PRTK Paratek Pharmaceuticals Inc

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

1.   Description of the business  

Paratek Pharmaceuticals, Inc., or the Company or Paratek, is a Delaware corporation with its corporate office in Boston, Massachusetts and an office in King of Prussia, Pennsylvania.  

The Company is a commercial-stage biopharmaceutical company focused on the development and commercialization of novel life-saving therapies for life-threatening diseases or other public health threats for civilian, government and military use.  The Company’s United States, or U.S., Food and Drug Administration, or FDA, approved commercial product, NUZYRA^® (omadacycline), is a once-daily oral and intravenous antibiotic for the treatment of adult patients with community-acquired bacterial pneumonia, or CABP, and acute skin and skin structure infections, or ABSSSI, caused by susceptible pathogens. SEYSARA^® (sarecycline) is an FDA-approved product with respect to which the Company has exclusively licensed in the U.S. and the People’s Republic of China, or the PRC, Hong Kong and Macau, or the greater China region, certain rights to Almirall, LLC, or Almirall. SEYSARA is currently being marketed by Almirall in the U.S. as a once-daily oral therapy for the treatment of moderate to severe acne vulgaris. With respect to the Company’s technology as it relates to sarecycline, the Company retains development and commercialization rights in all countries other than the U.S. and the greater China region, and in February 2020, the Company exclusively licensed from Almirall certain technology owned or in-licensed by Almirall or its affiliates that is necessary or useful to develop or commercialize sarecycline outside of the U.S. Almirall plans to develop sarecycline for acne in China, with a submission to the China National Medical Products Administration, or NMPA, expected in 2023.

The Company has incurred significant losses since inception in 1996. The Company has generated an accumulated deficit of $761.9 million through June 30, 2020 and may require substantial additional funding in connection with the Company’s continuing operations to support clinical development and commercialization activities associated with NUZYRA. Based upon the Company’s current operating plan, it anticipates that its cash, cash equivalents and available for sale marketable securities of $186.8 million as of June 30, 2020 will enable the Company to fund operating expenses and capital expenditure requirements through at least the next twelve months from the issuance of the financial statements included in this Quarterly Report on Form 10-Q. The Company expects to finance future cash needs primarily through a combination of product sales, royalties, public or private equity offerings, debt or other structured financings, strategic collaborations and grant funding.  The Company is subject to risks common to companies in the biopharmaceutical industry, including, but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain additional financing to fund the future development of the Company’s product candidates, the need to obtain compliant product from third party manufacturers, the need to obtain marketing approval for the Company’s product candidates, the need to successfully commercialize and gain market acceptance of product candidates, the risks of manufacturing product with an external supply chain, dependence on key personnel, and compliance with government regulations as well as the risks discussed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 10, 2020, or the 2019 Form 10-K, in the Company’s other filings with the SEC and in the “Risk Factors” section of this Quarterly Report on Form 10-Q.

2.   Summary of Significant Accounting Policies and Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASU, of the Financial Accounting Standards Board, or FASB, and pursuant to the rules and regulations of the SEC.

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2019, and, in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of June 30, 2020 and December 31, 2019, results of operations for the three and six month periods ended June 30, 2020 and June 30, 2019, cash flows for the six month periods ended June 30, 2020 and June 30, 2019 and changes in stockholders’ equity (deficit) for the three and six month periods ended June 30, 2020 and June 30, 2019.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2020. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2019, and notes thereto, which are included in the Company’s 2019 Form 10-K.

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Summary of Significant Accounting Policies

As of June 30, 2020, the Company’s significant accounting policies and estimates, which are detailed in the Company’s 2019 Form 10-K, have not changed except as discussed below.

Revenue Earned Under Government Contracts

If the Company concludes that some or all aspects of its government contracts represent a transaction with a customer to obtain services or goods that are an output of its ordinary activities in exchange for consideration, it accounts for those aspects of the arrangement in accordance with ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606.  Arrangements that are entirely in the scope of other guidance are accounted for under that guidance. The Company’s accounting policy under ASC 606, which is included in the Company’s 2019 Form 10-K, has not changed.

The Company recognizes sales of NUZYRA under its government contracts as product revenue when control of NUZYRA is transferred, in accordance with ASC 606. It also recognizes government contract service revenue and government contract grant revenue as defined below.  

Government Contract Service Revenue

Government contract service revenue is recognized as services are performed.  Revenue and related reimbursable expenses are presented on a gross basis in the Company’s consolidated statements of operations. The related reimbursable expenses are expensed as incurred as research and development expense.

Government Contract Grant Revenue

Government contract grant revenue is recognized as the related reimbursable expenses are incurred.  The cost reimbursements that are reported as revenue is presented gross of the related reimbursable expenses in the Company’s consolidated statements of operations. The related reimbursable expenses are expensed as incurred as research and development expense.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the results of operations of Paratek Pharmaceuticals, Inc. and its wholly-owned subsidiaries, Paratek Pharma, LLC, Paratek Securities Corporation, Transcept Pharma, Inc., Paratek UK Limited, Paratek Royalty Corporation, and Paratek Ireland Limited. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated financial statements, in conformity with U.S. GAAP, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses in the Company’s financial statements. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to, among other items, accounts receivable and related reserves, inventory and related reserves, goodwill, net product revenue, government contract service revenue, government contract grant revenue, collaboration and royalty revenue, leases, stock-based compensation arrangements, manufacturing and clinical accruals, useful lives for depreciation and amortization of long-lived assets and valuation allowances on deferred tax assets. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known by the Company’s management.

Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist primarily of cash, restricted cash, and accounts receivable. The Company places its cash in an accredited financial institution and this balance is above federally insured amounts. The Company has no off-balance sheet concentrations of credit risk such as foreign currency exchange contracts, option contracts or other hedging arrangements.

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Accounts receivable as of June 30, 2020 represents $7.6 million due from customers on sales of NUZYRA, net of prompt payment discounts, chargebacks, rebates and certain fees. The balance of accounts receivable as of June 30, 2020, includes estimated revenue earned of $0.3 million of royalties on SEYSARA sales under the Almirall Collaboration Agreement (as defined below) and XERAVA ^TM (eravacycline) sales under the Tetraphase License Agreement (as defined below), $0.3 million of government contract service revenue earned under the BARDA contract (as defined below), and $0.4 million of government contract grant revenue earned under the BARDA contract. Refer to Note 8, Government Contract Revenue, and Note 9, License and Collaboration Agreements, for further information on these agreements.

3.   Marketable Securities 

The following is a summary of available-for-sale securities as of June 30, 2020 and December 31, 2019 (in thousands):

No available-for-sale securities held as of June 30, 2020 and December 31, 2019 had remaining maturities greater than twelve months.

4.  Cash and Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated statement of cash flows that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows (in thousands):

Short-term restricted cash

On May 1, 2019, the Company deposited $4.0 million into an interest reserve account in conjunction with the funding of a royalty-backed loan agreement, or the Royalty-Backed Loan Agreement, executed with Healthcare Royalty Partners III, L.P., or HCRP. Payments of interest under the Royalty-Backed Loan Agreement are made quarterly using royalty payments received since the immediately preceding payment date under the Almirall Collaboration Agreement. On each interest payment date, if the royalty payments received do not equal the total interest due for the respective quarter, the Company will cover the balance of the interest payment due from the interest reserve account.  Refer to Note 14, Debt, for further details. As of June 30, 2020 and December 31, 2019, restricted cash of $1.4 million and $0.3 million, respectively, represented the estimated amount that is expected to be paid to HCRP out of the interest reserve account within the next twelve months.

Long-term restricted cash

The Company leases its Boston, Massachusetts office space under a non-cancelable operating lease. Refer to Note 15, Leases, for further details. In accordance with the lease, the Company has a cash-collateralized irrevocable standby letter of credit in the amount of $0.3 million as of both June 30, 2020 and December 31, 2019, naming the landlord as beneficiary.

As of June 30, 2020 and December 31, 2019, long term restricted cash of $0.6 million and $2.7 million, respectively, represented the remaining balance in the interest reserve account that is expected to be paid to HCRP after June 30, 2021.

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5. Inventories, Net

The following table presents inventories, net (in thousands):

When recorded, inventory reserves reduce the carrying value of inventories to their net realizable value. The Company reviews inventories on hand at least quarterly and records provisions for estimated excess, slow-moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable value.

