ttph-10q_20190630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2019

or

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

For the transition period from                      to                      

Commission File Number: 001-35837

 

TETRAPHASE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-5276217

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

480 Arsenal Way

Watertown, MA

(Address of principal executive offices)

02472

(Zip Code)

 

Registrant’s telephone number, including area code: (617) 715-3600

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

 

TTPH

 

Nasdaq Global Select Market

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of August 6, 2019, there were 54,316,535 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 


 

 

2


 

TETRAPHASE PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS

 

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

4

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

4

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018

6

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2019 and 2018

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

PART II. OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 6.

Exhibits

62

 

 

 

 

SIGNATURES

63

3


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,954

 

 

$

107,776

 

Accounts receivable, net

 

 

1,728

 

 

 

2,274

 

Contract asset

 

 

 

 

 

3,000

 

Inventory

 

 

2,964

 

 

 

748

 

Prepaid expenses and other current assets

 

 

3,047

 

 

 

2,674

 

          Total current assets

 

 

78,693

 

 

 

116,472

 

Noncurrent assets:

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

683

 

 

 

1,121

 

Operating lease right-of-use assets

 

 

5,549

 

 

 

 

Restricted cash

 

 

699

 

 

 

699

 

Intangible assets, net

 

 

4,455

 

 

 

4,652

 

Total assets

 

$

90,079

 

 

$

122,944

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,079

 

 

$

3,210

 

Accrued expenses

 

 

11,821

 

 

 

11,761

 

Loan payable, current portion

 

 

3,846

 

 

 

 

Operating lease liabilities

 

 

1,447

 

 

 

 

Total current liabilities

 

 

19,193

 

 

 

14,971

 

Long-term operating lease liabilities

 

 

4,239

 

 

 

 

Loan payable, long-term

 

 

24,902

 

 

 

28,291

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001 per share; 5,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

 

Common stock, par value $0.001 per share; 125,000 shares authorized;                                            54,317 and 53,680 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

54

 

 

 

53

 

Additional paid-in capital

 

 

618,142

 

 

 

613,671

 

Accumulated deficit

 

 

(576,451

)

 

 

(534,042

)

Total stockholders’ equity

 

 

41,745

 

 

 

79,682

 

Total liabilities and stockholders’ equity

 

$

90,079

 

 

$

122,944

 

 

See accompanying notes to unaudited condensed consolidated financial statements

4


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

$

796

 

 

$

 

 

$

1,137

 

 

$

 

License and collaboration revenue

 

 

 

 

9,500

 

 

 

 

 

 

9,500

 

Government revenue

 

277

 

 

 

2,079

 

 

 

1,209

 

 

 

3,969

 

Total revenue

 

1,073

 

 

 

11,579

 

 

 

2,346

 

 

 

13,469

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue - product sales

 

307

 

 

 

 

 

 

471

 

 

 

 

Cost of revenue - intangible asset amortization

 

99

 

 

 

 

 

 

197

 

 

 

 

Research and development

 

8,166

 

 

 

14,370

 

 

 

14,903

 

 

 

32,497

 

Selling, general and administrative

 

15,113

 

 

 

7,165

 

 

 

28,427

 

 

 

12,869

 

Total expenses

 

23,685

 

 

 

21,535

 

 

 

43,998

 

 

 

45,366

 

Loss from operations

 

(22,612

)

 

 

(9,956

)

 

 

(41,652

)

 

 

(31,897

)

Other income and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

250

 

 

 

 

 

 

250

 

 

 

 

Interest income

 

416

 

 

 

413

 

 

 

923

 

 

 

778

 

Interest expense

 

(975

)

 

 

 

 

 

(1,930

)

 

 

 

Net loss

$

(22,921

)

 

$

(9,543

)

 

$

(42,409

)

 

$

(31,119

)

Net loss per share-basic and diluted

$

(0.42

)

 

$

(0.18

)

 

$

(0.79

)

 

$

(0.60

)

Weighted-average number of common shares used in net loss per share-basic and diluted

 

54,274

 

 

 

51,839

 

 

 

54,009

 

 

 

51,721

 

Comprehensive loss

$

(22,921

)

 

$

(9,543

)

 

$

(42,409

)

 

$

(31,119

)

 

See accompanying notes to unaudited condensed consolidated financial statements

5


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(42,409

)

 

$

(31,119

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

405

 

 

 

237

 

Non-cash interest expense related to notes payable

 

 

457

 

 

 

 

Stock-based compensation expense

 

 

4,432

 

 

 

6,364

 

Impairment of equipment related to restructuring

 

 

334

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

546

 

 

 

1,541

 

Contract asset

 

 

3,000

 

 

 

 

Inventory

 

 

(2,216

)

 

 

 

Prepaid expenses and other assets

 

 

(372

)

 

 

351

 

Accounts payable

 

 

(1,131

)

 

 

(3,187

)

Accrued expenses and other liabilities

 

 

177

 

 

 

(3,832

)

Deferred revenue

 

 

(6

)

 

 

(551

)

Operating lease right-of-use assets

 

 

689

 

 

 

 

Operating lease liabilities

 

 

(661

)

 

 

 

Net cash used in operating activities

 

 

(36,755

)

 

 

(30,196

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(106

)

 

 

(88

)

Net cash used in investing activities

 

 

(106

)

 

 

(88

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net of issuance costs

 

 

 

 

 

4,713

 

Proceeds from issuance of stock under stock plans

 

 

39

 

 

 

362

 

Net cash provided by financing activities

 

 

39

 

 

 

5,075

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(36,822

)

 

 

(25,209

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

108,475

 

 

 

136,610

 

Cash, cash equivalents and restricted cash at end of period

 

$

71,653

 

 

$

111,401

 

Supplemental cash flow disclosures from investing activities:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,474

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements

6


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

Common Shares

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

53,680

 

 

$

53

 

 

$

613,671

 

 

$

(534,042

)

 

$

79,682

 

Issuance of common stock under stock plans

 

 

66

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,723

 

 

 

 

 

 

2,723

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(19,488

)

 

 

(19,488

)

Balance at March 31, 2019

 

 

53,746

 

 

$

54

 

 

$

616,394

 

 

$

(553,530

)

 

$

62,918

 

Issuance of common stock under stock plans

 

 

518

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee stock purchase plan

 

 

53

 

 

 

 

 

 

 

39

 

 

 

 

 

 

 

39

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,709

 

 

 

 

 

 

1,709

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(22,921

)

 

 

(22,921

)

