ttph-10q_20200331.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 March 31, 2020

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(s)

 

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 May 6, 2020, there were 7,263,236 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 


TETRAPHASE PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS

 

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

5

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

PART II. OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 6.

Exhibits

61

 

 

 

 

SIGNATURES

62

2


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,146

 

 

$

21,239

 

Accounts receivable, net

 

 

1,706

 

 

 

1,503

 

Assets held for sale

 

 

 

 

 

53

 

Inventory

 

 

788

 

 

 

1,595

 

Prepaid expenses and other current assets

 

 

1,178

 

 

 

2,103

 

          Total current assets

 

 

29,818

 

 

 

26,493

 

Property and equipment, net

 

 

78

 

 

 

98

 

Intangible assets, net

 

 

4,160

 

 

 

4,259

 

Operating lease right-of-use assets

 

 

2,598

 

 

 

4,836

 

Restricted cash

 

 

699

 

 

 

699

 

Total assets

 

$

37,353

 

 

$

36,385

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,977

 

 

$

2,429

 

Accrued expenses

 

 

5,235

 

 

 

5,794

 

Operating lease liabilities

 

 

932

 

 

 

1,547

 

Total current liabilities

 

 

8,144

 

 

 

9,770

 

Long-term operating lease liabilities

 

 

1,754

 

 

 

3,448

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

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; 7,259 and 3,466 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

7

 

 

 

3

 

Additional paid-in capital

 

 

643,699

 

 

 

627,291

 

Accumulated deficit

 

 

(616,251

)

 

 

(604,127

)

Total stockholders’ equity

 

 

27,455

 

 

 

23,167

 

Total liabilities and stockholders’ equity

 

$

37,353

 

 

$

36,385

 

See accompanying notes to unaudited condensed consolidated financial statements

3


TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

Product revenue, net

$

1,755

 

 

$

341

 

Government revenue

 

-

 

 

 

932

 

Total revenue

 

1,755

 

 

 

1,273

 

Expenses:

 

 

 

 

 

 

 

Cost of revenue - product sales

 

1,360

 

 

 

164

 

Cost of revenue - intangible asset amortization

 

98

 

 

 

98

 

Research and development

 

1,893

 

 

 

6,737

 

Selling, general and administrative

 

10,668

 

 

 

13,314

 

Total expenses

 

14,019

 

 

 

20,313

 

Loss from operations

 

(12,264

)

 

 

(19,040

)

Other income and expenses

 

 

 

 

 

 

 

Other income

 

71

 

 

 

 

Interest income

 

69

 

 

 

507

 

Interest expense

 

 

 

 

(955

)

Net loss

$

(12,124

)

 

$

(19,488

)

Net loss per share-basic and diluted

$

(1.31

)

 

$

(7.25

)

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

 

9,273

 

 

 

2,687

 

Comprehensive loss

$

(12,124

)

 

$

(19,488

)

 

See accompanying notes to unaudited condensed consolidated financial statements

4


TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(12,124

)

 

$

(19,488

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

112

 

 

 

201

 

Non-cash interest expense related to notes payable

 

 

 

 

 

223

 

Stock-based compensation expense

 

 

480

 

 

 

2,723

 

Gain from modification of operating lease

 

 

(68

)

 

 

 

Gain on asset disposal

 

 

(71

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(203

)

 

 

457

 

Inventory

 

 

806

 

 

 

(1,600

)

Prepaid expenses and other assets

 

 

927

 

 

 

262

 

Accounts payable

 

 

(452

)

 

 

(518

)

Accrued expenses and other liabilities

 

 

(559

)

 

 

(2,387

)

Deferred revenue

 

 

 

 

 

(6

)

Operating lease right-of-use assets

 

 

360

 

 

 

342

 

Operating lease liabilities

 

 

(363

)

 

 

(328

)

Net cash used in operating activities

 

 

(11,155

)

 

 

(20,119

)

Investing activities

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

130

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(98

)

Net cash provided by (used in) investing activities

 

 

130

 

 

 

(98

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from sale of common stock and prefunded warrants under a concurrent private placement and registered direct offering, net of issuance costs

 

 

15,931

 

 

 

 

Proceeds from issuance of stock under stock plans

 

 

1

 

 

 

 

Net cash provided by financing activities

 

 

15,932

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

4,907

 

 

 

(20,217

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

21,938

 

 

 

108,475

 

Cash, cash equivalents and restricted cash at end of period

 

$

26,845

 

 

$

88,258

 

Supplemental cash flow disclosures from investing activities

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

 

$

539

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements

5


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, 2019

 

 

3,466

 

 

$

3

 

 

$

627,291

 

 

$

(604,127

)

 

$

23,167

 

Issuance of common stock under stock plans

 

 

23

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Issuance of common stock and prefunded warrants

   under a concurrent private placement and

   registered direct offering, less issuance costs

 

 

3,650

 

 

 

4

 

 

 

15,927

 

 

 

 

 

 

15,931

 

Issuance of common stock from warrant exercise

 

 

120

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

480

 

 

 

 

 

 

480

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,124

)

 

 

(12,124

)

Balance at March 31, 2020

 

 

7,259

 

 

$

7

 

 

$

643,699

 

 

$

(616,251

)

 

$

27,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

2,684

 

 

$

3

 

 

$

613,721

 

 

$

(534,042

)

 

$

79,682

 

Issuance of common stock under stock plans

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,723

 

 

 

 

 

 

2,723

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(19,488

)

 

 

(19,488

)

Balance at March 31, 2019

 

 

2,687

 

 

$

3

 

 

$

616,444

 

 

$

(553,530

)

 

$

62,917

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

6


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 create, develop and commercialize novel tetracyclines for serious and life-threatening conditions, including bacterial infections caused by multidrug-resistant, or MDR, bacteria. There is a medical need for new antibiotics as resistance to existing antibiotics increases. In recognition of this need, the Company has developed its product, Xerava (eravacycline), a fully synthetic fluorocycline, as an intravenous, or IV, antibiotic for use as a first-line empiric monotherapy for the treatment of MDR infections, including MDR Gram-negative infections, such as those found in complicated intra-abdominal infections, or cIAI.  

On March 15, 2020, the Company entered into an agreement and plan of merger, or Merger Agreement, with AcelRx Pharmaceuticals, Inc., a Delaware corporation, or AcelRx, and Consolidation Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of AcelRx, or Merger Sub. The Merger Agreement provides for, among other things, the acquisition of the Company by AcelRx, with the acquisition to be accomplished through the merger of Merger Sub with and into the Company, with the Company being the surviving corporation and becoming an indirect wholly owned subsidiary of AcelRx. The Company’s Board of Directors has unanimously approved the Merger and the Merger Agreement and recommended that stockholders adopt the Merger Agreement. The Company submitted the Merger Agreement to its stockholders for their consideration at a special meeting of stockholders to be held on June 8, 2020. The Company expects the merger to be completed in the second quarter of 2020.