6.   Fixed Assets, Net

Fixed assets, net, consists of the following (in thousands):

7.   Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common stock outstanding during the period, without consideration for common stock equivalents. 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 or the if-converted method, as applicable. For purposes of this calculation, shares of common stock issuable upon conversion of convertible debt, stock options, restricted stock units, or RSUs, warrants to purchase common stock, and shares issuable under the employee stock purchase plan are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following outstanding shares subject to stock options and restricted stock units, warrants to purchase shares of common stock, common stock issuable upon conversion of convertible debt and shares issuable under the employee stock purchase plan were antidilutive due to a net loss in the periods presented and, therefore, were excluded from the dilutive securities computation for the three and six months ended June 30, 2020 and 2019 as indicated below:

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8. Government Contract Revenue

Biomedical Advanced Research and Development Authority

On December 18, 2019, the Company entered into a five-year contract with the Biomedical Advanced Research and Development Authority, or BARDA, a division of the U.S. Department of Health and Human Services’ Office of the Assistant Secretary for Preparedness and Response, herein referred to as the BARDA contract, with an option to extend up to ten years, to support the development of NUZYRA for the treatment of pulmonary anthrax, FDA post-marketing requirements, or PMRs, associated with the initial NUZYRA approval, and with an option for BARDA to procure up to 10,000 treatment courses of NUZYRA for the Strategic National Stockpile, or SNS.

The BARDA contract could result in payments to the Company of up to approximately $284.7 million and consists of a five-year base period-of-performance and a total contract period-of-performance (base period plus option exercises) of up to ten years. Under the base period-of-performance, the Company will conduct activities necessary to (i) allow the product to be used under an Emergency Use Authorization, (ii) obtain licensure of NUZYRA through a supplemental New Drug Application, or NDA, submission for anthrax, and (iii) provide up to 2,500 treatment courses of the drug product to be stored as vendor managed inventory and subsequently delivered to the SNS. The contract options may be exercised to perform additional studies necessary for licensure, support post-licensure commitments as required by the FDA, additional security requirements, and procure additional treatment regimens.

Under the terms of the agreement, BARDA awarded initial funding of approximately $59.4 million for the development of NUZYRA for the treatment of pulmonary anthrax and the purchase of an initial 2,500 treatment courses of NUZYRA to add to the current SNS. The contract provides for additional staged funding, including approximately $76.8 million for existing FDA PMR commitments and approximately $20.4 million for manufacturing-related requirements, both of which began in April 2020. BARDA exercised the options to award the initial funding in December 2019 and the additional staged funding in April 2020.  The additional staged funding will support all FDA PMRs associated with the approval of NUZYRA, including CABP and pediatric studies as well as a five-year post-marketing bacterial surveillance study, and support the U.S. onshoring and security requirements of Paratek manufacturing activities for NUZYRA.

The remaining funding under the BARDA contract includes the potential for approximately $12.7 million to support the development of NUZYRA for the prophylaxis of anthrax and a maximum of approximately $115.4 million to provide for three additional purchases of NUZYRA, each of which may be exercised upon development milestones related to the anthrax treatment development program.

The BARDA contract contains a number of terms and conditions that are customary for government contracts of this nature, including provisions giving the government the right to terminate the contract at any time for its convenience.

The Company evaluated the BARDA contract under ASC 606 and concluded that a portion of the arrangement represents a transaction with a customer. The Company identified five material promises under the BARDA contract: (i) research and development services performed for the treatment of pulmonary anthrax, (ii) the procurement of 2,500 treatment courses of NUZYRA, (iii) an option for services performed for the supplemental late-stage development of NUZYRA for treatment and prophylaxis of pulmonary anthrax, (iv) an option for services related to U.S. manufacturing onshoring and security requirements, which includes shelf-life stability extension work and regulatory activities that will benefit the manufacturing processes that support NUZYRA for the treatment of pulmonary anthrax and (v) options to procure up to three 2,500 treatment courses of NUZYRA.

In December 2019, the Company determined material promises (i) and (ii) above were performance obligations since they were distinct within the context of the contract as the services are separately identifiable from other promises within the arrangement. The Company also determined that for (i) and (ii) the transaction price included within the BARDA contract was equivalent to the standalone selling price of the services and the cost of the procurement.

The Company evaluated the material promises that contained option rights ((iii), (iv), and (v) above). The Company determined that (iii) and (iv) were not offered at a discount that is incremental to the range of discounts typically given for these goods and services, and therefore do not represent material rights. As such, options for additional services in (iii) and (iv) were not considered performance obligations at the outset of the arrangement. The Company also evaluated the future procurement option rights (v) and determined that those option rights represent a material right. As such, the optional additional NUZYRA procurements in (v) were considered performance obligations at the outset of the arrangement. The Company concluded that three performance obligations existed at the outset of the BARDA contract.

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As the BARDA contract is partially within the scope of ASC 606 and partially within the scope of other guidance, the Company applied the guidance of ASC 606 to initially measure the parts of the contract within ASC 606. The total transaction price of the parts of the BARDA contract that existed at the outset of the contract that fall under ASC 606 was determined to be $63.6 million, inclusive of $4.2 million in variable consideration, and was allocated to each of the three performance obligations based on the performance obligation’s estimated relative stand-alone selling prices. As of June 30, 2020, the Company reevaluated the variable consideration of $4.2 million that is included in the transaction price and determined that the variable consideration should not be constrained as it is not probable that a significant reversal in the amount of the cumulative revenue recognized will occur in a future period. The transaction price was allocated as follows: $21.5 million to research and development services performed for the treatment of pulmonary anthrax in (i), which will be classified as government contract service revenue when recognized, $37.9 million to the procurement of 2,500 treatment courses of NUZYRA in (ii), which will be classified as product revenue when recognized, and a total of $4.2 million to the options to procure up to three 2,500 treatment courses of NUZYRA in (v), which would be included within product revenue when recognized upon exercise and transfer of control of related treatment courses.  The Company estimated the stand-alone selling price of the research and development services performed for the treatment of pulmonary anthrax based on the Company’s projected cost of providing the services plus an applicable profit margin commensurate with observable market data for similar services.  The Company estimated the stand-alone selling price of the procurement of 2,500 treatment courses of NUZYRA based on historical pricing of the Company’s commercial products to similar customers.  The Company estimated the stand-alone selling price of the future procurement options based on the discount that the customer would obtain when exercising the option, adjusted for any discount that the customer could receive without entering into the contract, and the likelihood that the option will be exercised.  

The Company’s performance obligations are either satisfied over time as work progresses or at a point in time.  

The Company concluded that research and development services performed for the treatment of pulmonary anthrax in (i) would be recognized as government contract service revenue over time as the performance obligation is satisfied. Costs incurred represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Types of contract costs include labor, material, and third-party services.

The product procurement performance obligations ((ii) and, if any optional additional procurements are exercised from, (v) above), generate revenue at a point in time, which will be upon transfer of control of the product. As such, the related revenue for these performance obligations will be recognized at a point in time as product revenue within the Company’s consolidated statement of operations.  As of June 30, 2020, no product procurement performance obligations have been completed and therefore no product revenue has been recognized.

In April 2020, BARDA exercised its option to obtain manufacturing-related services under material promise (iv) and the Company is accounting for these services as a separate $20.4 million contract for accounting purposes since manufacturing-related services were determined at the contract outset to be optional services that did not represent a material right. The Company’s manufacturing-related services are satisfied over time as work progresses.

The Company recognized $0.4 million and $0.8 million of government contract service revenue during the three and six months ended June 30, 2020, respectively.

As of June 30, 2020, the aggregate amount of transaction price allocated to remaining performance obligations, excluding unexercised contract options, was $83.2 million. The Company expects to recognize this amount as revenue over the next six years.

The Company concluded that BARDA’s reimbursement for existing FDA PMR requirements associated with the initial NUZYRA approval was not within the scope of ASC 606 as BARDA is not receiving services as the Company’s customer. The Company estimated the consideration to be allocated to government contract grant revenue based on the consideration under the BARDA contract in excess of the estimated standalone selling prices for components of the BARDA contract accounted for under ASC 606.   The Company recognizes the allocated consideration for BARDA’s reimbursement of existing FDA PMR requirements associated with the initial NUZYRA approval of $72.6 million as government contract grant revenue as the related reimbursable expenses are incurred.  