Balance at June 30, 2019

 

 

54,317

 

 

$

54

 

 

$

618,142

 

 

$

(576,451

)

 

$

41,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

51,458

 

 

$

51

 

 

$

592,243

 

 

$

(461,884

)

 

$

130,410

 

Issuance of common stock under stock plans

 

 

172

 

 

 

1

 

 

 

230

 

 

 

 

 

 

231

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,972

 

 

 

 

 

 

2,972

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(21,576

)

 

 

(21,576

)

Balance at March 31, 2018

 

 

51,630

 

 

$

52

 

 

$

595,445

 

 

$

(483,460

)

 

$

112,037

 

Issuance of common stock under stock plans

 

 

9

 

 

 

 

 

 

30

 

 

 

 

 

 

30

 

Issuance of common stock under "at-the-market" equity offering sales agreement, less issuance costs

 

 

1,180

 

 

 

1

 

 

 

4,712

 

 

 

 

 

 

4,713

 

Issuance of common stock under employee stock purchase plan

 

 

32

 

 

 

 

 

 

101

 

 

 

 

 

 

101

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,392

 

 

 

 

 

 

3,392

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(9,543

)

 

 

(9,543

)

Balance at June 30, 2018

 

 

52,851

 

 

$

53

 

 

$

603,680

 

 

$

(493,003

)

 

$

110,730

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

7


 

Tetraphase Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Operations

Tetraphase Pharmaceuticals, Inc., or the Company, is a biopharmaceutical company using its proprietary chemistry technology to develop and commercialize novel tetracyclines for serious and life-threatening conditions, including bacterial infections caused by multidrug-resistant, or MDR, bacteria. The Company’s commercial product, XeravaTM (eravacycline), a fully synthetic fluorocycline, is an intravenous, or IV, antibiotic that is approved for use as a first-line empiric monotherapy for the treatment of MDR infections, including those found in complicated intra-abdominal infections, or cIAI.  

On August 27, 2018, the United States Food and Drug Administration, or FDA, approved Xerava for the treatment of cIAI in adults. Approval of Xerava was based on the Company’s IGNITE (Investigating Gram-Negative Infections Treated with Eravacycline) phase 3 program. In October 2018, the Company commenced sales of Xerava in the United States.

On September 20, 2018, based on the results of the IGNITE phase 3 clinical program, the European Commission, or EC, granted marketing authorization for Xerava for the treatment of cIAI in adults in all 28 countries of the European Union, or EU, plus Norway, Iceland and Liechtenstein

In addition to Xerava, the Company has also developed TP-6076, a fully synthetic fluorocycline, targeted at addressing unmet medical needs, including multidrug-resistant Gram-negative bacteria, and TP-271, a fully synthetic fluorocycline developed for respiratory disease caused by bacterial biothreat pathogens, as well as bacterial pathogens associated with community-acquired pneumonia. Both of these programs have completed phase 1. The Company also developed TP-2846, a tetracycline for the treatment of acute myeloid leukemia, or AML. The Company has completed pre-clinical toxicology studies in this program and intends to file an investigational new drug application, or IND, with the FDA for TP-2846. The Company is seeking to out-license each of these product candidates.

On June 10, 2019, the Company announced a restructuring of its organization, including a 20% reduction in headcount, designed to focus its cash resources on commercializing Xerava primarily in the hospital setting. This reorganization included the elimination of the Company’s internal research function and an exploration of out-licensing opportunities for all of the Company’s pipeline of early-stage antibiotics and oncology product candidates. The reduction in headcount did not reduce any headcount in the commercial organization. Following the restructuring, over 50% of the Company’s full-time employees are commercial and medical affairs personnel.

The Company has incurred annual net operating losses every year since its inception. As of June 30, 2019, the Company had incurred losses since inception of $576.5 million. The Company has financed its operations primarily through public offerings and private placements of equity securities, debt financings, revenue from United States government grants and contract awards, milestone payments from its licensing agreement and Xerava product revenue.

Liquidity and Going Concern Assessment

Accounting Standards Update, or ASU, No. 2014-15, Presentation of Financial Statements - Going Concern, requires management to evaluate the Company’s ability to continue as a going concern one year beyond the filing date of the given financial statements. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether it has plans in place to alleviate that doubt. Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate the substantial doubt that was raised.

Based on its current operating plan, the Company expects its cash and cash equivalents as of June 30, 2019, its projected revenues from sales of Xerava, and the $2 million up-front payment related to expanded territories it expects to receive from Everest Medicines in August 2019 (Note 13) will be sufficient to fund the Company’s operations into the middle of the third quarter of 2020, which is more than one year beyond the filing date of this quarterly report. This estimate is based on certain significant assumptions, which are uncertain and may turn out to be incorrect. In particular, the forecast assumes continued significant growth of Xerava revenue, for which the Company has limited historical experience to base its estimate. In addition, the Company has forecast a significant reduction in expenses as a result of the restructuring announced in June 2019. If these estimates are incorrect, the Company may use its cash resources sooner than expected, in which case the Company would look to further reduce expenses. In addition, the

8


 

Company will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to fund its operations including ongoing spending to commercialize Xerava.

If the Company is unable to raise capital when needed or if its operating results fall short of its current projections, the Company could be forced to significantly delay, scale back or discontinue the commercialization of Xerava or reduce other expenditures, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, the Company’s rights to Xerava and its product candidates. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.

2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission, or SEC, for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles, or GAAP, for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2018 contained in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2019, or the 2018 Form 10-K. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2019 and the results of its operations and comprehensive loss and cash flows for the three and six months ended June 30, 2019 and 2018. Interim operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for future interim periods or for the fiscal year ending December 31, 2019. The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies” in the 2018 Form 10-K. The Company is disclosing certain significant policies as well as changes in its accounting policies related to guidance that became effective January 1, 2019 and April 1, 2019 in this Quarterly Report on Form 10-Q.

The December 31, 2018 condensed consolidated balance sheet included herein was derived from audited consolidated financial statements, but does not include all disclosures including notes required by GAAP for complete financial statements.   

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, the Company’s management evaluates its estimates, including product revenue, license and collaboration revenue, inventory, estimates related to clinical trial accruals, stock-based compensation expense, contract and grant revenues, and going concern considerations. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions

Accounts Receivable

Accounts receivable as of June 30, 2019 and December 31, 2018 represent amounts due from two main sources: (1) trade accounts receivable of $0.5 million consisting of payments to be received from customers for sales of Xerava, net of prompt payment discounts, chargebacks, rebates and certain fees and (2) contract accounts receivable of $1.2 million related to the Company’s government-related agreements.  