On March 15, 2020, concurrently with the execution of the Merger Agreement, the Company and AcelRx entered into a Co-Promotion Agreement. Under this agreement, the parties have agreed that, during the term of the agreement, their sales forces will promote and detail the other party’s products in accordance with marketing plans agreed to by the parties and subject to specified minimum call requirements. The parties have established a Joint Marketing and Sales Committee to oversee the promotion and marketing of the products. There are no payments being made between the parties under the agreement, and each party will continue to receive all the revenues from the sales of its own products. The agreement is terminable by either party for any reason upon 15 months’ notice or upon 90 days’ notice in the case of material breach. However, in the event of a change of control of a party during the term of the agreement, the non-change of control party may terminate the agreement upon one month’s notice and may be entitled to royalties in the case of a material breach by the change of control party.

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 IGNITE1, 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 LiechtensteinThe Company has not yet commenced sales outside of the United States. In February 2018, the Company entered into a license agreement with Everest Medicines Limited, or Everest Medicines, granting Everest Medicines commercialization rights to eravacycline in China and other Asian territories.

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. As part of its restructuring, the Company decided not to engage in further product development, including conducting clinical trials of its product candidates, and intends to seek out-licensing opportunities for all of its pipeline of early-stage antibiotics and oncology product candidates.

The Company has incurred annual net operating losses every year since its inception. As of March 31, 2020, the Company had incurred losses since inception of $616.3 million. The Company has financed its operations primarily through public offerings and private placements of equity securities, debt financings, revenue from U.S. government grants and contract awards, milestone payments from a licensing agreement and Xerava product revenue.

7


Liquidity and Going Concern Assessment

Accounting Standards Update ("ASU"), 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), also referred to as Accounting Standards Codification ("ASC") 205-40 (“ASC 205-40”), requires the Company to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the financial statements are issued. This evaluation requires management to perform two steps. First, management must evaluate whether there are conditions and events that raise substantial doubt about the Company’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.

The Company has financed its operations primarily through public offerings and private placements of equity securities, debt financings, revenue from U.S. government grants and contract awards and milestone payments from its licensing agreements. The 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.

Based on its current operating plan, and if the Merger is not consummated when expected, the Company expects that its cash and cash equivalents of $26.1 million as of March 31, 2020, and its projected revenues from sales of Xerava, together with the $2.3 million in proceeds from its Paycheck Protection Program (“PPP”) loan via the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, received in April 2020 (“PPP Loan”) (see note 13, Subsequent Events), will be sufficient to fund the Company’s operations into the first quarter of 2021, but will not be sufficient to fund the Company’s operations for more than one year beyond the filing date of this Quarterly Report on Form 10-Q. 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, and a significant reduction in expenses in 2020 as a result of the restructuring implemented in June 2019. If these estimates are incorrect, the Company may use its cash resources sooner than expected. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

If the Merger is not consummated, the 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. However, there can be no assurance that the Company will be able to obtain such funding on terms acceptable to the Company, on a timely basis or at all. If the Merger is not consummated and the Company is unable to obtain funding, the Company may be required to delay, reduce or eliminate its commercialization efforts, which could adversely affect its business prospects, and the Company may be unable to continue operations.

If the Merger is not consummated and the Company is unable to raise additional capital when needed or if the Company’s operating results fall short of its current projections, or if the Company determines to explore strategic alternatives but is unable to consummate such a transaction or transactions on a timely basis or at all, 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, its rights to Xerava and the Company’s product candidates. The Company’s failure to obtain sufficient funds on acceptable terms when needed would have a material adverse effect on its business, results of operations and financial condition. In addition, in such circumstances, the Company would consider seeking protection under the bankruptcy laws in order to continue to pursue potential transactions and conduct a wind-down of the Company. If the Company decides to seek protection under the bankruptcy laws, the Company would expect that it would file for bankruptcy at a time that is significantly earlier than when it would otherwise exhaust its cash resources. If the Company decides to dissolve and liquidate its assets or to seek protection under the bankruptcy laws, it is unclear to what extent the Company will be able to pay its obligations, and, accordingly, it is further unclear whether and to what extent any resources will be available for distributions to stockholders.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

8


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 U.S. Securities and Exchange Commission, or SEC, for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. 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, 2019 contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020, or the 2019 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 March 31, 2020 and the results of its operations and comprehensive loss and cash flows for the three months ended March 31, 2020 and 2019. Interim operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for future interim periods or for the fiscal year ending December 31, 2020. The Company’s significant accounting policies are described in Note 2, Summary of Significant Accounting Policies in the 2019 Form 10-K. The Company is disclosing certain significant policies as well as changes in its accounting policies related to guidance that became effective in this Quarterly Report on Form 10-Q.

The December 31, 2019 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.   

Reverse Stock Split

On September 25, 2019, the Company’s Board of Directors authorized a 1-for-20 reverse stock split and approved an amendment to the Company’s Certificate of Incorporation (the “Amendment”) to affect the 1-for-20 reverse split of the Company’s common stock, which was effected at 5:00 p.m. Eastern Time on September 26, 2019. All of the share and per share amounts disclosed in these condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q have been adjusted to reflect the reverse stock split.

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, impairment of intangible assets, 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 March 31, 2020 and December 31, 2019 represent amounts due from two main sources: (1) trade accounts receivable of $1.0 million and $0.8 million, respectively, 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 $0.7 million and $0.7 million, respectively, 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 $0.7 million as of December 31, 2019. There were no unbilled contract accounts receivable as of March 31, 2020

Inventory

Inventory is stated at the lower of cost or net realizable value on a first-in, first-out 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.

9


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 March 31, 2020, there was no excess or obsolete inventory.

Long-Lived Assets

The Company evaluates the recoverability of its property, equipment and intangible assets when circumstances indicate that an event of impairment may have occurred. The Company recognizes an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. Impairment is measured based on the difference between the carrying value of the related assets or businesses and the fair value of such assets or businesses.

Restricted Cash

As of March 31, 2020, the Company had $699,000 in restricted cash deposits with a bank, of which $500,000 is serving as security for its field force corporate credit card program and $159,000 is collateral for a letter of credit issued to the landlord of the Company’s leased facility. If the Company defaults on its rental obligations, $159,000 will be payable to the landlord. In addition, the Company has $40,000 in restricted cash to secure the Company’s corporate purchasing credit card.

Intangible Assets

The Company maintains definite-lived intangible assets related to certain capitalized milestone payments to Harvard University (Harvard). These assets are amortized over their remaining useful lives, which are estimated based on the shorter of the remaining patent life or the estimated useful life of the underlying product. Intangible assets are amortized using the economic consumption method if future revenues can be reasonably estimated. The straight-line method is used when future revenues cannot be reasonably estimated.

The Company assesses its intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding one of the Company’s drug candidates or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate, or new information regarding potential sales of the drug. If impairment indicators are present or changes in circumstance suggest that impairment may exist, the Company performs a recoverability test by comparing the sum of the estimated undiscounted cash flows of each intangible asset to its carrying value on the consolidated balance sheet. If the undiscounted cash flows used in the recoverability test are less than the carrying value, the Company would determine the fair value of the intangible asset and recognize an impairment loss if the carrying value of the intangible asset exceeds its fair value.

The Company capitalized milestone payments of $4.75 million related to regulatory approval of Xerava in the United States and European Union, which will be amortized over their estimated useful lives of approximately 12 years. Amortization expense for each of the following five years is expected to be $0.4 million.