The Company recognized $0.4 million of government contract grant revenue under the BARDA contract during the three and six months ended June 30, 2020.

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Contract Balances

Contract assets (i.e. unbilled accounts receivable) and/or contract liabilities (i.e. customer advances and deposits) may exist at the end of each reporting period under the BARDA contract. When amounts are received prior to performance obligations being satisfied, the amounts allocated to those performance obligations are reflected as contract liabilities on the consolidated balance sheets, as deferred revenue, until the performance obligations are satisfied.

As of June 30, 2020, no such deferred revenue was recorded. Future deferred revenue will be included within other liabilities on the Company’s consolidated balance sheet.

9.    License and Collaboration Agreements

Tetraphase Pharmaceuticals, Inc.

On March 18, 2019, Paratek and Tetraphase Pharmaceuticals, Inc., or Tetraphase, entered into a License Agreement, or the Tetraphase License Agreement. Under the terms of the Tetraphase License Agreement, Paratek granted to Tetraphase a non-exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain Paratek patents, to develop, make, have, use, import, offer for sale and sell the licensed product, or XERAVA, which is a drug for the treatment of complicated, intra-abdominal infections caused by bacteria, which was approved by the FDA in August 2018.

The terms of the Tetraphase License Agreement provide for Tetraphase to pay Paratek royalties at a low single digit percent on net product revenues of the licensed product sold in the U.S. Tetraphase’s obligation to pay royalties with respect to the licensed product shall be retroactive to the date of the first commercial sale of the licensed product in the U.S., which occurred in February 2019. Tetraphase is currently selling XERAVA in the U.S.

The Tetraphase License Agreement will continue until the expiration of and payment by Tetraphase of all of Tetraphase’s payment obligations, which is when there are no longer any valid claims of the licensed Paratek patents that would be infringed, in the absence of a license, by a manufacture, use, or sales of the licensed product.  The principal licensed patent under the Tetraphase License Agreement is expected to expire in October 2023.

The Company recognized an insignificant amount of royalty revenue during the three and six months ended June 30, 2020 under the Tetraphase License Agreement.

Zai Lab (Shanghai) Co., Ltd.

On April 21, 2017, Paratek Bermuda Ltd., a former wholly-owned subsidiary of Paratek Pharmaceuticals, Inc., and Zai Lab (Shanghai) Co., Ltd., or Zai, entered into a License and Collaboration Agreement, or the Zai Collaboration Agreement. On December 18, 2019 Paratek Bermuda Ltd. assigned its rights under the Zai Collaboration Agreement to Paratek Pharmaceuticals, Inc. Under the terms of the Zai Collaboration Agreement, Paratek granted Zai an exclusive license to develop, manufacture and commercialize omadacycline, or the licensed product, in the PRC, Hong Kong, Macau and Taiwan, or the Zai territory, for all human therapeutic and preventative uses other than biodefense. Zai will be responsible for the development, manufacturing and commercialization of the licensed product in the Zai territory, at its sole cost with certain assistance from Paratek.

Under the terms of the Zai Collaboration Agreement, Paratek earned an upfront cash payment of $7.5 million in April 2017, $5.0 million upon approval by the FDA of a NDA, submission in the CABP indication, in October 2018, and $3.0 million upon submission of the first regulatory approval application for a licensed product in the PRC in December 2019.  The Center for Drug Evaluation of China’s NMPA granted priority review status to the NDA submitted by Zai for the treatment of CABP and ABSSI in May 2020.  Paratek is eligible to receive up to $6.0 million in potential future regulatory milestone payments and $40.5 million in potential future commercial milestone payments, the next being $6.0 million upon regulatory approval for a licensed product in the PRC. The terms of the Zai Collaboration Agreement also provide for Zai to pay Paratek tiered royalties at a low double digit to mid-teen percent on net sales of the licensed product in the Zai territory.

The Zai Collaboration Agreement will continue, on a region-by-region basis, until the expiration of and payment by Zai of all Zai’s payment obligations, which is until the later of: (i) the abandonment, expiry or final determination of invalidity of the last valid claim within the Paratek patents that covers the licensed product in the region in the Zai territory in the manner that Zai or its affiliates or sublicensees exploit the licensed product or intend for the licensed product to be exploited or (ii) the eleventh anniversary of the first commercial sale of such licensed product in such region.

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The Company evaluated the Zai Collaboration Agreement under ASC Topic 606, Revenue from Contracts with Customers. The Company determined that there were six material promises under the Zai Collaboration Agreement: (i) an exclusive license to develop, manufacture and commercialize omadacycline in the Zai territory, (ii) the initial technology transfer, (iii) a transfer of certain materials and materials know-how, (iv) optional manufacturing services, (v) optional regulatory support and (vi) optional commercialization support. The Company determined that the exclusive license and initial technology transfer were not distinct from one another, as the license has limited value without the transfer of the Company’s technology; which will allow Zai to develop the manufacturing process and commercialize omadacycline in the Zai territory in the timeline anticipated under the agreement. Without the technology transfer, Zai would incur additional costs to recreate the Company’s know-how. Therefore, the license and initial technology transfer are combined as a single performance obligation.  The transfer of materials is a single distinct performance obligation.  The Company evaluated the option rights for manufacturing services, regulatory support and commercialization support to determine whether they represent or include material rights to Zai and concluded that the options were not issued at a discount, and therefore do not represent material rights. As such, they are not considered performance obligations at the outset of the arrangement.

Based on these assessments, the Company determined that two performance obligations existed at the outset of the Zai Collaboration Agreement: (i) the exclusive license combined with the initial technology transfer and (ii) the transfer of certain materials.  

The Company satisfied both performance obligations and recognized the upfront payment of $7.5 million as revenue in the year ended December 31, 2017. Future potential milestone payments were excluded from the transaction price as they are fully constrained as the risk of significant reversal has not yet been resolved. The achievement of the future potential milestones is not within the Company’s control and is subject to certain research and development success or regulatory approvals and therefore carry significant uncertainty. The Company will reevaluate the likelihood of achieving future milestones at the end of each reporting period. As all performance obligations have been satisfied, if the risk of significant reversal is resolved, any future milestone revenue from the arrangement will be recognized as revenue in the period the risk is relieved.

As FDA approval was not within the control of the Company and was not obtained until October 2018, the achievement of the milestone was not deemed probable and the risk of significant reversal of revenue was not resolved until that time. Upon the FDA approval, the uncertainty related to this milestone was resolved and a significant reversal of revenue would not occur in future periods. As such, the $5.0 million milestone payment was recognized as revenue at the time of FDA approval in the fourth quarter of 2018.

As submission of the first regulatory approval application for a licensed product in the PRC is not within the control of the Company and was not obtained until December 2019, the achievement of the milestone was not was not deemed probable and the risk of significant reversal of revenue was not resolved until that time. Upon submission, the uncertainty related to this milestone was resolved and a significant reversal of revenue would not occur in future periods. As such, the $3.0 million milestone payment was recognized as revenue at the time of the regulatory approval application submission in the fourth quarter of 2019.

As regulatory approval in the PRC is not within the control of the Company, the achievement of the milestone was not deemed probable and the risk of significant reversal of revenue was not resolved as of June 30, 2020. As such, the next milestone payment was not recognized as revenue during the six months ended June 30, 2020 or during the year ended December 31, 2019.

Almirall, LLC

In July 2007, the Company and Warner Chilcott Company, Inc. (which became a part of Allergan plc, or Allergan), entered into a collaborative research and license agreement under which the Company granted Allergan an exclusive license to research, develop, manufacture and commercialize tetracycline products for use in the U.S. for the treatment of acne and rosacea. In September 2018, Allergan assigned to Almirall its rights under the collaboration agreement, or the Almirall Collaboration Agreement. Since Allergan did not exercise its development option with respect to the treatment of rosacea prior to initiation of a Phase 3 trial for the product, the license grant to Allergan, which was assigned to Almirall, converted to a non-exclusive license for the treatment of rosacea as of December 2014.

Under the terms of the Almirall Collaboration Agreement, Almirall is responsible for and is obligated to use commercially reasonable efforts to develop and commercialize tetracycline compounds that are specified in the agreement for the treatment of acne. The Company has agreed during the term of the Almirall Collaboration Agreement not to directly or indirectly develop or commercialize any tetracycline compounds in the U.S. for the treatment of acne, and Almirall has agreed during the term of the Almirall Collaboration Agreement not to directly or indirectly develop or commercialize any tetracycline compound included as part of the agreement for any use other than as provided in the Almirall Collaboration Agreement.