Contract accounts receivable relate to payments from entities administering the Company’s government-related agreements which include unbilled contract accounts receivable of $0.9 million and $0.7 million as of June 30, 2019 and December 31, 2018, respectively.

Contract Balances

The Company recognizes a contract asset when the Company transfers goods or services to a customer before the customer pays consideration or before payment is due, excluding any amounts presented as a receivable (i.e., accounts receivable). A contract asset represents the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer.

9


 

As of June 30, 2019, there was no contract asset. A milestone payment of $3.0 million was received in the second quarter of 2019 under the terms of the license agreement (the Everest license agreement), with Everest Medicines Limited, or Everest Medicines, whereby the Company granted Everest Medicines an exclusive license to develop and commercialize eravacycline, for the treatment of cIAI and other indications, in mainland China, Taiwan, Hong Kong, Macau, South Korea and Singapore. See Note 6 and Note 13 for further details.

Inventory

Inventory is stated at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis. Prior to the regulatory approval of Xerava, given the uncertainty of approval, the Company recognized as research and development expense costs related to the manufacture of Xerava. Upon approval of Xerava, the Company began to capitalize such costs as inventory.

During each quarter, the Company performs an assessment quantifying any potential excess or obsolete inventory and writes down any such inventory to its net realizable value in the period in which the impairment is identified. These adjustments are based upon multiple factors, including inventory levels at the Company and at its specialty distributors, projected demand and product shelf life. These impairment charges, if required, are recorded as a cost of revenue. As of June 30, 2019, there was no excess inventory.

Leases

Effective January 1, 2019, the Company adopted Accounting Standards Codification, or ASC, Topic 842, Leases. The Company adopted the new guidance as of January 1, 2019 using the modified retrospective adoption method in which it did not restate prior periods. Prior periods are presented in accordance with ASC 840, Leases.

The Company’s review and approval process for new leases, contracts, amendments and renewals includes an evaluation at the inception of each agreement to determine whether the contract is within the scope of ASC Topic 842, or other areas of accounting guidance. The Company’s contracts are determined to contain a lease within the scope of ASC Topic 842 when all of the following criteria based on the specific circumstances of the agreement are met: (1) there is an identified asset for which there are no substantive substitution rights; (2) the Company has the right to obtain substantially all of the economic benefits from the identified asset; and (3) the Company has the right to direct the use of the identified asset.

Upon transition to ASC 842, an operating lease asset is valued at the amount of the lease liability adjusted for prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment of the operating lease asset. Once the Company assesses a contract for a lease, it will only reassess whether a contract is or contains a lease if the terms and conditions of the contract are amended. Leases with a greater than one year duration are categorized on the balance sheet as operating lease assets, lease liabilities, and if applicable, long-term lease liabilities. Leases with a duration of less than one year are not presented on the balance sheet.

The Company records the operating lease asset and related lease liability based upon the present value of the lease payments not yet paid using the discount rate for the lease established at the commencement date. The discount rate associated with each lease agreement is based upon either (i) the rate implicit in the lease or (ii) the Company’s incremental borrowing rate if the rate implicit in the lease is indeterminable.

Although separation of lease and non-lease components is required, certain practical expedients are available to entities. The Company’s facilities operating leases have lease and non-lease components which the Company has elected to account for as one single lease component. The lease component results in an operating lease asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

Revenue Recognition

Product Revenue

Revenue recognition under ASC Topic 606 is applied through a five-step model as follows: (1) identify the contract(s) with the customer; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate transaction price to the performance obligation; and (5) recognize revenue when (or as) each performance obligation is satisfied.

The Company’s arrangements with its distributors are determined to be contracts within the scope of ASC Topic 606 when all five criteria in ASC Topic 606 are met. These five criteria were assessed at the inception of each arrangement. Since the criteria were met during this initial assessment, the Company will not reassess the criteria unless there is an indication of a significant change in facts and circumstances. In order to meet the definition of a contract, it must also be probable that the Company will collect the

10


 

consideration to which it is entitled for goods or services to be transferred. Once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services to be delivered with each contract, determines whether those are performance obligations and the related transaction price. The Company then recognizes revenue based on the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied.

The Company’s product revenue consists of the sales of Xerava, which the Company began selling to customers in October 2018. The Company sells Xerava to specialty distributors and these customers resell Xerava to hospitals or other treatment centers. In addition to these distributor agreements and the related discounts and allowances, the Company is subject to government mandated rebates, chargebacks, and discounts with respect to the purchase of the Company’s product. Product revenue is recognized net of reserves for all variable consideration, including discounts, chargebacks, government rebates and product returns. The Company is expensing the costs of obtaining and fulfilling these contracts when incurred. The Company has opted to immediately expense the incremental cost of obtaining a contract when the underlying related asset would have been amortized over one year or less.

Reserves for Variable Consideration

The Company evaluates its contracts with customers for forms of variable consideration which may require an adjustment to the transaction price based on their estimated impact. Revenues from product sales are recorded at the gross sales price, net of variable consideration, as described above.

The Company estimates variable consideration using the expected value method, which is the sum of probability-weighted amounts in a range of possible outcomes. These outcomes include market events and trends, forecasted product demand patterns, customer buying patterns and statutory requirements. The resulting reserves represent the Company’s best estimates of variable consideration it expects to occur.

Before it can include an amount of variable consideration in the transaction price, the Company must consider whether the amount of variable consideration is constrained. The Company includes estimates of variable consideration in revenue only when it has a “high degree of confidence” that revenue will not be reversed in a subsequent reporting period. To include variable consideration in the estimated transaction price, the entity has to conclude that it is “probable” that a significant revenue reversal will not occur in future periods, considering both the likelihood and magnitude of a revenue reversal to apply the constraint. Based on the above, the Company applies the constraint to variable consideration included in its contracts if it cannot conclude that it is probable that a significant revenue reversal will not occur in future periods.

Trade Discounts and Allowances: The Company offers its customers prompt pay discounts and service fees as stated in its customer contracts. The Company pays these service fees to its customers in exchange for their performance of various product distribution, marketing and promotional services targeted at advancing end-user sales of the Company’s product. The related reserves are set in the same period the corresponding revenue is recognized, resulting in a reduction of product revenue.