During the three months ended March 31, 2020, management identified impairment indicators related to the intangible assets for the Harvard milestones. As result, an interim test of recoverability of the intangible asset was performed based on the estimated undiscounted future cash flows related to the intangible asset, and concluded the intangible asset was recoverable. The Company’s quantitative assessment considered significant assumptions related to estimates of future Xerava sales, offset by direct costs to derive the sales. The estimates of future Xerava sales include estimates of significant growth as the product was launched in the fourth quarter of 2018. Given the limited history of sales and the inherent difficulty in making a long-range forecast, such estimates contain significant uncertainty. If the assumptions regarding forecasted revenue or the costs to derive such revenues are not achieved, the Company may be required to perform future impairment analyses and record an impairment charge for the intangible asset in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

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. Manufacturing costs at contract manufacturing sites not yet approved by the US FDA for commercial production have also been expensed in research and development and are not included in cost of revenue.

10


Recently Adopted Accounting Pronouncements

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

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): 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, 2022, 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 consolidated financial position and results of operations.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, or ASU 2019-12, which includes amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, or ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The new guidance is effective for the Company for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The Company is currently evaluating the potential impact that the adoption of ASU 2019-12 will have on the Company’s consolidated financial statements.

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 March 31, 2020 and December 31, 2019 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

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

26,146

 

 

$

26,146

 

 

$

 

 

$

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

21,239

 

 

$

21,239

 

 

$

 

 

$

 

 

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. Shares of common stock underlying pre-funded warrants are considered outstanding as of their issuance date and are included in the basic net loss per share calculation as the exercise price was deemed non-substantive. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, warrants, stock options, and restricted stock units 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.

11


The amounts in the table below were excluded from the calculation of diluted weighted-average shares outstanding, prior to the use of the treasury stock method, due to their anti-dilutive effect:

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Warrants

 

 

7,984,650

 

 

 

20,718

 

Unvested restricted stock units

 

 

49,773

 

 

 

178,225

 

Outstanding stock options

 

 

148,254

 

 

 

365,789

 

Totals

 

 

8,182,677

 

 

 

564,732

 

 

5. Inventory

Inventory consisted of the following (in thousands):

 

 

 

As of March 31,

2020

 

 

As of December 31,

2019

 

Work in progress

 

$

115

 

 

$

115

 

Finished goods

 

 

673

 

 

 

1,480

 

Total inventory

 

$

788

 

 

$

1,595

 

 

There were no charges related to excess inventory for the three months ended March 31, 2020 or 2019.

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 March 31, 2020, the Company has paid an aggregate $17.0 million in upfront license fees, sublicense fees, development and regulatory milestone payments and royalties on net sales of such product, for the licensed Harvard technology, and has issued 1,568 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 March 31, 2020 the Company did not make any payments to Harvard related to regulatory milestone payments. During the three months ended March 31, 2019, the Company paid Harvard $25,000 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 a license agreement with Everest Medicines, or the Everest License Agreement, 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.

12


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 received from Everest Medicines an upfront, nonrefundable cash payment of $2.0 million in September 2019. As with the milestones discussed above, the Company is obligated to make certain 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 ASC 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 were not considered probable at upon signing or at each reporting period thereafter 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 obligation 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 estimated that the value of this right was immaterial.

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.

13


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.

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 was subsequently extended, that provided 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. The funding under the BARDA Contract was also 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 was also the direct recipient of the BARDA Contract. The BARDA Contract and the Company’s subcontract with CUBRC under the BARDA Contract had terms which expired on December 31, 2019. Committed funding from CUBRC under the Company’s BARDA subcontract was for up to approximately $41.3 million through December 31, 2019. Total funds of $40.7 million have been received by the Company through December 31, 2019 under this contract. No revenue was recognized for the three months ended March 31, 2020 as the contract expired by its terms on December 31, 2019. The Company does not expect to receive any additional revenue under this contract. During the three months ended March 31, 2019, the Company recognized revenue of $0.6 million 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 bacterial pneumonia. The NIAID Contract was 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 the contract, the Company could originally receive 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. As of March 31, 2020, the Company had received $16.2 million. The company’s obligations under the NIAID contract have been met in full as of March 31, 2020 and the Company does not expect to receive any additional revenue under this contract. No revenue was recognized for the three months ended March 31, 2020 as the contract expired by its terms on March 31, 2019. During the three months ended March 31, 2019, the Company recognized $0.1 million 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 18 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 March 31, 2020 the Company did not recognize any revenue as the Sub-Award Agreement expired on June 30, 2019. During the three months ended March 31, 2019 the Company recognized revenue of $0.3 million under this Sub-Award Agreement. The Company does not expect to receive any additional revenue under the award.

 

14


7.  Accrued Expenses

Accrued expenses at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Salaries and benefits

 

$

2,007

 

 

$

1,825

 

Drug supply and development

 

 

634

 

 

 

2,608

 

Professional fees

 

 

1,331

 

 

 

573

 

Commercial

 

 

789

 

 

 

516

 

Clinical trial related

 

 

27

 

 

 

111

 

Other

 

 

447

 

 

 

161

 

Total

 

$

5,235

 

 

$

5,794

 

 

8.  Stock-Based Compensation

In January 2020, 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 0.1 million shares as a result of the automatic increase provision of the 2013 Plan. As of March 31, 2020, the total number of shares of common stock available for issuance under the 2013 Plan was approximately 0.4 million.

Stock-Based Compensation Expense

During the three months ended March 31, 2020 and 2019, the Company recognized the following stock-based compensation expense (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

106

 

 

$

983

 

General and administrative

 

 

374

 

 

 

1,740

 

Total

 

$

480

 

 

$

2,723

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Stock options

 

$

366

 

 

$

1,977

 

Restricted stock units

 

 

114

 

 

 

726

 

Employee stock purchase plan

 

 

-

 

 

 

20

 

Total

 

$

480

 

 

$

2,723

 

Stock Options

The following table summarizes the stock option activity for the three months ended March 31, 2020:

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

Outstanding at December 31, 2019

 

 

177,768

 

 

$

223.53

 

Canceled

 

 

(29,514

)

 

$

265.42

 

Outstanding at March 31, 2020

 

 

148,254

 

 

$

215.20

 

Exercisable at March 31, 2020

 

 

113,255

 

 

$

253.33

 

 

As of March 31, 2020, there was $2.3 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 1.7 years.

Restricted Stock Units and Performance Stock Units

15


The following table summarizes the restricted stock unit, or RSU, and performance stock unit, or PSU, activity for the three months ended March 31, 2020:

 

 

 

Shares

 

 

Weighted-

Average

Grant Date Fair

Value

 

Unvested at December 31, 2019

 

 

91,981

 

 

$

28.62

 

Canceled

 

 

(19,845

)

 

$

34.56

 

Vested/Released

 

 

(22,363

)

 

$

27.03

 

Unvested at March 31, 2020

 

 

49,773

 

 

$

26.97

 

 

As of March 31, 2020, there was total unrecognized stock-based expense of $0.7 million related to RSUs and $44,000 related to PSUs. The expense is expected to be recognized over a weighted-average period of 1.5 years.    