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In February 2020, the Company finalized a license agreement with Almirall granting the Company exclusive rights to develop, manufacture and commercialize sarecycline outside of the U.S., including rights of reference to Almirall’s clinical data thus formalizing the Company’s rights to develop, manufacture and commercialize sarecycline in the rest of the world.  In connection with that license, the Company then exclusively licensed Almirall pursuant to the Almirall China License Agreement, the rights to develop, manufacture and commercialize sarecycline in the greater China region. Almirall currently holds a nonexclusive license to develop and commercialize sarecycline for the treatment of rosacea in the U.S., and in the U.S., Paratek cannot grant rights on back-up compounds, lead candidate(s), or products licensed to Almirall for rosacea.

The Almirall Collaboration Agreement contains two performance obligations: (i) an exclusive license to research, develop and commercialize tetracycline products for use in the U.S. for the treatment of acne and rosacea and (ii) research and development services. The performance obligation to deliver the license was satisfied upon execution of the Almirall Collaboration Agreement in July 2007.  All research and development services were completed by December 2010.  The options provided to Almirall for additional development services do not provide Almirall with a material right as these services will not be provided at a significant or incremental discount.  As such, the option services are not performance obligations. As the performance obligation to deliver the license was satisfied in 2007 and research and development services were completed by December 2010, all subsequent milestone payments are recognized as revenue when the risk of significant reversal is resolved, generally when the milestone event occurs.

The Company received an upfront fee in the amount of $4.0 million upon the execution of the Almirall Collaboration Agreement, $1.0 million upon filing of an Investigational New Drug Application in 2010, $2.5 million upon initiation of Phase 2 trials in 2012 and $4.0 million upon initiation of Phase 3 trials associated with the Almirall Collaboration Agreement in December 2014.

In December 2017, the FDA’s acceptance of the NDA for sarecycline was received, triggering a milestone payment of $5.0 million earned upon acceptance of an NDA for a product licensed under the Almirall Collaboration Agreement.

In October 2018, the FDA’s regulatory approval of sarecycline, under the tradename SEYSARA, triggered the last milestone payment under the Almirall Collaboration Agreement of $12.0 million. Since FDA approval of SEYSARA was outside of the Company’s control and not obtained until October 2, 2018, the achievement of the milestone was not deemed probable and the risk of significant reversal of revenue was not resolved until such time. Upon the FDA approval, the uncertainty related to this milestone was resolved and a significant reversal of revenue would not occur in future periods. As such, the $12.0 million milestone payment was recognized as revenue at the time of FDA approval in the fourth quarter of 2018.

Almirall is also obligated to pay the Company tiered royalties, ranging from the mid-single digits to the low double digits, based on net sales of tetracycline compounds developed under the Almirall Collaboration Agreement, with a standard royalty reduction post patent expiration for such product for the remainder of the royalty term. Almirall’s obligation to pay the Company royalties for each tetracycline compound it commercializes under the Almirall Collaboration Agreement expires on the later of the expiration of the last to expire patent that covers the tetracycline compound in the U.S. and the date on which generic drugs that compete with the tetracycline compound reach a certain threshold market share in the U.S.

Royalty payments are recognized when the sales occur. The Company recognized $0.3 million and $0.5 million of royalty revenue recognized for sales of SEYSARA in the U.S. by Almirall for the three and six months ended June 30, 2020, respectively, under the Almirall Collaboration Agreement. During the second quarter of 2020, royalty revenue recognized for sales of SEYSARA in the U.S. was estimated using third party data and an approximation of discounts and allowances to calculate net product sales, to which the Company then applied the applicable royalty percentage specified in the Almirall Collaboration Agreement. Differences between actual and estimated royalty revenues will be adjusted for in the period in which they become known, which is expected to be the following quarter.

In February 2020, the Company entered into (i) an ex-U.S. license agreement with Almirall, or the Ex-U.S. License, under which Almirall granted the Company an exclusive license in and to certain technology owned or in-licensed by Almirall or its affiliates in order to research, develop, manufacture and commercialize sarecycline for the treatment of acne in all countries other than the U.S. and (ii) a license agreement with Almirall that is specific to China, or the China License, under which the Company granted to Almirall an exclusive license in and to certain technology owned or in-licensed by the Company or its affiliates in order to research, develop and commercialize sarecycline for the treatment of acne in the greater China region.

Under the terms of the China License, Almirall is responsible for and is obligated to use commercially reasonable efforts to develop and commercialize sarecycline for the treatment of acne, including requirements to (i) file an Investigational New Drug Application (or analogous foreign submission) for sarecycline for the treatment of acne in the greater China region in calendar year 2020, (ii) receive regulatory approval for sarecycline for the treatment of acne in the greater China region within seven years following such submission and (iii) commercialize sarecycline for the treatment of acne in the greater China region within eighteen  months after obtaining regulatory approval. If Almirall does not satisfy the diligence requirements set forth in subclauses (ii) or (iii) above, the Company may terminate the China License.

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The Company has agreed during the term of the Ex-U.S. License to use commercially reasonable efforts to not, directly or indirectly, make sarecycline products commercialized by the Company, its affiliates or its sublicensees available for resale in the U.S., and Almirall has agreed during the term of the Ex-U.S. License to use commercially reasonable efforts to not, directly or indirectly, make sarecycline products commercialized by Almirall, their affiliates or their sublicensees available for resale outside of the greater China region. Similarly, the Company has agreed during the term of the China License to use commercially reasonable efforts to not, directly or indirectly, make sarecycline products commercialized by the Company, its affiliates or its sublicensees available for resale in the greater China region, and Almirall has agreed during the term of the China License to use commercially reasonable efforts to not, directly or indirectly, make sarecycline products commercialized by Almirall, their affiliates or their sublicensees available for resale outside of the greater China region, other than as provided in the Almirall Collaboration Agreement.

In connection with the Ex-U.S. License, the Company pays Almirall, on a country-by-country and product-by-product basis, (i) for eight  years following the first commercial sale of a sarecycline product in a country, a royalty in the middle-single digits on its or its affiliates’ nets sales of sarecycline products outside of the U.S., subject to certain standard reductions, and (ii) for fifteen years following the first commercial sale of a sarecycline product in a country, a percentage of the consideration (e.g., milestones, royalties) we receive from sublicensees in connection with developing and commercializing sarecycline outside of the U.S., which ranges from one-fifth to one-half of such consideration, subject to certain standard reductions. In connection with the China License, for fifteen years following the first commercial sale of a sarecycline product in China, Almirall pays the Company a royalty in the high-single digits on their, their affiliates’ or their sublicensees’ net sales of sarecycline products in the greater China region, subject to certain standard reductions.

Tufts University

In February 1997, the Company and Tufts University, or Tufts, entered into a license agreement under which the Company acquired an exclusive license to certain patent applications and other intellectual property of Tufts related to the drug resistance field to develop and commercialize products for the treatment or prevention of bacterial or microbial diseases or medical conditions in humans or animals or for agriculture. The Company subsequently entered into eleven amendments to that agreement, collectively the Tufts License Agreement, to include patent applications filed after the effective date of the original license agreement, to exclusively license additional technology from Tufts, to expand the field of the agreement to include disinfectant applications, and to change the royalty rate and percentage of sublicense income paid by the Company to Tufts under sublicense agreements with specified sublicensees. The Company is obligated under the Tufts License Agreement to provide Tufts with annual diligence reports and a business plan and to meet certain other diligence milestones. The Company has the right to grant sublicenses of the licensed rights to third parties, which will be subject to the prior approval of Tufts unless the proposed sublicensee meets a certain net worth or market capitalization threshold. The Company is primarily responsible for the preparation, filing, prosecution and maintenance of all patent applications and patents covering the intellectual property licensed under the Tufts License Agreement at its sole expense. The Company has the first right, but not the obligation, to enforce the licensed intellectual property against infringement by third parties.