Government Chargebacks and Rebates: Under the terms of the Company’s master agreements, customers may charge back the Company for reimbursement when they are contractually obligated to sell products to government entities or other end-users at a lower price than the wholesale acquisition cost at which those products were acquired from the Company. These rebates consist of Medicare and Medicaid rebates as well as those related to other government drug pricing and reimbursement programs.

Product Returns: Products are eligible for return by the Customers in various scenarios under the Company’s returns policies included as part of its master distribution agreements. Return options are provided for expired merchandise, short-dated merchandise, products damaged in transit, or any discontinued, withdrawn, or recalled products. The Company estimates the amount of product that may be returned and records this as a reduction in revenue in the relevant period. The Company currently estimates product return liabilities using available industry data, sales information and visibility into the inventory remaining in the distribution channel. The Company has not received any returns to date since launch.

The Company will continue to assess its estimates of the various components of variable consideration as it accumulates additional historical data and make adjustments to these estimates and allowances accordingly.

Collaboration Revenue

The Company has entered into an out-licensing agreement that is evaluated under Accounting Standards Codification, Topic 606, or Topic 606, Revenue from Contracts with Customers, through which the Company licenses certain of its product candidates’ rights to a third party. Any future out-licensing agreements entered into by the Company and additional third parties shall also be evaluated under Topic 606. Terms of these arrangements include various payment types, typically including one or more of the

11


 

following: upfront license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply services; and/or royalties on net sales of licensed products.

To determine the amount and timing of revenue to be recognized under each agreement, the Company evaluates the following criteria: (i) confirming the goods or services in the contract; (ii) defining the performance obligations under the agreement; (iii) determining the transaction price, including any constraint on variable consideration; (iv) allocating the transaction price to the performance obligations; and (v) defining how the revenue will be recognized for each performance obligation. In determining the accounting treatment for these arrangements, the Company develops assumptions to determine the stand-alone selling price for each performance obligation in the contract. These assumptions may include forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success.

Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from upfront fees allocated to the license when the license, including any associated know-how, is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other obligations, the Company uses judgment to evaluate the combined performance obligation to determine whether it is satisfied over time or at a point in time and the appropriate method of measuring completion for purposes of recognizing revenue.  

Milestone Payments: For arrangements that include development milestone payments, the Company evaluates whether the milestones are considered probable and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.  

Manufacturing Supply: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, the Company recognizes revenue when the licensee obtains control of the goods, which is upon delivery.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  

Government Contract Revenue

The Company’s government contract revenue has been derived from its subcontracts with CUBRC, Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts, with which the Company is collaborating. These subcontracts with CUBRC relate to the following funding awards: (1) an award from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services, for the development of Xerava, which the Company refers to as the BARDA Contract; (2) two awards from the National Institute of Allergy and Infectious Diseases, or NIAID, for the development, manufacturing and clinical evaluation of TP-271, which the Company refers to as the NIAID Contract and the NIAID Grant, respectively. The Company is also the recipient of its cost reimbursement Sub-Award Agreement with the Trustees of Boston University, the administrator of the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, or CARB-X, program, for the development of TP-6076 (see Note 6). The Company recognizes revenue under these best-efforts, cost-reimbursable and cost-plus-fixed-fee subcontracts and subaward as the Company performs services under the subcontracts and subaward so long as a subcontract and subaward has been executed and the fees for these services are fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflect the Company’s partial performance under the subcontracts and subaward and equal direct and indirect costs incurred plus fixed fees, where applicable. The Company does not recognize revenue under these arrangements for amounts related to contract periods where funding is not yet committed as amounts above committed funding thresholds would not be considered fixed or determinable or reasonably assured of collection. Revenues and expenses under these arrangements are presented gross on the consolidated statements of operations and comprehensive loss as the Company has determined it is the primary obligor under these arrangements relative to the research and development services it performs as lead technical expert.

12


 

Revenue under the Company’s subcontracts under the BARDA Contract and under the CARB-X Award are earned under a cost-plus-fixed-fee arrangement in which the Company is reimbursed for direct costs incurred plus allowable indirect costs and a fixed-fee earned. Billings under these arrangements are based on approved provisional indirect billing rates, which permit recovery of allowable fringe benefits, allowable overhead and general and administrative expenses and a fixed fee.

Revenue under the Company’s subaward under the NIAID Contract and NIAID Grant were earned under a cost-reimbursable arrangement in which the Company was reimbursed for direct costs incurred plus allowable indirect costs. Billings under the NIAID Contract and NIAID Grant were based on approved provisional indirect billing rates, which permit recovery of fringe benefits and allowable general and administrative expenses.

Cost of Revenue

Cost of revenue consists primarily of the manufacturing and distribution costs for Xerava, Xerava net sales-based royalties and the amortization of the intangible asset associated with certain milestones paid to Harvard related to Xerava. All manufacturing costs incurred prior to Xerava’s approval in the United States on August 27, 2018 have been expensed in research and development and are not included in cost of revenue.

Recently Adopted Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, Compensation – “Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payment Accounting, which addresses aspects of the accounting for nonemployee share-based payment transactions. This pronouncement is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company early adopted ASU 2018-07 on April 1, 2019 and there was no impact on adoption.

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02, Leases (Topic 842), which among other things, results in the recognition of lease assets and lease liabilities by lessees on the Company’s balance sheets for virtually all leases. ASU 2016-02 supersedes most previous lease accounting guidance and is effective for interim and annual periods beginning after December 15, 2018. The Company adopted the new guidance as of January 1, 2019 using the modified retrospective adoption method in which it did not restate prior periods. The Company has elected the transition relief package of practical expedients permitted within Topic 842. Accordingly, the Company has not reassessed the classification of its existing leases as the transition date, whether existing contracts at the transition date contain a lease, or whether unamortized initial direct costs before the transition adjustments would have met the definition of initial direct costs at lease commencement. The Company does not allocate consideration in its leases to lease and non-lease components and does not record leases on its balance sheet with terms of 12 months or less.

The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company’s incremental borrowing rate represents the rate of interest that the Company would have to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. The Company considers its recent debt issuances and publicly available data for instruments with similar terms and characteristics when calculating its incremental borrowing rates.

The adoption had a material impact on the consolidated balance sheet related to the recognition of operating lease assets of $6.2 million and lease liabilities of $6.3 million, along with derecognition of deferred rent originally accounted for under the legacy guidance. The adoption did not have a material impact on the consolidated statement of operations. The Company has implemented changes to related processes, controls and disclosures.