Employee stock purchase plan

On March 15, 2020,  the Company’s 2014 Employee Stock Purchase Plan, as amended, was terminated. 

9.  Stockholders’ 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.

As of March 31, 2020, the Company had sold an aggregate of 305,522 shares of common stock under the Sales Agreement, at an average selling price of approximately $129.80 per share for aggregate gross proceeds of $39.6 million and net proceeds of $38.2 million after deducting sales commissions and offering expenses. The Company did not sell any shares of common stock under the Sales Agreement during the three months ended March 31, 2020. As of May 6, 2020, $40.4 million of common stock remained available to be sold under the Amended Sales Agreement.

On November 1, 2019 the Company completed a registered direct offering with Armistice Capital, LLC, a healthcare-focused institutional investor priced at-the-market, of (i) 300,000 shares of common stock and accompanying warrants to purchase an aggregate of 300,000 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 1,830,493 shares of common stock and accompanying warrants to purchase an aggregate of 1,830,493 shares of common stock. Each share of common stock and accompanying common stock warrant were sold together at a combined price of $3.755, and each pre-funded warrant and accompanying common stock warrant were sold together at a combined price of $3.745. Each pre-funded warrant has an exercise price of $0.01 per share, is exercisable immediately and is exercisable until exercised in full. Each common stock warrant has an exercise price of $3.62 per share, is exercisable immediately and expires five years from the date of issuance. The net proceeds to the Company from the offering, after deducting the placement agent's fees and other offering expenses payable by the Company, was approximately $7.1 million. The fair value allocated to the common stock, warrants and pre-funded warrants, less issuance costs, was $0.6 million, $2.9 million and $3.6 million, respectively. In November 2019, 400,000 of the pre-funded warrants were exercised.

On January 24, 2020, the Company completed a private placement with Armistice Capital, LLC, a healthcare-focused institutional investor priced at-the-market of (i) 1,270,000 shares of common stock and accompanying warrants to purchase an aggregate of 1,270,000 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 2,063,334 shares of common stock and accompanying warrants to purchase up to an aggregate of 2,063,334 shares of common stock. Each share of common stock and accompanying common stock warrant were sold together at a combined price of $3.00, and each pre-funded warrant and accompanying common stock warrant were sold together at a combined price of $2.999, for gross proceeds of

16


approximately $10.0 million. Each pre-funded warrant had an exercise price of $0.001 per share, was exercisable immediately and was exercisable until all of the pre-funded warrants are exercised in full. Each common stock warrant had an exercise price of $2.87 per share, was exercisable immediately and will expire five years from the date of issuance.

Also on January 24, 2020, the Company completed a registered direct offering to certain healthcare-focused institutional investors priced at-the-market, of (i) 2,380,105 shares of common stock and accompanying warrants to purchase up to an aggregate of 2,380,105 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 120,000 shares of common stock and accompanying warrants to purchase up to an aggregate of 120,000 shares of common stock. Each share of common stock and accompanying common stock warrant were sold together at a combined price of $3.00, and each pre-funded warrant and accompanying common stock warrant were sold together at a combined price of $2.999, for gross proceeds of approximately $7.5 million. Each pre-funded warrant had an exercise price of $0.001 per share, was exercisable immediately and was exercisable until all of the pre-funded warrants are exercised in full. Each common stock warrant had an exercise price of $2.87 per share, was exercisable immediately and will expire five years from the date of issuance.

The net proceeds to the Company from the registered direct offering and the concurrent private placement, after deducting the placement agent's fees and other offering expenses payable by the Company, were approximately $15.9 million.

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). On August 30, 2019, the Company entered into a payoff letter with the Lenders, pursuant to which the Company agreed to pay off and thereby terminate the Loan Agreement. Pursuant to the payoff letter, the Company paid a total of $30.7 million to the Lenders, representing the principal balance, accrued interest outstanding and a portion of the final fee under the Loan Agreement in repayment of the Company’s outstanding obligations under the Loan Agreement. The Company recorded a loss from debt extinguishment of $1.6 million as the difference between the net carrying amount of the indebtedness under the Loan Agreement and the amount paid.

In connection with the Loan Agreement and the funding of the initial loan facility, the Company issued to the Lenders warrants to purchase an aggregate of 20,718 shares of the Company’s common stock, equal to 3.00% of the term loan funded divided by the exercise price of $43.44. The warrants will terminate 10 years from the date of its original issuance. The warrants were equity classified with a fair value of $0.8 million at issuance and recorded to additional paid in capital.  

The Company recorded interest expense related to the loan facility of $1.0 million for the three months ended March 31, 2019.

 

11. Commitments and Contingencies

Operating Leases

The Company’s leases consist of office equipment and 37,438 square feet of office and laboratory space in Watertown.

On January 31, 2020, the Company amended its existing operating lease in order to surrender a portion of its leased space, reducing the leased premises by a total of 15,899 square feet from approximately 37,438 square feet to approximately 21,539 square feet. The amendment was accounted for as a modification of the original lease agreement which required the Company to reassess and remeasure the lease liability based on the incremental borrowing rate determined as of the modification date. As a result, the amendment to the original lease resulted in a $2.0 million reduction of the lease liability and corresponding right-of-use asset as of the effective date of the amendment, with an immaterial gain recorded to operating expenses.  

The components of lease expense were as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Operating lease cost

 

$

343

 

 

$

474

 

Variable lease cost

 

 

226

 

 

 

296

 

Total lease cost

 

$

569

 

 

$

770

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term (years)

 

 

2.64

 

 

 

3.65

 

Weighted-average discount rate

 

 

9.25

%

 

 

9.25

%

 

17


Cash paid for amounts included in the measurement of the lease liabilities were $0.3 million for the three months ended March 31, 2020.

As of March 31, 2020, the Company’s operating lease liabilities were as follows (in thousands):

 

 

 

Amount

 

2020

 

 

907

 

2021

 

 

1,138

 

2022

 

 

1,027

 

Thereafter

 

 

 

Less: Imputed interest

 

 

(386

)

Present value of lease payments

 

$

2,686

 

 

Legal Proceedings

On February 7, 2020, DHL Supply Chain (Netherlands) B.V, or DHL, made an arbitration demand against the Company with Foundation UNUM. 

As of May 6, 2020, ten lawsuits have been filed by alleged Tetraphase stockholders against us, members of our board of directors, AcelRx and/or Merger Sub, challenging the Merger.

Please refer to Part II Item 1, Legal Proceedings, of this Form 10-Q for further information regarding these matters.

12. Corporate Restructuring Charges

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. This reorganization included the elimination of its internal research function and an exploration of out-licensing opportunities for all of its pipeline of early-stage antibiotics and oncology product candidates. The Company expects the total costs associated with the restructuring to be $2.4 million, all of which the Company incurred during the three months ended June 30, 2019. The Company expects the restructuring liability to be paid by the third quarter of 2020. The restructuring charges consist primarily of severance and benefit costs and asset impairment costs, offset in part by stock-based compensation adjustments associated with award modifications.