The Company issued Tufts 1,024 shares of the Company’s common stock on the date of execution of the original license agreement, and the Company was required to make certain payments of up to $0.3 million to Tufts upon the achievement by products developed under the Tufts License Agreement of specified development and regulatory approval milestones. The Company made a payment of $50,000 to Tufts for achieving the first milestone following commencement of the Phase 3 clinical trial for omadacycline and a payment of $100,000 to Tufts for achieving the second milestone following its first marketing application submitted in the U.S. The third, and final, payment of $150,000 became due upon FDA approval of omadacycline in October 2018. The Company is also obligated to pay Tufts a minimum royalty payment in the amount of $25,000 per year. In addition, the Company is obligated to pay Tufts royalties based on gross sales of products, as defined in the agreement, ranging in the low single digits depending on the applicable field of use for such product sale. If the Company enters into a sublicense under the Tufts License Agreement, based on the applicable field of use for such product, the Company will be obligated to pay Tufts (i) a percentage, ranging from 10% to 14% (ten percent to fourteen percent) for compounds other than omadacycline, and a percentage in the single digits for the compound omadacycline, of that portion of any sublicense issue fees or maintenance fees received by the Company that are reasonably attributable to the sublicense of the rights granted to the Company under the Tufts License Agreement and (ii) the lesser of (a) a percentage, ranging from the low tens to the high twenties based on the applicable field of use for such product, of the royalty payments made to the Company by the sublicensee or (b) the amount of royalty payments that would have been paid by the Company to Tufts if the Company had sold the product.

Unless terminated earlier, the Tufts License Agreement will expire at the same time as the last-to-expire patent in the patent rights licensed to the Company under the agreement and after any such expiration the Company will continue to have an exclusive, fully-paid-up license to such intellectual property licensed from Tufts. Tufts has the right to terminate the agreement upon 30 days’ notice should the Company fail to make a material payment under the Tufts License Agreement or commit a material breach of the agreement and not cure such failure or breach within such 30-day period, or if, after the Company has started to commercialize a product under the Tufts License Agreement, the Company ceases to carry on its business for a period of 90 consecutive days. The Company has the right to terminate the Tufts License Agreement at any time upon 180 days’ notice. Tufts has the right to convert the Company’s exclusive license to a non-exclusive license if the Company does not commercialize a product licensed under the Tufts License Agreement within a specified time period.  

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The Company incurred $0.1 million and $0.2 million of royalty expense for the three and six months ended June 30, 2020, respectively.

Past Collaborations

Novartis International Pharmaceutical Ltd.

In September 2009, the Company and Novartis International Pharmaceutical Ltd., or Novartis, entered into a Collaborative Development, Manufacture and Commercialization License Agreement, or the Novartis Agreement, which provided Novartis with a global, exclusive patent and technology license for the development, manufacturing and marketing of omadacycline. The Novartis Agreement was terminated by Novartis without cause in June 2011 and the termination was effective 60 days later. The Company and Novartis subsequently entered in a letter agreement in January 2012, or the Novartis Letter Agreement, as amended, pursuant to which we reconciled shared development costs and expenses and granted Novartis a right of first negotiation with respect to commercialization rights of omadacycline following approval of omadacycline from the FDA, European Medicines Agency, or any regulatory agency, but only to the extent the Company had not previously granted such commercialization rights related to omadacycline to another third party as of any such approval. The Company also agreed to pay Novartis a 0.25% royalty, to be paid from net sales received by the Company in any country following the launch of omadacycline in that country and continuing until the later of expiration of the last active valid patent claim covering such product in the country of sale and 10 years from the date of first commercial sale in such country.  The first royalty payment became payable as of March 31, 2019. The amended Novartis Letter Agreement resulted in a long-term liability in the amount of $3.3 million and $3.4 million as of June 30, 2020 and December 31, 2019, respectively, included within “Other liabilities” on the Company’s consolidated balance sheet. In addition, a short-term liability of $0.2 million and $0.1 million, included within “Other current liabilities” on the Company’s consolidated balance sheet as of June 30, 2020 and December 31, 2019, respectively, represents the portion of royalty payments due to Novartis within twelve months. There are no other payment obligations to Novartis under the Novartis Agreement or the amended Novartis Letter Agreement.

10.   Capital Stock

In July 2019, the Company entered into an At the Market Sales Agreement, or the 2019 Sales Agreement, with Jefferies LLC, or Jefferies, and BTIG, LLC, or BTIG, under which it may offer and sell its common stock having aggregate sales proceeds of up to  $50.0 million from time to time through Jefferies or BTIG as its sales agents. Sales of the Company’s common stock through Jefferies or BTIG, if any, will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, including without limitation sales made directly on the Nasdaq Global Market or any other existing trading market for its common stock. Jefferies and BTIG will use commercially reasonable efforts to sell the Company’s common stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions we may impose). The Company will pay Jefferies or BTIG, as applicable, a commission of 3% of the gross sales proceeds of any common stock sold through Jefferies and BTIG under the 2019 Sales Agreement. The Company has also provided Jefferies and BTIG with customary indemnification rights.

The Company is not obligated to make any sales of common stock under the 2019 Sales Agreement. The Company sold 4,937,278 shares of common stock pursuant to the 2019 Sales Agreement for $20.8 million in proceeds, after deducting commissions of $0.6 million, during the six months ended June 30, 2020. As of July 31, 2020, $1.1 million remains available for sale under the 2019 Sales Agreement.

The offering of shares of the Company’s common stock pursuant to the 2019 Sales Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the 2019 Sales Agreement, or (ii) termination of the 2019 Sales Agreement in accordance with its terms.

Warrants to Purchase Common Stock

Warrants to purchase preferred stock with intrinsic value issued to HBM Healthcare Investments (Cayman) Ltd., Omega Fund III, L.P., and K/S Danish BioVenture, all beneficial owners of more than 5% of the Company’s common stock, were exchanged for 9,614 warrants to purchase common stock in connection with the with the business combination between privately-held Paratek Pharmaceuticals, Inc. and Transcept Pharmaceuticals, Inc. in October 2014, or the Merger. These 9,614 warrants to purchase common stock have an exercise price of $0.15 per share and will, if not exercised, expire in 2021.

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In connection with the Loan and Security Agreement, dated September 30, 2015, as amended from time to time, or the Hercules Loan Agreement, into which the Company entered with Hercules Technology II, L.P. and Hercules Technology III, L.P., together, Hercules, and certain other lenders and Hercules Technology Growth Capital, Inc. (as agent), the Company issued to each of Hercules Technology II, L.P. and Hercules Technology III, L.P. a warrant to purchase 16,346 shares of its common stock (32,692 shares of common stock in total) at an exercise price of $24.47 per share, or the Hercules Warrants, on September 30, 2015, which expire five years from issuance or at the consummation of a Public Acquisition, as defined in each of the Hercules Warrant agreements.

In connection with the second amendment to the Hercules Loan Agreement on December 12, 2016, the Company issued to each of Hercules Technology II, L.P. and Hercules Technology III, L.P. a warrant to purchase 18,574 shares of its common stock (37,148 shares of common stock in total) at an exercise price of $13.46 per share, or the Second Amendment Warrants.

In connection with the borrowing under the Hercules Loan Agreement on June 27, 2017, the Company issued an additional warrant to Hercules Capital, Inc. to purchase 5,374 shares of its common stock at an exercise price of $23.26 per share, or the Additional Warrant.

In connection with the fifth amendment to the Hercules Loan Agreement, on August 1, 2018, the Company issued to Hercules Capital, Inc. a warrant to purchase up to 19,627 shares of its common stock at an exercise price of $10.19 per share, or the Fifth Amendment Warrant.

As described in Note 14, Debt, in connection with the First Amendment (as defined below), on August 5, 2020, the Company issued to Hercules Capital, Inc. a warrant to purchase up to 407,239 shares of its common stock at an exercise price of $4.42 per share, or the First Amendment Warrant.

The Hercules Warrants, Second Amendment Warrants, Additional Warrant, Fifth Amendment Warrant and the First Amendment Warrant, collectively referred to as the Warrants, may be exercised on a cashless basis. The Warrants are exercisable for a term beginning on the date of issuance and ending on the earlier to occur of five years (or seven years, in the case of the Fifth Amendment Warrant and the First Amendment Warrant) from the date of issuance or the consummation of certain acquisitions of the Company as set forth in the various agreements for the Warrants.