There have been no other significant changes to the Company’s significant accounting policies since the beginning of this fiscal year.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 will change how companies account for credit losses for most financial assets and certain other instruments. For trade receivables, loans and held-to-maturity debt securities, companies will be required to recognize an allowance for credit losses rather than reducing the carrying value of the asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of ASU 2016-13 will have on the Company’s financial position and results of operations.

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3.  Fair Value Measurements

The Company records its cash and cash equivalents at fair value. Fair value measurements are classified and disclosed in one of the following three categories:

 

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.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial instruments measured at fair value as of June 30, 2019 and December 31, 2018 are classified below based on the three fair value hierarchy tiers described above (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

70,954

 

 

$

70,954

 

 

$

 

 

$

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

107,776

 

 

$

107,776

 

 

$

 

 

$

 

 

The Company measures cash equivalents at fair value on a recurring basis. The fair value of cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.

4.  Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, unvested restricted stock units, or RSU’s, and warrants, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The amounts in the table below were excluded from the calculation of net loss per share, due to their anti-dilutive effect:

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Warrants

 

 

414,365

 

 

 

 

Unvested restricted stock units

 

 

2,590,700

 

 

 

1,088,689

 

Outstanding stock options

 

 

6,865,136

 

 

 

7,149,909

 

Totals

 

 

9,870,201

 

 

 

8,238,598

 

 

5. Inventories

Inventory consisted of the following:

(in thousands)

 

As of June 30,

2019

 

 

As of December 31,

2018

 

Work in progress

 

$

115

 

 

$

655

 

Finished goods

 

 

2,849

 

 

 

93

 

Total inventory

 

$

2,964

 

 

$

748

 

There were no charges related to excess inventory for the three and six months ended June 30, 2019.

14


 

6.  Significant Agreements and Contracts

License Agreements

Harvard University

In August 2006, the Company entered into a license agreement for certain intellectual property with Harvard. Under the license agreement, as of June 30, 2019, the Company has paid Harvard an aggregate of $16.4 million in upfront license fees, sublicense fees and development milestone payments for the licensed Harvard technology, and has issued 31,379 shares of common stock to Harvard.

For each product covered by the license agreement, the Company is obligated to make certain payments totaling up to approximately $15.1 million upon achievement of certain development and regulatory milestones and to pay additional royalties on net sales of such product. The Company is also obligated to make certain payments to Harvard based on amounts received under its license agreement with Everest Medicines Limited. During the three months ended June 30, 2019 and June 30, 2018, the Company paid Harvard $0.6 million and $1.9 million, respectively, related to the Everest Medicines license agreement. During the three months ended June 30, 2019 the Company did not pay Harvard any regulatory milestones. During the three months ended June 30, 2018, the Company paid Harvard $3.0 million in regulatory milestone payments.

Paratek

On March 18, 2019, the Company and Paratek Pharmaceuticals, Inc., or Paratek, entered into a license agreement, or the Paratek License Agreement. Under the terms of the Paratek License Agreement, Paratek granted to Tetraphase a non-exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain Paratek patents.

The terms of the Paratek License Agreement provide for the Company to pay Paratek royalties at a low single digit percent on net sales of Xerava sold in the United States. The Company’s obligation to pay royalties with respect to the licensed product is retroactive to the date of the first commercial sale of Xerava and shall continue until there is no longer any valid claims of the Paratek patents which will expire in October 2023.

Everest Medicines License Agreement

In February 2018, the Company entered into the Everest License Agreement with Everest Medicines, whereby the Company granted Everest Medicines an exclusive license to develop and commercialize Xerava, for the treatment of cIAI and other indications, in mainland China, Taiwan, Hong Kong, Macau, South Korea and Singapore, or the Territory.

Under the terms of the Everest License Agreement, the Company received from Everest Medicines an upfront cash payment of $7.0 million in the first quarter of 2018 and a cash payment of $2.5 million related to Everest Medicines’ submission of an IND with the National Medical Products Administration (formerly CHINA FDA) in June 2018. In the second quarter of 2019, the Company received a cash payment of $3.0 million related to Everest Medicine’s initiation of a Phase 3 clinical trial.

The Company is eligible to receive up to an aggregate of $11.0 million in future clinical development and regulatory milestone payments and up to an aggregate of $20.0 million in sales milestone payments. There can be no guarantee that any such milestones or sales thresholds will in fact be met. The Company is obligated to make certain payments to Harvard based on amounts received from Everest Medicines under the Everest License Agreement pursuant to the existing license agreement by and between Harvard and the Company.

The Company will also be entitled to receive low double-digit tiered royalties on sales in the Territory, if any, of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Territory until the latest to occur of: (i) the last-to-expire of specified patent rights in such jurisdiction in the Territory; (ii) expiration of marketing or regulatory exclusivity in such jurisdiction in the Territory; or (iii) ten (10) years after the first commercial sale of a product in such jurisdiction in the Territory. In addition, royalties payable under the Everest License Agreement will be subject to reduction on account of generic competition and after patent expiry in a jurisdiction if required by applicable law, with any such reductions capped at certain percentages of the amounts otherwise payable during the applicable royalty payment period.

In addition, on July 29, 2019, the Company amended its original agreement with Everest Medicines to extend Everest Medicines’ exclusive license to develop and commercialize Xerava to the jurisdictions of the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines. Under the terms of this amendment, the Company will receive from Everest Medicines an upfront, nonrefundable cash payment of $2.0 million within 30 days of the effective date of the amendment. As with the other milestones discussed above, the Company is obligated to make certain

15


 

payments to Harvard based on amounts received from Everest under this amendment pursuant to the existing license agreement by and between Harvard and the Company.

Under the terms and conditions of the Everest License Agreement, Everest Medicines will be solely responsible for the development and commercialization of licensed products in the Territory. The Company agreed to manufacture clinical material, which will be paid by Everest Medicines at the Company’s cost, as well as commercial supply, which will be paid by Everest at cost plus a reasonable margin.

In evaluating the recognition of revenue under the Everest License Agreement, the Company identified the following three performance obligations under the Agreement: (i) exclusive license to develop and commercialize eravacycline for the treatment of cIAI and other potential, future indications, in the Territory, (ii) provision of information and technical assistance related to the know-how transfer for the development of eravacycline; and (iii) provision of clinical supply to Everest Medicines.