The restructuring charges recorded during the year ended December 31, 2019 and the related liability balance as of March 31, 2020 for each major type of cost associated with this restructuring plan are as follows:

 

 

 

Restructuring

Expense

 

 

Cash

payments

 

 

Non-cash

expense

 

 

Restructuring

Liability at

March 31, 2020

 

Employee severance, benefits and related costs

 

$

2,130

 

 

$

(1,812

)

 

$

 

 

$

318

 

Asset impairments

 

 

335

 

 

 

-

 

 

 

(335

)

 

 

-

 

Compensation expense

 

 

(97

)

 

 

-

 

 

 

97

 

 

 

-

 

 

 

$

2,368

 

 

$

(1,812

)

 

$

(238

)

 

$

318

 

 

13. Subsequent Event

On April 22, 2020, the Company entered into a promissory note evidencing the $2.3 million PPP Loan under the PPP.

The PPP Loan is evidenced by a promissory note, dated as of April 22, 2020 (the “Note”), between the Company, as borrower, and Silicon Valley Bank, N.A., as lender (“SVB”). The interest rate on the Note is 1.0% per annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”).

Beginning one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of the Note (the “Maturity Date”), the Company is obligated to make monthly payments of principal and interest to SVB with respect to any unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note as of the last day of the Deferral Period by the Maturity Date. The Company is permitted to prepay the Note at any time without payment of any premium.

18


The principal and accrued interest under the Note evidencing the PPP Loan are forgivable after eight weeks as long as the Company has used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the Company terminates employees or reduces salaries during the eight-week period. The Company will be obligated to repay any portion of the principal amount of the Note that is not forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid in full.

Upon a default under the Note, including the non-payment of principal or interest, the obligations of the Company under the Note may be accelerated and SVB may pursue its rights under the Uniform Commercial Code and any other applicable law or in equity.

 

19


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

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2019, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission, or the SEC, on March 12, 2020, which we refer to as our Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company using our proprietary chemistry technology to create, develop and commercialize novel tetracyclines for serious and life-threatening conditions, including bacterial infections caused by multidrug-resistant, or MDR, bacteria. There is a medical need for new antibiotics as resistance to existing antibiotics increases. In recognition of this need, we developed our product, Xerava (eravacycline), a fully synthetic fluorocycline, as an intravenous, or IV antibiotic for use as a first-line empiric monotherapy for the treatment of MDR infections, including MDR Gram-negative infections, such as those found in complicated intra-abdominal infections, or cIAI.

On March 15, 2020, we entered into an agreement and plan of merger, or Merger Agreement, with AcelRx Pharmaceuticals, Inc., a Delaware corporation, or AcelRx, and Consolidation Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of AcelRx, or Merger Sub. The Merger Agreement provides for, among other things, our acquisition by AcelRx, with the acquisition to be accomplished through the merger of Merger Sub with and into us, with us surviving as an indirect wholly owned subsidiary of AcelRx. The Company’s Board of Directors has unanimously approved the Merger and the Merger Agreement and recommended that stockholders adopt the Merger Agreement. The Company submitted the Merger Agreement to its stockholders for their consideration at a special meeting of stockholders to be held on June 8, 2020.

We have also entered into a co-promotion agreement with AcelRx, or Co-Promotion Agreement, under which the parties have agreed that, during the term of the agreement, their sales forces will promote and detail the other party’s products in accordance with marketing plans agreed to by the parties and subject to specified minimum call requirements. The Co-Promotion Agreement will continue in effect even if the Merger Agreement is terminated.

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 our IGNITE (Investigating Gram-Negative Infections Treated with Eravacycline) phase 3 program. In the first pivotal phase 3 trial in the IGNITE program in patients with cIAI, twice-daily IV Xerava met the primary endpoint by demonstrating statistical non-inferiority of clinical response compared to ertapenem, a carbapenem and a standard of care treatment for cIAI, and was well-tolerated. We refer to this trial as IGNITE1. In our other pivotal phase 3 clinical trial of Xerava in patients with cIAI, twice-daily IV Xerava met the primary endpoint by demonstrating statistical non-inferiority of clinical response compared to meropenem, another standard of care treatment, and was well-tolerated. We refer to this trial as IGNITE4. In both IGNITE1 and IGNITE4, Xerava achieved high cure rates in patients with poly-microbial infections (Gram-negative, Gram-positive, and anaerobic infections), including resistant isolates.

In October 2018, we commenced sales of Xerava in the United States. We are commercializing Xerava in the United States using a small, targeted commercial and medical affairs groups to build and promote access to Xerava. As of April 30, 2020, we have approximately 19 sales representatives, 2 regional business directors, 3 strategic market access executives and approximately 5 medical affairs personnel supporting Xerava in the United States. In connection with the Co-Promotion Agreement, we reduced the size of our commercial group by eight people.

On September 20, 2018, based on the results of IGNITE1, 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. We are not selling Xerava in the EU. In February 2018 we entered into a license agreement with Everest Medicines Limited, or Everest Medicines, granting Everest Medicines commercialization rights to eravacycline in China and other Asian territories. In June 2018, Everest Medicines submitted an Investigational New Drug, or IND, application to the China National Medical Products Administration (formerly China FDA) for a phase 3 clinical trial of eravacycline in cIAI. The application was approved, and Everest Medicines began enrolling patients in this phase 3 trial in the second quarter of 2019. In April 2020, Everest Medicines notified us that its new drug application in Singapore had been approved. Everest Medicines expects to begin commercializing Xerava in Singapore later in 2020.

20


In addition to Xerava, we have also developed other fluorocycline antibiotic compounds, TP-6076 and TP-271, and TP-2846, a tetracycline for the treatment of acute myeloid leukemia. We developed TP-6076, a fully-synthetic fluorocycline derivative, as a lead candidate under our second-generation program to target unmet medical needs, including MDR Gram-negative bacteria such as carbapenem-resistant Enterobacteriaceae and carbapenem-resistant or pan-resistant Acinetobacter baumanii. To date, we have conducted phase 1 single-ascending and multiple-ascending dose studies evaluating the safety, tolerability and pharmacokinetics of IV TP-6076 in healthy volunteers. We also conducted a Phase 1 study to assess the bronchopulmonary disposition, pharmacokinetics and safety of TP-6076 in healthy volunteers. TP-271 is a fully-synthetic fluorocycline that we developed for respiratory disease caused by bacterial biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia. To date, we have completed single-ascending and multiple-ascending dose trials for IV and oral formulations of TP-271. We have completed pre-clinical toxicology studies for TP-2846.

In June 2019, we announced a restructuring of our organization, including a 20% reduction in headcount, designed to focus our cash resources on commercializing Xerava primarily in the hospital setting. This reorganization included the elimination of our internal research function. As part of our restructuring, we decided not to engage in further product development, including conducting clinical trials of our product candidates, and intend to seek out-licensing opportunities for all of our pipeline of early-stage antibiotics and oncology product candidates.