11.   Accrued Expenses

Accrued expenses consist of the following (in thousands):

12.   Fair Value Measurements

Financial instruments, including cash, cash equivalents, restricted cash, money market funds, U.S. treasury securities, accounts receivable, accounts payable, and accrued expenses are carried on the condensed consolidated financial statements at amounts that approximate fair value. The fair value of the Company’s long-term debt is determined using current applicable rates for similar instruments as of the balance sheet date.  The fair value of the Company’s debt (including the Notes as defined in Note 14, Debt), is $216.1 million as of June 30, 2020. The fair value of the Company’s debt was determined using Level 3 inputs.  Fair values are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

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The following table presents information about the Company’s financial assets and liabilities that have been measured at fair value as of June 30, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities or other inputs that are observable market data. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability (in thousands):  

13.   Stock-Based and Incentive Compensation

Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period. The Company estimates the fair value of its stock options using the Black-Scholes option-pricing model. The weighted-average assumptions used to determine the fair value of the stock option grants is as follows:

Stock Plan Activity

The Company’s Board of Directors adopted the Paratek Pharmaceuticals, Inc. 2015 Equity Incentive Plan, or the 2015 Plan, which was approved by Company stockholders at the annual meeting of shareholders held on June 9, 2015, reserving 1,200,000 shares of common stock for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock awards, performance cash awards and other stock awards to directors, officers, employees and consultants. The 2015 Plan is intended to be the successor to and continuation of the Paratek Pharmaceuticals, Inc., 2006 Incentive Award Plan and the Paratek Pharmaceuticals, Inc. 2014 Equity Incentive Plan, or collectively, the Prior Plans.  When the 2015 Plan became effective, no additional stock awards were granted under the Prior Plans, although all outstanding stock awards granted under the Prior Plans will continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards and the terms of the Prior Plans. On January 1, 2020, 1,991,387 shares of common stock were automatically added to the shares authorized

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for issuance under the 2015 Plan pursuant to a “Share Reserve” provision contained in the 2015 Plan.  The Share Reserve automatically increases on January 1 of each year, for the period commencing on (and including) January 1, 2016 and ending on (and including) January 1, 2025, in an amount equal to 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year. Notwithstanding the foregoing, the Board of Directors of the Company may act prior to January 1 of a given year to provide that there will be no January 1 increase in the Share Reserve for such year or that the increase in the Share Reserve for such year will be a lesser number of shares of common stock than would otherwise automatically occur.  Total shares available for future issuance under the 2015 Plan are 1,371,077 shares as of June 30, 2020.

The Company recognizes the stock-based compensation expense of awards subject to performance-based vesting conditions over the requisite service period, to the extent achievement of the performance condition is deemed probable relative to targeted performance using the accelerated attribution method. If achievement of the performance condition is not probable, but the award will vest based on the service condition, the Company recognizes the stock-based compensation expense over the requisite service period. A change in the requisite service period that does not change the estimate of the total stock-based compensation expense (i.e., it does not affect the grant-date fair value or quantity of awards to be recognized) is recognized prospectively over the remaining requisite service period.

During the six months ended June 30, 2020, the Company’s Board of Directors granted 61,300 stock options and 2,495,950 RSUs to directors, executives and employees of the Company under the 2015 Plan. The stock option awards are subject to time-based vesting over a period of one to four years. The RSU awards granted to executives in February 2020 are subject to time-based vesting, with 1/3 of the shares vesting on December 10, 2020, or the Initial Vest Date, and an additional 1/3 of the shares vesting on the succeeding two anniversaries of the Initial Vesting Date. The RSU awards granted to non-executive employees of the Company in February 2020 are subject to time-based vesting and vest in three equal installments commencing on each of the one-year anniversaries of the grant date. The grants also included performance-based RSU, or PRSU, awards to certain executives and employees of the Company. The PRSU awards granted in February 2020 will vest as follows: (a) 25/55 on certain net product revenue achievements, (b) 15/55 on achievement of certain clinical milestones related to NUZYRA and (c) 15/55 on achievement of certain regulatory milestones related to NUZYRA. Since the Company believes it is probable that milestone (b) above will be achieved, the Company recognized compensation cost for a total of $0.2 million for the performance condition during the six months ended June 30, 2020 using the accelerated attribution method.

During the year ended December 31, 2019, the Company’s Board of Directors granted PRSU awards to certain executives and employees of the Company in February 2019 and July 2019 under the 2015 Plan that will vest as follows: (a) 25/60 and (b) 25/60, each, on certain net product revenue achievements and (c) the remaining 10/60 on certain other business achievements. Since the Company believes it is probable that milestones (a) and (b) above will be achieved, the Company recognized stock-based compensation expense for a total of $0.8 million for the performance conditions during the six months ended June 30, 2020 using the accelerated attribution method. During the six months ended June 30, 2020, the Company’s Board of Directors modified the vesting terms related to the PRSUs that were expected to time vest on attainment of certain other business achievements. The modification resulted in the recognition of an insignificant amount of stock-based compensation expense during the six months ended June 30, 2020.   

During the year ended December 31, 2018, the Company’s Board of Directors granted PRSU awards to certain executives and employees of the Company and those awards have vested or will vest as follows: (a) 10/55 shall be earned and time vest on achievement of European Medicines Agency, or EMA, filing preliminary validation, which occurred in October 2018, (b) 20/55 shall be earned and time vest on achievement of EMA approval of omadacycline, and (c) 25/55 shall be earned on achievement of the launch of omadacycline in the U.S. and time vest on the date that is 15 months following such launch date.  During the year ended December 31, 2019, the Company’s Board of Directors modified the vesting terms related to the PRSUs in (b) above which were expected to time vest on achievement of EMA approval of omadacycline. The Company determined the awards were probable of vesting under the modified conditions. The modification resulted in 136,000 shares vesting during the year ended December 31, 2019 and the recognition of stock-based compensation expense of $0.5 million during the year ended December 31, 2019.

The Company’s Board of Directors adopted the Paratek Pharmaceuticals, Inc. 2015 Inducement Plan, or the 2015 Inducement Plan, in accordance with Nasdaq Rule 5635(c)(4), reserving 360,000 shares of common stock solely for the grant of inducement stock options to employees entering into employment or returning to employment after a bona fide period of non-employment with the Company. The Company has not made any grants under the 2015 Inducement Plan since December 31, 2015. Although the Company does not currently anticipate the issuance of additional grants under the 2015 Inducement Plan, as of June 30, 2020, 306,500 shares remain available for grant under that plan, as well as any shares underlying outstanding stock options that may become available for grant pursuant to the plan’s terms. It is therefore possible that the Company may, based on the business and recruiting needs of the Company, issue additional stock options under the 2015 Inducement Plan. 

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In June 2017, the Company’s Board of Directors adopted the Paratek Pharmaceuticals, Inc. 2017 Inducement Plan, or the 2017 Inducement Plan, in accordance with Nasdaq Rule 5635(c)(4), reserving 550,000 shares of common stock solely for the grant of inducement stock options and RSU awards to employees entering into employment or returning to employment after a bona fide period of non-employment with the Company. In October 2018, the Company’s Board of Directors approved the reserve of an additional 500,000 shares for the 2017 Inducement Plan, for a total of 1,050,000 shares reserved for issuance under it. During the six months ended June 30, 2020, the Company’s Board of Directors granted 21,100 stock options and 17,600 RSUs to employees of the Company under the 2017 Inducement Plan. The stock option awards are subject to time-based vesting over a period of one to four years. The RSU awards are generally subject to time-based vesting, with 100% of the shares of common stock subject to the RSU award vesting three years from the grant date. As of June 30, 2020, 430,003 shares remain available for grant under the 2017 Inducement Plan, as well as any shares underlying awards that may become available for grant pursuant to the plan’s terms.

During the six months ended June 30, 2020, certain executives voluntarily forfeited 1,073,891 outstanding stock options with exercise prices significantly above the current trading price of the Company’s common stock in order to make additional shares available for future grants to Company employees subsequent to the quarter ended June 30, 2020 under the Company’s 2014 Equity Incentive Plan, 2015 Equity Incentive Plan, and the 2017 Inducement Plan. On the dates of forfeiture, the total amount of unrecognized stock-based compensation expense of each award was accelerated and recognized, which resulted in the recognition of $0.2 million of stock-based compensation expense during the six months ended June 30, 2020.

Total unrecognized stock-based compensation expense for all stock-based awards was $12.2 million as of June 30, 2020. This amount will be recognized over a weighted-average period of 1.75 years.