The Company evaluated the Everest License Agreement under Topic 606 at the time of execution of the arrangement. Based on that evaluation, the upfront fee of $7.0 million represented the amount of the consideration to be included in the transaction price, which will be allocated to the identified performance obligations. Subsequent to execution, the Company determined that the milestones for the Chinese IND and Phase 3 clinical trial were probable to be achieved and that a significant revenue reversal would not occur, and included the payment amounts of $2.5 and $3.0 million, respectively, in the transaction price.  

No other clinical milestones, regulatory milestones, sales-based milestones or sales royalties have been included in the transaction price, as these milestones are not considered probable given Everest Medicines relatively short operating history, the uncertainty of regulatory processes in China and that commercial sales have not commenced. The Company determined that the license and related know-how were a combined performance obligation as the license is not distinct without the provision of the related know-how transfer. The Company’s requirement to manufacture clinical supply for Everest Medicines is dependent on Everest Medicines’ future purchases, the payment for which was determined to be at cost and therefore potentially represents a material right. However, based on the amount of clinical supply expected to be ordered by Everest Medicines, the Company has estimated that the value of this right would be immaterial.

The Company satisfied no performance obligations during the three months ended June 30, 2019, and therefore recognized no revenue.

Other Material Agreements

Patheon UK Limited Master Manufacturing Services Agreement

In June 2017, the Company and Patheon UK Limited and certain of its affiliates, or Patheon, entered into a master manufacturing services agreement. Under the Patheon agreement, the Company is responsible for supplying the active pharmaceutical ingredient for eravacycline to Patheon, and Patheon is responsible for manufacturing eravacycline, conducting quality control, quality assurance, analytical testing and stability testing and packaging. The Company and Patheon entered into two related product agreements pursuant to the Patheon agreement that govern the terms and conditions of Patheon’s manufacture of commercial supplies of eravacycline at Patheon’s Greenville, North Carolina and Ferentino, Italy manufacturing sites. Pursuant to the Patheon agreement, the Company has agreed to order from Patheon at least a certain percentage of its annual commercial requirements for eravacycline in the United States and European Union each year for the term of the Patheon agreement. The Patheon agreement has an initial term ending December 31, 2022, and will automatically renew after the initial term for successive terms of two years each, unless either party gives notice of its intention to terminate at least 18 months prior to the end of the then current term. The Company may terminate a product agreement upon 30 days’ prior written notice under certain circumstances.

Finorga SAS Commercial Supply Agreement

In October 2017, the Company and Finorga SAS, or Novasep, entered into a commercial supply agreement. Under the agreement, Novasep will, pursuant to accepted purchase orders entered into under the agreement, manufacture for commercial supply the active pharmaceutical ingredient for eravacycline. This agreement has an initial term ending October 16, 2022, and will automatically renew after the initial term, unless either party gives notice of its intention to terminate at least 18 months prior to the end of the then current term. The Company may terminate the Novasep agreement upon 30 days’ prior written notice under certain circumstances.

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Government Grant and Contracts

BARDA Contract for Eravacycline

The Company received funding for the development of Xerava under an award from BARDA, an agency of the U.S. Department of Health and Human Services. In January 2012, BARDA awarded a five-year contract, which has since been extended, that provides for up to a total of $67.3 million in funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens (or BARDA Contract). The funding under the BARDA Contract is also being used for the development, manufacturing and clinical evaluation of Xerava to treat certain infections caused by life-threatening MDR bacteria.

In connection with the BARDA Contract, in February 2012, the Company entered into a cost-plus-fixed-fee subcontract with CUBRC, an independent, not for profit, research corporation that specializes in U.S. government-based contracts, which is also the direct recipient of the BARDA Contract. This subcontract, which currently expires on December 31, 2019, granted the Company initial funding of up to approximately $41.3 million, reflecting the portion of the BARDA Contract funding that could be paid to the Company for its activities.

The BARDA Contract and the Company’s subcontract with CUBRC under the BARDA Contract have terms which currently expire on December 31, 2019, BARDA is entitled to terminate the project for convenience at any time and is not obligated to provide continued funding beyond current-year amounts from congressionally approved annual appropriations. To the extent that BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to the Company. Committed funding from CUBRC under the Company’s BARDA subcontract is for up to approximately $41.3 million through December 31, 2019, the current contract end date, as a result of the exercise of several options by BARDA under the BARDA Contract. Total funds of $39.9 million had been received by the Company through June 30, 2019 under this contract. During the three months ended June 30, 2019 and 2018, the Company recognized revenue of $0.1 million and $0.6 million, respectively, from the Company’s subcontract under the BARDA Contract. During the six months ended June 30, 2019 and 2018, the Company recognized revenue of $0.6 million and $1.0 million, respectively, from the Company’s subcontract under the BARDA Contract.

NIAID Grant and Contract for TP-271

The Company received funding for its phase 1 compound TP-271 from NIAID for the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired pneumonia:

 

The NIAID Contract awarded in September 2011 provided up to a total of approximately $35.8 million and expired on March 31, 2019.

In connection with the NIAID Contract, in October 2011, the Company entered into a cost-plus-fixed-fee subcontract with CUBRC, the direct recipient of the NIAID Contract, which subcontract expired on March 31, 2019 under which the Company could have originally received funding of up to approximately $16.9 million (which was subsequently reduced to $16.3 million based on actual work performed), reflecting the portion of the NIAID Contract funding that could be paid to the Company for its activities.

The NIAID Contract and the Company’s subcontract with CUBRC under the NIAID Contract expired on March 31, 2019. As of June 30, 2019, the Company received $16.1 million.

During the three months ended June 30, 2019 the Company recognized no revenue under the NIAID Contract compared to $0.9 million for the three months ended June 30, 2018, as the contract expired on March 31, 2019. During the six months ended June 30, 2019 and 2018, the Company recognized revenue of $0.1 million and $1.6 million, respectively, from the Company’s subcontract under the NIAID Contract.

CARB-X Award for TP-6076

In March 2017, Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator (CARB-X) selected the Company to receive up to $4.0 million in research funding over eighteen months for TP-6076. In connection with this funding, the Company entered into a cost reimbursement Sub-Award Agreement, or the Sub-Award Agreement, with the Trustees of Boston University, the administrator of the program. The Company began recognizing revenue from the Sub-Award Agreement in April 2017. During the three months ended June 30, 2019 and 2018, the Company recognized revenue of $0.2 million and $0.6 million, respectively, under this Sub-Award Agreement. During the six months ended June 30, 2019 and 2018, the Company recognized revenue of $0.5 million and $1.4 million, respectively, under this Sub-Award Agreement. This Sub-Award Agreement expired on June 30, 2019.

