company’s collaborative and other research and development revenues. The completion (as with the

June 30, 2014

BARDA/HHS peramivir development contract) or termination of the NIAID/HHS and BARDA/HHS galidesivir contracts could negatively impact the Company’s future Consolidated Statements of Comprehensive Loss and Cash Flows. The Company recognizes royalty revenue from the net sales of RAPIACTA by Shionogi; however, the underlying cash flow from these royalty payments, except for Japanese government stockpiling sales, goes directly to pay the interest, and then the principal, on the Company’s non-recourse notes payable. Payment of the interest and the ultimate repayment of principal of these notes will be entirely funded by future royalty payments derived from net sales of RAPIACTA. Further, the Company’s drug development activities are performed by a limited group of

third

party vendors. If any of these vendors were unable to perform their services, this could significantly impact the Company’s ability to complete its drug development activities.

Credit Risk

Cash equivalents and investments are financial instruments which potentially subject the Company to concentration of risk to the extent recorded on the Consolidated Balance Sheets. The Company deposits excess cash with major financial institutions in the United States. Balances

may

exceed the amount of insurance provided on such deposits. The Company believes it has established guidelines for investment of its excess cash relative to diversification and maturities that maintain safety and liquidity. To minimize the exposure due to adverse shifts in interest rates, the Company maintains a portfolio of investments with an average maturity of approximately

months or less. Other than product sale and collaborative partner receivables discussed above, the majority of the Company’s receivables from collaborations are due from the U.S. Government, for which there is

assumed credit risk.

Recent Accounting Pronouncements

November 2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update

2016

18:

Statement of Cash Flows (Topic

230

): Restricted Cash

(“ASU

2016

18”

). The new standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for annual periods beginning after

December

15,

2017,

and interim periods within those annual reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

August 2016,

the FASB issued Accounting Standards Update

No.

2016

15:

Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments

(“ASU

2016

15”

). The amendments in this update clarify how entities should classify certain cash receipts and cash payments on the Consolidated Statements of Cash Flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than

one

class of cash flows. ASU

2016

will be effective for annual periods beginning after

December 15, 2017,

including interim periods within those annual reporting periods, but early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

March 2016,

the FASB issued Accounting Standards Update

No.

2016

09:

Compensation - Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accounting

(“ASU

2016

09”

). The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU

2016

eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized as an increase in paid in capital. Under ASU

2016

09,

these previously unrecognized deferred tax assets were recognized on a modified retrospective basis as of

January 1, 2017,

the start of the year in which the Company adopted ASU

2016

09.

The U.S. federal and state net operating losses and credits recognized as of

January 1, 2017

have been offset by a full valuation allowance. As a result, there is

cumulative-effect adjustment to retained earnings as of

September 30, 2017.

The Company elected

not

to change its policy on accounting for forfeitures and continues to estimate the total number of awards for which the requisite service period will

not

be rendered. The Company adopted ASU

2016

as of

January 1, 2017.

Adoption of ASU

2016

did

not

have a material impact on the Company’s consolidated financial statements.

February 2016,

the FASB issued Accounting Standards Update

No.

2016

02:

Leases (Topic

842

)

(“ASU

2016

02”

). The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for all leases with terms greater than

months. This update also introduces new disclosure requirements for leasing arrangements. ASU

2016

will be effective for the Company in fiscal year

2019,

but early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

January 2016,

the FASB issued Accounting Standards Update

No.

2016

01:

Financial Instruments - Overall (Subtopic

825

): Recognition and Measurement of Financial Assets and Financial Liabilities

(“ASU

2016

01”

). The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the amendments in this update supersede, for public business entities, the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU

2016

will be effective for the Company in fiscal year

2018,

but early adoption is permitted. The Company does

not

expect this standard to have a material impact on its consolidated financial statements.

July 2015,

the FASB issued Accounting Standards Update

No.

2015

11:

Inventory (Topic

330

): Simplifying the Measurement of Inventory

(“ASU

2015

11”

), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU

2015

defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The update does

not

apply to inventory that is measured using last-in,

first

-out or the retail inventory method. The update applies to all other inventory, which includes inventory that is measured using

first

-in,

first

-out or average cost methods. The amendments in ASU

2015

are effective for the Company for fiscal years, and the interim periods within those years, beginning after

December 15, 2016.

The Company adopted ASU

2015

as of

January 1, 2017.

Adoption did

not

have a material impact on its consolidated financial statements.

May 2014,

the FASB issued Standards Update

No.

2014

09:

Revenue from Contracts with Customers (Topic

606

)

(“ASU

2014

09”

), which provides a single, comprehensive revenue recognition model for all contracts with customers. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU

2014

also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In

July 2015,

the FASB finalized a

one

year delay in the effective date of this standard, which will now be effective

January 1, 2018;

however, early adoption is permitted any time after the original effective date,

January 1, 2017.

Companies can transition to the new standard under the full retrospective method or the modified retrospective method. The Company will adopt the standard effective

January 1, 2018

and expects to utilize the modified retrospective methodology. The Company is continuing to evaluate the effect that the standard will have on its consolidated financial statements and related disclosures.