2009 Employee Stock Purchase Plan

On June 3, 2009, at the annual meeting of stockholders, the stockholders of the Company approved the 2009 Employee Stock Purchase Plan, or the 2009 ESPP. The Company’s 2009 ESPP is designed to allow eligible employees of the Company to purchase shares of common stock through periodic payroll deductions and during specified offering periods under the plan. The price of common stock purchased under the 2009 ESPP is equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. As of June 30, 2020, 36,539 shares were available for issuance under the 2009 ESPP. Since the Merger, the Company has not made the 2009 ESPP available to employees.

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2018 Employee Stock Purchase Plan 

The Company’s Board of Directors adopted, and in June 2018 Company’s stockholders approved, the Paratek Pharmaceuticals, Inc. 2018 Employee Stock Purchase Plan, or the 2018 ESPP. The 2018 ESPP was amended in October 2018 to change the commencement dates of the offering periods. The maximum aggregate number of shares of the Company’s common stock that may be purchased under the 2018 ESPP is 943,294 shares, or the ESPP Share Pool, subject to adjustment as provided for in the 2018 ESPP.  The 2018 ESPP allows eligible employees to purchase shares during certain offering periods, which will be six -month periods commencing June 1 and ending November 30 and commencing December 1 and ending May 31 of each year. The first offering under the 2018 ESPP occurred on December 1, 2018. During the six months ended June 30, 2020, the Company issued 130,055 shares of common stock with proceeds of $0.3 million. As of June 30, 2020, 631,593 shares remain available for issuance. During the three and six months ended June 30, 2020, the Company recognized an insignificant amount in related stock-based compensation expense. 

Revenue Performance Incentive Plan

On October 4, 2018, the Company adopted the Revenue Performance Incentive Plan, or the Plan, to grant performance-based cash incentive awards to key employees and consultants of the Company.  The Plan provides for an incentive pool of up to $50.0 million, plus accrued interest during the period between the awards’ vesting date and payment dates.  Each participant will be allocated a percentage of the incentive pool.

The incentive pool will be divided into two equal tranches with the first tranche vesting upon the Company’s achievement of cumulative net product revenues over $300.0 million by December 31, 2025, or Tranche 1, and the second tranche vesting upon the Company’s achievement of cumulative product revenues over $600.0 million by December 31, 2026, or Tranche 2.  Participants will vest annually in each tranche of their awards in four equal installments on December 31, 2019, December 31, 2020, December 31, 2021, and December 31, 2022, subject to their continued employment with the Company through the applicable vesting date.  If a participant’s employment terminates prior to December 31, 2022 due to death or disability, the participant will automatically vest in an additional 25% of each tranche of his or her award.  Upon the achievement of a Tranche 1 or Tranche 2 milestone (but not a deemed achievement in connection with a change of control), each participant who has remained in continuous employment with the Company through December 31, 2022 will be 100% vested in the applicable tranche. In the event of a change of control of the Company prior to December 31, 2026, participants whose employment has terminated prior to such date will be eligible for payouts under the Plan based on the then-vested portion of their awards, and participants who have remained employed through the change of control will be deemed to have time vested in full in each tranche of their awards.

Upon the achievement of a Tranche 1 or Tranche 2 milestone (but not a deemed achievement in connection with a change of control), each participant’s payout in respect of the applicable tranche of his or her award will equal (a) the participant’s then-vested percentage, multiplied by (b) $25 million, multiplied by (c) the participant’s individual percentage allocation of the incentive pool.

If a change of control occurs prior to December 31, 2026, and the Tranche 1 milestone was not achieved prior to the change of control, the Tranche 1 milestone will be deemed to be achieved at a percentage equal to the greater of (1) 50% and (2) the cumulative product revenues as of the change of control, divided by $300.0 million.  If a change of control occurs prior to December 31, 2026, and the Tranche 2 milestone was not achieved prior to the change of control, the Tranche 2 milestone will be deemed to be achieved at a percentage equal to the greater of (1) 30% and (2) the cumulative product revenues as of the change of control, divided by $600.0 million.  A participant’s payout in respect of each tranche of his or her award in a change of control will equal (1) the participant’s then-vested percentage of such tranche, multiplied by (2) the percentage of that tranche’s milestone that has been achieved or is deemed to have been achieved, multiplied by (3) $25.0 million, multiplied by (4) the participant’s individual percentage allocation of the incentive pool.

Amounts that become payable upon achievement of the Tranche 1 milestone will be paid in a lump-sum in the first quarter of 2026 and amounts that become payable upon achievement of the Tranche 2 milestone will be paid in a lump-sum in the first quarter of 2027.  In the event of a change of control, any portion of the incentive pool that is earned, but unpaid, or deemed earned in connection with the change of control will be paid at the time of the change of control.

If a change of control occurs prior to the achievement of either or both of the Tranche 1 and Tranche 2 milestones, the awards will remain outstanding and the remaining unpaid portion of the incentive pool applicable to the Tranche 1 or Tranche 2 milestone, as applicable, will be paid following the achievement of either such milestone at the time or times the bonuses would otherwise be paid out.  Any successor in interest to the Company upon or following a change of control will be required to assume all obligations under the Plan.

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Awards may be paid out in cash or in a combination of cash and registered securities of equal value (based on the Company’s 20-day trailing average closing common stock price), with the portion paid in registered securities not to exceed 50% of the aggregate payment amount with respect to each tranche; provided, however, that any amounts payable with respect to an award in connection with a change in control will be paid in cash.

The Company will recognize the compensation cost over the requisite service period, to the extent achievement of the performance condition is deemed probable relative to targeted performance. The performance condition is not yet deemed probable; as such, no amounts were accrued under the Plan during the six months ended June 30, 2020.

14.    Debt

Hercules Loan Agreement                

On June 27, 2019, the Company entered into an Amended and Restated Loan and Security Agreement, or the Loan Agreement, with Hercules Technology III, L.P., certain other lenders, together, the Lenders, and Hercules Capital, Inc. (as agent), under which the Company may borrow up to $100.0 million in multiple tranches, each, a Term Loan Tranche. The Loan Agreement amends and restates in its entirety the Company’s prior Loan and Security Agreement with the Lenders dated as of September 30, 2015 to, among other things, provide for an extension of the scheduled maturity date of the $60.0 million Term Loan Tranche, or the First Tranche, from September 1, 2021 to September 1, 2023, upon certain events set forth in the Loan Agreement, and an extension of the scheduled maturity date of the $10.0 million Term Loan Tranche, or the Second Tranche, and additional Term Loan Tranches (if any), from August 1, 2022 to August 1, 2024, upon certain events set forth in the Loan Agreement. The Loan Agreement also provides for an additional $10.0 million of additional Term Loan Tranches (up to a total of $30.0 million of additional Term Loan Tranches) that may be available to the Company, subject to approval by Hercules, in its sole discretion, whether to provide such tranches. As such there can be no assurance as to whether or not the additional Term Loan Tranches shall be funded.

The interest rate with respect to the First Tranche is a floating per annum rate equal to the greater of (i) 8.50% plus the prime rate as reported from time to time in The Wall Street Journal minus 5.75%, and (ii) 8.50%. The interest rate with respect to the Second Tranche is, and the interest rate with respect to additional Term Loan Tranches (if any) will be, a floating per annum rate equal to the greater of (i) 7.85% plus the prime rate as reported from time to time in The Wall Street Journal minus 5.75%, and (ii) 7.85%. An end of term charge equal to 4.5% with respect to $50.0 million of the First Tranche and equal to 2.25% with respect to the remaining $10.0 million of the First Tranche of the issued principal balance of the term loans is payable in September of 2020, and an end of term charge equal to 6.95% of the Second Tranche, and the Additional Term Loan Tranches (if any), of the issued principal balance of the term loans is payable at maturity, including in the event of any prepayment, and is being accrued as interest expense over the term of the term loans using the effective interest method. Payments under the Loan Agreement with respect to the First Tranche are interest only until January 1, 2021, followed by equal monthly payments of principal and interest through the scheduled maturity date. Payments under the Loan Agreement with respect to the Second Tranche are, and with respect to additional Term Loan Tranches (if any) will be, interest only until January 1, 2021 (which can be extended to May 1, 2021 or September 1, 2021, upon certain events set forth in the Loan Agreement), followed by equal monthly payments of principal and interest through the scheduled maturity date. The Company’s obligations under the Loan Agreement are secured by a security interest in substantially all of its and Paratek Pharma, LLC’s assets, other than intellectual property.