We commenced business operations in July 2006. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our proprietary chemistry technology, identifying potential product candidates, undertaking preclinical studies and clinical trials of our product candidates and conducting commercial sales of Xerava. Prior to October 2018, when we commenced sales of Xerava in the United States, we had not generated any product revenues. We have financed our operations primarily through the public offerings and private placements of our equity securities, debt financings, revenue from United States government grants and contract awards, milestone payments from our licensing agreement and product revenue from sales of Xerava. As of March 31, 2020, we had received an aggregate of $612.1 million in net proceeds from the issuance of equity securities and borrowings under debt facilities, an aggregate of $61.0 million from government grants and contracts and an aggregate of $14.5 million from licensing agreement milestone payments. As of March 31, 2020, our principal source of liquidity was cash and cash equivalents, which totaled $26.1 million.

On April 22, 2020, we entered into a promissory note evidencing an unsecured $2.3 million loan, or the PPP Loan, under the Paycheck Protection Program, or the PPP, which was established as part of the Coronavirus Aid, Relief, and Economic Security Act. The interest rate on the PPP Loan is 1.0% per annum, and no payments of principal or interest are due during the six-month period beginning on the date of the PPP Loan. Beginning one month following such period and continuing monthly until 24 months from the date of the PPP Loan, we are obligated to make monthly payments of principal and interest. We are permitted to prepay the PPP Loan at any time without payment of any premium. The principal and accrued interest under the Note evidencing the PPP Loan may be forgivable. See “Liquidity and Capital Resources.”

As of March 31, 2020, we had an accumulated deficit of $616.3 million. Our net losses were $12.1 million and $19.5 million for the three months ended March 31, 2020 and 2019, respectively. We expect that our expenses will decrease in 2020 compared with 2019, driven by lower costs associated with development of Xerava, our 2019 reorganization and a gradual decrease in Xerava sales and marketing expenses.

Based on our current operating plan, and assuming that the Merger is not consummated when expected, we expect that our cash and cash equivalents of $26.1 million as of March 31, 2020, and our projected revenues from sales of Xerava, together with the $2.3 million in proceeds from our PPP Loan received in April 2020, will be sufficient to fund our operations into the first quarter of 2021 but will not be sufficient to fund our operations for more than one year beyond the filing date of this Quarterly Report on Form 10-Q. 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 we have limited historical experience to base our estimate. In addition, we have forecast a significant reduction in expenses in 2020 as a result of the restructuring implemented in June 2019. If these estimates are incorrect, we may use our cash resources sooner than expected.

As of March 31, 2020, management has further assessed this risk and, in accordance with the requirements of Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), or ASC 205-40, has determined that there is substantial doubt about our ability to continue as a going concern. There is no assurance that we will be successful in consummating the Merger and, if we do not, in obtaining additional financing on terms acceptable to us, if at all, nor is it considered probable under the accounting standards. As such, under the requirements of ASC 205-40, management may not consider the potential for future capital raises or management plans to reduce costs that are not considered probable in the assessment of our ability to meet our obligations.

21


If the Merger is not consummated, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources to fund our operations including ongoing spending to commercialize Xerava. However, there can be no assurance that we will be able to obtain such funding on terms acceptable to us, on a timely basis or at all. If the Merger is not consummated and we are unable to obtain funding, we may be required to delay, reduce or eliminate our commercialization efforts, which could adversely affect our business prospects, and we may be unable to continue operations.

If the Merger is not consummated and we are unable to raise additional capital when needed or if our operating results fall short of its current projections, or if we determine to explore strategic alternatives but are unable to consummate such a transaction or transactions on a timely basis or at all, we 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, our rights to Xerava and our product candidates. Our failure to obtain sufficient funds on acceptable terms when needed would have a material adverse effect on our business, results of operations and financial condition. In addition, in such circumstances, we would consider seeking protection under the bankruptcy laws in order to continue to pursue potential transactions and conduct a wind-down of our company. If we decide to seek protection under the bankruptcy laws, we would expect that we would file for bankruptcy at a time that is significantly earlier than when we would otherwise exhaust our cash resources. If we decide to dissolve and liquidate our assets or to seek protection under the bankruptcy laws, it is unclear to what extent we will be able to pay our obligations, and, accordingly, it is further unclear whether and to what extent any resources will be available for distributions to stockholders. See “Liquidity and Capital Resources—Operating Capital Requirements.”

Impact of COVID-19 on our Business

The spread of SARS-CoV-2 and the resulting disease COVID-19 during the first quarter of 2020 has caused a global economic downturn and resulted in significant volatility in financial markets. In March 2020 the World Health Organization declared COVID-19 a pandemic. As of May 6, 2020, we have not experienced a significant financial or supply chain impact directly related to the pandemic. In this time of uncertainty as a result of the COVID-19 pandemic, we continue to serve our customers and take precautions to provide a safe work environment for our employees. We have implemented a work from home policy for our employees. We have also continued to make internal resource allocation decisions in order to deliver on key business objectives, to increase our financial flexibility and to ensure the success of the Merger. We may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include changes in the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Any prolonged material disruption of the Company’s employees, suppliers, manufacturing or customers could negatively impact its consolidated financial position, consolidated results of operations and consolidated cash flows.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was enacted in response to the COVID-19 pandemic. The CARES Act, along with other provisions, permits carryovers and carrybacks of net operating losses generated from 2018 through 2020 to offset 100% of taxable income. In addition, the CARES Act allows net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate refund of previously paid income taxes. We are currently evaluating the impact of the CARES Act, but at present we do not expect it to have a material impact on our financial statements.

Financial Overview

Product Revenue

Our lead product, Xerava, received approval on August 27, 2018 for the treatment of cIAI in adults. Following FDA approval of Xerava in the United States, we began selling Xerava in October 2018. We sell Xerava to a limited number of specialty distributors in the United States, who collectively represent our customers. These customers subsequently resell Xerava to hospitals or other treatment centers. In addition to the agreements with these distributors and the related discounts and fees, we are subject to government mandated rebates, chargebacks, and discounts with respect to the purchase of Xerava. Product revenue is recognized net of reserves for all variable consideration, including discounts, chargebacks, government rebates and product returns. For further discussion of our product revenue, see Note 2, Summary of Significant Accounting Policies to the interim condensed consolidated financial statements in this Form 10-Q.

22


Collaboration Revenue

In February 2018, we entered into a license agreement with Everest Medicines, whereby we 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. We amended this agreement in July 2019 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. Terms of this arrangement include various payment types, including upfront license fees, development, regulatory and commercial milestone payments, payments for clinical supply services and royalties on sales revenue. For further discussion of the Everest Medicines collaboration and the related revenue recognition, please see Note 6, Significant Agreements and Contracts to the interim condensed consolidated financial statements.

Government and Grant Revenue

Our government revenue has been derived from funding provided under four awards, all of which have terminated. These awards include a contract 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 for the treatment of disease caused by bacterial biothreat pathogens, two separate awards from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of the National Institutes of Health, for the development of TP-271. These three awards were made to CUBRC, Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in United States government-based contracts, with which we are collaborating. CUBRC serves as the prime contractor under these awards, primarily carrying out a program management and administrative role with additional responsibility for the management of preclinical studies. The fourth award is from Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator, or CARB-X, an international public-private partnership focused on advancing new antimicrobial products to address the threat of antibiotic resistance. For further discussion of our contract and grant revenue agreements and the related revenue recognition, please see Note 6, Significant Agreements and Contracts to the consolidated financial statements.