 

17


 

7.  Accrued Expenses

Accrued expenses at June 30, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Salaries and benefits

 

$

4,485

 

 

$

3,801

 

Drug supply and development

 

 

3,476

 

 

 

3,901

 

Professional fees

 

 

1,148

 

 

 

1,178

 

Commercial

 

 

950

 

 

 

910

 

Royalties and license payments

 

 

58

 

 

 

617

 

Other

 

 

1,704

 

 

 

1,354

 

Total

 

$

11,821

 

 

$

11,761

 

 

8.  Stock-Based Compensation

In January 2019, the number of shares available for issuance under the Tetraphase Pharmaceuticals, Inc. 2013 Stock Incentive Plan, as amended, or 2013 Plan, was increased by approximately 2.1 million shares as a result of the automatic increase provision of the 2013 Plan. As of June 30, 2019, the total number of shares of common stock available for issuance under the 2013 Plan was approximately 1.2 million.

Stock-Based Compensation Expense

During the three and six months ended June 30, 2019 and 2018, the Company recognized the following stock-based compensation expense (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development

 

$

490

 

 

$

1,586

 

 

$

1,473

 

 

$

2,946

 

General and administrative

 

 

1,219

 

 

 

1,806

 

 

 

2,959

 

 

 

3,418

 

Total

 

$

1,709

 

 

$

3,392

 

 

$

4,432

 

 

$

6,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Stock options

 

$

1,588

 

 

$

2,799

 

 

$

3,565

 

 

$

5,586

 

Restricted stock units

 

 

105

 

 

 

557

 

 

 

830

 

 

 

726

 

Employee stock purchase plan

 

 

16

 

 

 

36

 

 

 

37

 

 

 

52

 

Total

 

$

1,709

 

 

$

3,392

 

 

$

4,432

 

 

$

6,364

 

Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2019:

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

Outstanding at December 31, 2018

 

 

7,322,436

 

 

$

11.16

 

Granted

 

 

174,000

 

 

$

0.92

 

Forfeited

 

 

(631,300

)

 

$

5.56

 

Outstanding at June 30, 2019

 

 

6,865,136

 

 

$

11.41

 

Exercisable at June 30, 2019

 

 

4,566,451

 

 

$

14.54

 

 

As of June 30, 2019, there was $7.6 million of total unrecognized stock-based compensation cost related to employee unvested stock options granted under the 2013 Plan. The Company expects to recognize that cost over a remaining weighted-average period of 2.1 years.

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Restricted Stock Units and Performance Stock Units

In January 2019 the Company awarded 2,297,950 restricted stock units, or RSU’s, to employees. These RSU’s vest in annual increments over two to three years, subject to continued employment with the Company and had a grant date fair value of $1.39 per share which was the closing price of the Company’s common stock on the date of grant. In connection with the restructuring in June 2019 (see Note 12), the Company modified certain RSUs.

In January 2019 the Company issued to certain employees 265,000 performance stock units, or PSU’s, which vest based on service and performance conditions. The number of units represents the target number of shares of common stock that may be earned; however, the actual number of shares that may be earned ranges from 0%-150% of the target number. None of these awards vested as of June 30, 2019. Vesting of these awards is contingent on the occurrence of certain milestone events and fulfillment of any remaining service condition. As a result, the related compensation cost is recognized as an expense when achievement of the milestone is considered probable over the remaining requisite service period.

The following table summarizes the RSU and PSU activity for the six months ended June 30, 2019:

 

 

 

Shares

 

 

Weighted-

Average

Grant Date Fair Value

 

Unvested at December 31, 2018

 

 

1,080,440

 

 

$

4.21

 

Awarded

 

 

2,562,950

 

 

$

1.25

 

Forfeited

 

 

(468,705

)

 

$

1.88

 

Vested/Released

 

 

(583,985

)

 

$

3.57

 

Unvested at June 30, 2019

 

 

2,590,700

 

 

$

1.38

 

 

As of June 30, 2019, there was total unrecognized stock-based expense of $1.8 million related to RSU’s and $0.1 million related to PSU’s. The expense is expected to be recognized over a weighted-average period of 1.4 years.    

Employee stock purchase plan

Under the Company’s 2014 Employee Stock Purchase Plan, as amended, or 2014 ESPP, an aggregate of 600,000 shares of common stock have been reserved for issuance pursuant to purchase rights granted to the Company’s employees. As of June 30, 2019, 300,000 shares remained available for issuance. During the six months ended June 30, 2019 and 2018 the Company issued 52,733 and 32,045 shares of common stock, respectively and recognized approximately $37,000 and $52,000 in related stock-based compensation expense, respectively. 

9.  Equity

On January 17, 2017, the Company entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co. as sales agent, or Cantor. On July 7, 2017, the Company entered into an amendment to the Sales Agreement to increase the maximum aggregate offering price of the shares of common stock that it may issue and sell from time to time under the Sales Agreement from $40,000,000 to $80,000,000.

Under the Sales Agreement, as amended, or the Amended Sales Agreement, Cantor may sell shares of the Company’s common stock by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the Nasdaq Global Select Market or on any other existing trading market for the Company’s common stock.

The Company is not obligated to make any sales of shares of its common stock under the Amended Sales Agreement. The Company or Cantor may suspend or terminate the offering of shares of the Company’s common stock upon notice to the other party and subject to other conditions. The Company will pay Cantor a commission rate equal to 3.0% of the gross proceeds per share sold.

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As of June 30, 2019, the Company had sold an aggregate of 6,110,446 shares of common stock under the Sales Agreement, at an average selling price of approximately $6.49 per share for aggregate gross proceeds of $39.6 million and net proceeds of $38.2 million after deducting sales commissions and offering expenses. As of August 6, 2019, $40.4 million of common stock remained available to be sold under the Amended Sales Agreement.

10. Debt Facility

On November 2, 2018, the Company entered into a loan and security agreement, or the Loan Agreement, with Solar Capital, as collateral agent and lender, and the other lenders named therein (Solar Capital and the other lenders collectively, the Lenders). The Lenders have agreed to make available to the Company term loans in an aggregate principal amount of up to $75.0 million under the Loan Agreement. The Company plans to use the proceeds of the term loans to support commercial launch of Xerava as well as for working capital and general corporate purposes. The Loan Agreement provides a term loan commitment of $50.0 million in two potential tranches: (i) a $30.0 million Term A loan facility funded on November 2, 2018 and (ii) a $20.0 million Term B loan facility to be funded at the request of the Company no later than October 31, 2020, subject to (A) the Company having unrestricted net cash proceeds of not less than $50 million from the issuance and sale of common stock and/or from other business activities and (B) the Company having product revenue greater than or equal to $14.0 million on a six month trailing basis prior to September 30, 2020. Both of these term loans have a maturity date of May 2, 2023. The Loan Agreement also provides access to an additional Term C loan facility in the amount of $25.0 million, to be funded at the Lenders’ sole discretion.