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 University, or 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.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, and include:

 

personnel-related expenses, including salaries, benefits and stock-based compensation expense;

 

expenses incurred under agreements with contract research organizations, contract manufacturing organizations, and consultants that provide preclinical, clinical, regulatory and manufacturing services;

 

certain payments made under our license agreement with Harvard;

 

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies;

 

facility, depreciation and other expenses, which include direct and allocated expenses for rent, maintenance of our facilities, insurance and other supplies;

 

costs associated with preclinical and regulatory activities.

We expense research and development costs to operations as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

23


We track external development expenses and personnel expense on a program-by-program basis and allocate common expenses, such as scientific consultants and laboratory supplies, to each program based on the personnel resources allocated to such program. Expenses related to facilities, consulting, travel, conferences, stock-based compensation and depreciation are not allocated to a program and are separately classified as other research and development expenses. The following table summarizes our research and development expenses on a program-specific basis for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Xerava

 

$

1,455

 

 

$

2,296

 

BARDA Contract

 

 

 

 

 

472

 

TP-6076

 

 

 

 

 

512

 

CARB-X Award

 

 

 

 

 

301

 

NIAID Contract

 

 

 

 

 

88

 

Other development programs

 

 

88

 

 

 

1,023

 

Other research and development

 

 

350

 

 

 

2,045

 

Total research and development expenses

 

$

1,893

 

 

$

6,737

 

 

Prior to our June 2019 reorganization, research and development activities were central to our business model. As part of our reorganization, we decided not to engage in further research and development, including conducting clinical trials of our product candidates. Instead, we intend to seek to out-license each of our pipeline candidates.

As of March 31, 2020, we had incurred an aggregate of $300.2 million in research and development expenses related to the development of Xerava, and $38.7 million in research and development expenses related to the development of Xerava that were funded under the BARDA Contract.

We have licensed our proprietary chemistry technology from Harvard on an exclusive worldwide basis under a license agreement that we entered into in August 2006. Under our license agreement, as of March 31, 2020, we have incurred expense in aggregate of $16.8 million in up front license fees, sublicense fee and development milestone payments for the licensed Harvard technology. We have also issued 1,568 shares of our common stock to Harvard under the license agreement. We have also agreed to make payments to Harvard upon the achievement of specified future development and regulatory milestones totaling up to $15.1 million for each licensed product candidate ($12.6 million of which has already been paid with respect to eravacycline), and to pay tiered royalties in the single digits based on annual worldwide net sales, if any, of licensed products, by us, our affiliates and our sublicensees. We are also obligated to pay Harvard a specified share of non-royalty sublicensing revenues that we receive from sublicensees for the grant of sublicenses under the license and to reimburse Harvard for specified patent prosecution and maintenance costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist principally of personnel-related costs, including salaries and related costs such as benefits and stock-based compensation for personnel in executive, finance, legal, operational, corporate communications, sales, marketing, regulatory, medical affairs and human resource functions. Other significant general and administrative expenses include professional fees for legal, patent, auditing and tax services, consulting and facility costs not otherwise included in research and development expenses.

We anticipate that our selling, general and administrative expenses will plateau or decrease for a number of reasons, including a decrease of infrastructure, including reductions in personnel-related costs, consulting, legal, and accounting costs.

Other Income (Expense)

Other income (expense) consists primarily of interest income and interest expense. Interest income consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is capital preservation. We did not have any interest expense for the three months ended March 31, 2020. Interest expense for the three months ended March 31, 2019 consisted primarily of interest accrued on our outstanding indebtedness and non-cash interest related to the amortization of debt discount costs associated with our term loan facility with Solar Capital which was paid in full in August 2019.

24


Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued clinical expenses, and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we and our management believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are those which require the most significant judgments and estimates in the preparation of our consolidated financial statements. We have determined that our most critical accounting policies are those relating to product revenue recognition, collaboration revenue recognition, government contract and grant revenue recognition and equity compensation. There have been no significant changes to our critical accounting policies as described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report, filed on form 10-K with the SEC on March 12, 2020, for the year ended December 31, 2019.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes the results of our operations for the three months ended March 31, 2020 and 2019, together with the changes in those items in dollars:

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

Increase/

 

 

 

2020

 

 

2019

 

 

(decrease)

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

1,755

 

 

$

341

 

 

 

1,414

 

Government revenue

 

 

-

 

 

 

932

 

 

 

(932

)

Total revenue

 

 

1,755

 

 

 

1,273

 

 

 

482

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue - product sales

 

 

1,360

 

 

 

164

 

 

 

1,196

 

Cost of revenue - intangible asset amortization

 

 

98

 

 

 

98

 

 

 

-

 

Research and development

 

 

1,893

 

 

 

6,737

 

 

 

(4,844

)

Selling, general and administrative

 

 

10,668

 

 

 

13,314

 

 

 

(2,646

)

Total operating expenses

 

 

14,019

 

 

 

20,313

 

 

 

(6,294

)

Loss from operations

 

 

(12,264

)

 

 

(19,040

)

 

 

6,776

 

Other income

 

 

71

 

 

 

-

 

 

 

71

 

Interest income

 

 

69

 

 

 

507

 

 

 

(438

)

Interest expense

 

 

-

 

 

 

(955

)

 

 

955

 

Net loss

 

$

(12,124

)

 

$

(19,488

)

 

$

7,364

 

 

Product Revenue

We initiated sales of Xerava in the United States on October 15, 2018. For the three months ended March 31, 2020 net sales of Xerava were $1.8 million. The increase in product revenue, net for the three months ended March 31, 2019 is primarily the result of increased sales volume of Xerava.

Revenue from U.S. Government Contracts and Grants

We had no government revenue for the three months ended March 31, 2020 compared to $0.9 million for the three months ended March 31, 2019. Our BARDA Contract, NIAID Contract and CARB-X Award each expired in 2019.

 

25


Cost of Revenue

Cost of product revenues for the three months ended March 31, 2020 was $1.5 million compared to $0.3 million for the three months ended March 31, 2019. Cost of product revenue consists primarily of 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. This increase was due to both increased sales of Xerava in 2020 as well as certain cost elements of inventory sold in 2019 being expensed in periods prior to the product’s approval in August 2018.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2020 were $1.9 million compared to $6.7 million for the three months ended March 31, 2019, a decrease of $4.8 million. This decrease was primarily due to the completion of Xerava development and our restructuring in June 2019, which included the cessation of development of our pipeline candidates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2020 were $10.7 million compared to $13.3 million for the three months ended March 31, 2019, a decrease of $2.6 million. The decrease was driven by our 2019 corporate reorganization as well as tight expense control during the three months ended March 31, 2020, partially offset by expenses related to the Merger announced in March 2020.

Other Income (Expense)

Interest expense decreased by $1.0 million for the three months ended March 31, 2020 due to early payment of our term loan facility in August 2019. Interest income decreased by $0.4 million related to the year-over-year decrease in cash and cash equivalents. For the three-month period ended March 31, 2020, we also recorded a one-time gain from our lease modification and asset sale totaling $0.1 million.