Borrowings under all three loan facilities bear interest at a floating per annum rate equal to the 1 Month LIBOR Rate plus 7.25%. The Company is permitted to make interest-only payments on the initial $30.0 million Term A loan for the fifteen (15) months following the funding date. The interest-only period can be extended by an additional nine (9) months subject to certain conditions being met, including a 12-month trailing product revenue milestone of $8.5 million by December 31, 2019; and by an additional six (6) months if the Company has met certain other conditions, including a 6-month trailing product revenue milestone of $14.0 million by September 30, 2020 and raising $50.0 million in new capital. The term of the combined facility will be 54 months, with repayment paid in equal monthly installments commencing at the end of the resulting interest-only period as outlined above through the end of the 54-month term.

The Company is obligated to pay a final fee equal to 4.00% of the aggregate amount of the term loans funded, to occur upon the earliest of (i) the maturity date, (ii) the acceleration of the term loans, and (iii) the prepayment of the term loans. The Company has the option to prepay all, but not less than all of the outstanding principal balance of the term loans under the Loan Agreement. If the Company prepays all or a portion of the term loans prior to the maturity date, it will pay the Lenders a prepayment penalty fee based on a percentage of the outstanding principal balance, equal to 3% if the payment occurs on or before 12 months after the initial funding date, 2% if the prepayment occurs more than 12 months after, but on or before 24 months after, the initial funding date, or 1% if the prepayment occurs more than 24 months after the initial funding date.

In connection with the Loan Agreement and the funding of the Term A loan facility, the Company issued to the Lenders warrants to purchase an aggregate of 414,365 shares of the Company’s common stock, equal to 3.00% of the term loan funded divided by the exercise price of $2.172. The Company is obligated to issue additional warrants to the Lenders in the event the Term B loan facility and/or the Term C loan facility is funded. Those warrants shall also be equal to 3.00% of the term loan funded. The warrants are exercisable at the option of the holder and the exercise price will be the lesser of (a) the 10-day trailing average of the Company’s common stock price, as determined as of the close of business day immediately prior to the funding date of the respective term loan, and (b) the Company’s common stock price, as determined as of the close of business day immediately prior to the funding date of the respective term loan. Each warrant will terminate 10 years from the date of its original issuance. The warrants issued in connection with the Term A loan were equity classified with a fair value of $0.8 million at issuance and recorded to additional paid in capital.  

The Loan Agreement was amended in March 2019 for the primary purpose of adding a newly opened operating bank account to the agreement as collateral.

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets. The Loan Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. The Company has agreed to maintain cash on hand at all times equal to $10.0 million plus an amount equal to 90 days aged accounts payable subject to certain exceptions, or it is in breach of the Loan Agreement.

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Upon the occurrence of an event of default, a default interest rate of an additional 4.00% per annum may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and exercise all of its rights and remedies as set forth in the Loan Agreement and under applicable law.

The Company recorded interest expense related to the loan facility of $1.0 and $1.9 million and for the three and six months ended June 30, 2019, respectively. The fair value of the loan at June 30, 2019 approximates its face amount given the close proximity of execution to June 30, 2019.

The Company evaluated the accounting for the Loan Agreement and identified an embedded derivative related to repayment upon default, which it evaluated and deemed immaterial. The Company will reassess this conclusion at each reporting period.

Future principal debt payments on the loan payable are as follows (in thousands):

 

 

June 30,

2019

 

2019

 

$

 

2020

 

 

8,462

 

2021

 

 

9,231

 

2022

 

 

9,231

 

2023

 

 

3,076

 

Total principal payments

 

 

30,000

 

Final fee due at maturity in 2023

 

 

1,200

 

Total principal and final fee payments

 

 

31,200

 

Unamortized debt issuance costs and final fee

 

 

(2,452

)

Total loan obligation

 

 

28,748

 

Less current portion

 

 

(3,846

)

Loan Payable, long term

 

$

24,902

 

 

 

11. Commitments and Contingencies

Operating Leases

The Company’s leases consist of office equipment and office and laboratory space in Watertown, MA. On March 24, 2015, the Company amended its existing operating lease to expand its existing premises by an additional 13,711 square feet, and on June 18, 2015, the Company amended its existing operating lease to expand its existing premises by an additional 7,828 square feet, resulting in a total of 37,438 square feet of office and laboratory space.

In the third quarter of 2016, the Company entered into a sublease with respect to a portion of its principal facilities with an unrelated third party. The term of the sublease expires in November 2019, with the sublessee obligated to pay rent to the Company that approximates the rent the Company is currently paying to its landlord with respect to such portion of its facility.

On November 29, 2018, the Company amended its existing operating lease to extend the lease term through November 30, 2022 for all of its existing operating leases. There are no extension or early termination options available to the Company which it is reasonably certain to exercise.

The Company identified and assessed significant assumptions in recognizing the right-of-use asset and lease liability as follows:

 

Incremental borrowing rate - The Company’s lease agreements do not provide implicit rates. The Company has one outstanding loan facility which was utilized to derive the Company’s incremental borrowing rate for its existing leases at the transition date. The Company estimated its incremental borrowing rate based on its credit quality indicators from its outstanding loan facility. The Company compared its incremental borrowing rate to rates available in the market for similar borrowings, and adjusted these rates based on the impact of collateral over the term of the lease to substantiate the incremental borrowing rate applied to its leases at the transition date.

 

Lease and non-lease components – The Company is required to pay fixed fees for operating expenses in addition to monthly base rent for certain operating leases. The amounts of additional rent associated with these fees are considered non-lease components. The Company has elected the practical expedient which allows non-lease components to be combined with lease components and will therefore include these additional rent amounts in its lease payments. Any

21


 

 

variable components of these operating costs are excluded from lease payments and are recognized in the period incurred.

The components of lease expense were as follows:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2019

 

Operating lease cost

 

$

474

 

 

$

949

 

Variable lease cost

 

 

283

 

 

 

579

 

Total lease cost

 

$

757

 

 

$

1,528

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term (years)

 

 

3.40