Liquidity and Capital Resources

We have incurred losses since our inception and anticipate that we will continue to incur losses for at least the next several years. We expect our total expenses to decrease but remain significant in 2020 and, as a result, if we do not consummate the Merger, we will need additional capital to fund our operations, which we may obtain from additional financings, research funding, collaborations, government contract and grant revenue or other sources.

Since our inception, we have funded our operations primarily through the public offerings and private placements of our equity securities, debt financings, revenue from U.S. government grants and contract awards, milestone payments from our licensing agreement and product revenue from sales of Xerava.

As of March 31, 2020, we had cash and cash equivalents of approximately $26.1 million. We invest cash in excess of immediate requirements in accordance with our investment policy, primarily with a view to liquidity and capital preservation. As of  March 31, 2020, our funds were held in cash and money market funds.

On January 17, 2017, we entered into a Controlled Equity Offering Sales Agreement, or Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, as sales agent. On July 7, 2017, we entered into an amendment to the sales agreement, or the Amended Sales Agreement. In accordance with the terms of the Amended Sales Agreement, we may offer and sell through Cantor, from time to time, shares of our common stock up to an aggregate offering price of $80,000,000 through an “at-the-market” offering program. As of March 31, 2020, we had sold an aggregate of 305,522 shares under the agreement at an average price of $129.80 per share and we had received aggregate cash proceeds of $38.2 million, after deducting sales commissions and offering expenses. Under the Amended Sales Agreement, Cantor may sell shares of our 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 our common stock. We are not obligated to make any sales of shares of our common stock under the Amended Sales Agreement. We or Cantor may suspend or terminate the offering of shares of our common stock upon notice to the other party and subject to other conditions. We will pay Cantor a commission rate equal to 3.0% of the gross proceeds per share sold. We have not sold any shares under the Amended Sales Agreement during 2019 or during the three months ended March 31, 2020

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On November 2, 2018, we entered into the 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 agreed to make available to us term loans in an aggregate principal amount of up to $75.0 million under the Loan Agreement. The Loan Agreement provided 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 had a maturity date of May 2, 2023. The Loan Agreement also provided access to an additional Term C loan facility in the amount of $25.0 million, to be funded at the Lenders’ sole discretion.

In connection with the Loan Agreement and the funding of the Term A facility, we issued to the Lenders warrants to purchase an aggregate of 20,718 shares of our common stock, equal to 3.00% of the term loan funded divided by the exercise price of $43.44. Each warrant will terminate 10 years from the date of its original issuance.

On August 30, 2019, we paid the Lenders a total of $30.7 million representing the principal balance, accrued interest outstanding and a portion of the final fee under the Loan Agreement in repayment of our outstanding obligations under the Loan Agreement. Upon the payment of the $30.7 million, all our outstanding indebtedness and obligations owing to the Lenders under the Loan Agreement were deemed paid in full. The Loan Agreement and the notes thereunder, as well as the security interests in the assets of the Company securing the Loan Agreement and note obligations, were terminated. The Lenders retained the warrants issued to them in connection with the origination of the Loan Agreement obligations.

On June 24, 2019, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusions on the Nasdaq Global Select Market, referred to as the minimum bid price rule. On September 26, 2019 we effected a 1-for-20 reverse stock split for the purpose of regaining compliance with the minimum bid price rule.

On October 11, 2019, we received notification from the Listing Qualifications Department of the Nasdaq Stock Market that for 10 consecutive business days, the closing bid price of our common stock had been at $1.00 per share or greater, confirming that we had regained compliance with the minimum bid price rule.

On November 1, 2019, we completed a registered direct offering to Armistice Capital, LLC, a healthcare-focused institutional investor, or Armistice, priced at-the-market, of (i) 300,000 shares of common stock and accompanying warrants to purchase an aggregate of 300,000 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 1,830,493 shares of common stock and accompanying warrants to purchase an aggregate of 1,830,493 shares of common stock. Each share of common stock and accompanying common stock warrant were sold together at a combined price of $3.755, and each pre-funded warrant and accompanying common stock warrant were sold together at a combined price of $3.745. Each pre-funded warrant has an exercise price of $0.01 per share, is exercisable immediately and is exercisable until exercised in full. Each common stock warrant has an exercise price of $3.62 per share, is exercisable immediately and expires five years from the date of issuance. The net proceeds from the offering, after deducting the placement agent's fees and other offering expenses payable by us, are approximately $7.1 million.  

On January 24, 2020, we completed a private placement with Armistice priced at-the-market of (i) 1,270,000 shares of common stock and accompanying warrants to purchase an aggregate of 1,270,000 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 2,063,334 shares of common stock and accompanying warrants to purchase up to an aggregate of 2,063,334 shares of common stock. Each share of common stock and accompanying common stock warrant were sold together at a combined price of $3.00, and each pre-funded warrant and accompanying common stock warrant were sold together at a combined price of $2.999, for gross proceeds of approximately $10 million. Each pre-funded warrant had an exercise price of $0.001 per share, was exercisable immediately and was exercisable until all of the pre-funded warrants are exercised in full. Each common stock warrant had an exercise price of $2.87 per share, was exercisable immediately and will expire five years from the date of issuance.

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Also on January 24, 2020, we completed a registered direct offering to certain institutional investors priced at-the-market, of (i) 2,380,105 shares of common stock and accompanying warrants to purchase up to an aggregate of 2,380,105 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 120,000 shares of common stock and accompanying warrants to purchase up to an aggregate of 120,000 shares of common stock. Each share of common stock and accompanying common stock warrant were sold together at a combined price of $3.00, and each pre-funded warrant and accompanying common stock warrant were sold together at a combined price of $2.999, for gross proceeds of approximately $7.5 million. Each pre-funded warrant had an exercise price of $0.001 per share, was exercisable immediately and was exercisable until all of the pre-funded warrants are exercised in full. Each common stock warrant had an exercise price of $2.87 per share, was exercisable immediately and will expire five years from the date of issuance.

The net proceeds from the concurrent January 2020 private placement and registered direct offering, after deducting the placement agent’s fees and other estimated offering expenses payable by us, were approximately $15.9 million.

On April 22, 2020, we entered into a promissory note evidencing the PPP Loan under the PPP. The PPP Loan is evidenced by a promissory note, dated as of April 22, 2020, or the Note, between us, as borrower, and Silicon Valley Bank, N.A., as lender, or SVB. The interest rate on the Note is 1.0% per annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note, or the Deferral Period.

Beginning one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of the Note, or the Maturity Date, we are obligated to make monthly payments of principal and interest to SVB with respect to any unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note as of the last day of the Deferral Period by the Maturity Date. We are permitted to prepay the Note at any time without payment of any premium.

The principal and accrued interest under the Note evidencing the PPP Loan are forgivable after eight weeks as long as we have used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintain our payroll levels. The amount of loan forgiveness will be reduced if we terminate employees or reduce salaries during the eight-week period. We will be obligated to repay any portion of the principal amount of the Note that is not forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid in full.

Upon a default under the Note, including the non-payment of principal or interest, our obligations under the Note may be accelerated and SVB may pursue its rights under the Uniform Commercial Code and any other applicable law or in equity.

The following table summarizes our sources and uses of cash for each of the periods set forth below (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash Flows from Operations:

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$