Under the Amended and Restated Loan Agreement, prepayment fees equaling 1.0% to 2.5% will apply to principal amounts prepaid prior to dates between September 1, 2020 and January 1, 2021, varying depending on the applicable tranche.

The Loan Agreement includes customary affirmative and restrictive covenants, including a liquidity covenant and a covenant against suffering a “change of control,” and also includes customary events of default, including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of Lenders’ security interest or in the value of the collateral, cross acceleration to the debt and certain events relating to bankruptcy or insolvency. Upon the occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

Borrowings under the Hercules Loan Agreement are collateralized by substantially all of the assets of the Company.

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Upon an Event of Default, an additional 5.0% interest would be applied, and Hercules could, at its option, accelerate and demand payment of all or any part of the term loans together with the prepayment and end of term charges. An Event of Default is defined in the Hercules Loan Agreement as (i) failure to make required payments; (ii) failure to adhere to financial, operating and reporting loan covenants; (iii) an event or development occurs that would be reasonably expected to have a material adverse effect; (iv) false representations in the Hercules Loan Agreement; (v) insolvency, as described in the Hercules Loan Agreement; (vi) levy or attachments on any of the Company's assets; and (vii) default of any other agreement or subordinated debt greater than $1.0 million. In the event of insolvency, this acceleration and declaration would be automatic. In addition, in connection with the Hercules Loan Agreement, the Company agreed to provide Hercules with a contingent security interest in the Company's bank accounts. The Company's control of its bank accounts is not adversely affected unless Hercules elects to obtain unilateral control of the Company's bank accounts by declaring that an Event of Default has occurred. The principal of the term loans, which is not due within 12 months of June 30, 2020, has been classified as long-term debt.

On August 5, 2020, the Company entered into the First Amendment to Amended and Restated Loan and Security Agreement, or the First Amendment. Concurrently with the closing of the First Amendment, the Company repaid a Term Loan Tranche of $10.0 million and paid the Lenders the existing end of term charges equal to $2.5 million.  Following the closing of the First Amendment, $60.0 million of Term Loan Tranches remained outstanding and $30.0 million of additional Term Loan Tranches remained available to the Company, subject to approval by Hercules, in its sole discretion, whether to provide such tranches.  The First Amendment provided for an additional end of term charge equal to 1.95% of the issued principal balance of the Term Loan Tranches payable on August 1, 2022 or upon prepayment.

The First Amendment extended the date on which the Company is required to begin making monthly principal installments on the outstanding Term Loan Tranches from January 1, 2021 to January 1, 2022 (which can be extended to July 1, 2022 or January 1, 2023, upon certain events set forth in the First Amendment), and extended the scheduled maturity of the Term Loan Tranches from August 1, 2022 to September 1, 2022 (which can be extended to March 1, 2023 or September 1, 2023, upon certain events set forth in the First Amendment).

The First Amendment increased the cash interest rate with respect to the Term Loan Tranches to a floating per annum rate equal to the greater of (i) 8.85% or (ii) the prime rate as reported from time to time in The Wall Street Journal plus 5.35%, and provided for the payment of additional “paid-in-kind” interest by the Company under the First Amendment at a fixed per annum rate equal to 1.55%.

In connection with the First Amendment, on August 5, 2020, the Company issued an additional warrant to Hercules Capital, Inc. that is exercisable for a minimum of up to 407,239 shares of common stock at an exercise price of $4.42 per share. The First Amendment Warrant may be exercised on a cashless basis. The First Amendment Warrant is exercisable for a term beginning on the date of issuance and ending on the earlier of seven years from the date of issuance or the consummation of certain events of the Company as set forth in the First Amendment Warrant.

The following table summarizes the impact of the Hercules Loan Agreement on the Company’s consolidated balance sheets at June 30, 2020 and December 31, 2019 (in thousands):

Debt issuance costs are presented on the consolidated balance sheet as a direct deduction from the related debt liability rather than capitalized as an asset in accordance with ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.

The Company recognized interest expense of $1.7 million and $3.4 million on the Hercules Loan Agreement for the three and six months ended June 30, 2020, respectively.

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Convertible Senior Subordinated Notes

On April 18, 2018, the Company entered into a Purchase Agreement, or the Purchase Agreement, with several initial purchasers, or the Initial Purchasers, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated and Leerink Partners LLC acted as representatives, relating to the sale of $135.0 million aggregate principal amount of 4.75% Convertible Senior Subordinated Notes due 2024, or the Notes, to the Initial Purchasers. The Company also granted the Initial Purchasers an option to purchase up to an additional $25.0 million aggregate principal amount of Notes, which was exercised in full on April 20, 2018.

The Purchase Agreement includes customary representations, warranties and covenants. Under the terms of the Purchase Agreement, the Company agreed to indemnify the Initial Purchasers against certain liabilities.

In addition, J. Wood Capital Advisors LLC, the Company’s financial advisor, purchased $5.0 million aggregate principal amount of Notes in a separate, concurrent private placement on the same terms as other investors.

The Notes were issued by the Company on April 23, 2018, pursuant to an Indenture, dated as of such date, or the Indenture, between the Company and U.S. Bank National Association, as trustee, or the Trustee. The Notes bear cash interest at the annual rate of 4.75%, payable on November 1 and May 1 of each year, beginning on November 1, 2018, and mature on May 1, 2024 unless earlier repurchased, redeemed or converted.  The Company will settle conversions of the Notes through delivery of shares of common stock of the Company, in accordance with the terms of the Indenture. The initial conversion rate for the Notes is 62.8931 shares of common stock (subject to adjustment as provided for in the Indenture) per $1,000 principal amount of the Notes, which is equal to an initial conversion price of approximately $15.90 per share, representing a conversion premium of approximately 20% above the closing price of the common stock of $13.25 per share on April 18, 2018.

Holders of the Notes may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date.

The Company may not redeem the Notes prior to May 6, 2021. The Company may redeem for cash all or part of the Notes, at its option, on or after May 6, 2021 if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

If the Company experiences a fundamental change, as described in the Indenture, prior to the maturity date of the Notes, holders of the Notes will, subject to specified conditions, have the right, at their option, to require the Company to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Notes and following a notice of redemption of the Notes, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or redemption.

The Indenture provides for customary events of default. In the case of an event of default with respect to the Notes arising from specified events of bankruptcy or insolvency, all outstanding Notes will become due and payable immediately without further action or notice. If any other event of default with respect to the Notes under the Indenture occurs or is continuing, the Trustee or holders of at least 25% in aggregate principal amount of the then outstanding Notes may declare the principal amount of the Notes to be immediately due and payable.

After deducting costs incurred of $6.0 million, the Company raised net proceeds from the issuance of long-term convertible debt of $159.0 million in April 2018. All costs were deferred and are being amortized over the life of the Notes at an effective interest rate of 5.47% and recorded as additional interest expense.

The Company has evaluated the Indenture for derivatives pursuant to ASC 815, Derivatives and Hedging, or ASC 815, and identified an embedded derivative that requires bifurcation as the feature is not clearly and closely related to the host instrument. The embedded derivative is a default provision, which could require additional interest payments. The Company determined in the prior year that the fair value of this embedded derivative was nominal.

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The Company evaluated the conversion feature and determined it was not within the scope of ASC 815 and therefore is not required to be accounted for separately. The Company concluded that the embedded conversion option is not subject to separate accounting pursuant to either the cash conversion guidance or the beneficial conversion feature guidance.  Under the general conversion guidance in ASC 470, Debt, all of the proceeds received from the Notes was recorded as a liability on the condensed consolidated balance sheet.

The following table summarizes the impact of the Notes on the Company’s consolidated balance sheets at June 30, 2020 and December 31, 2019 (in thousands):

The Company recognized coupon interest expense of $2.0 million and $3.9 million, and amortization expense on the debt issuance costs of $0.2 million and $0.4 million, on the Notes for the three and six months ended June 30, 2020, respectively.

Royalty-Backed Loan Agreement

On February 25, 2019, the Company, through its wholly-owned subsidiary Paratek Royalty Corporation, or the Subsidiary, entered into the Royalty-Backed Loan Agreement with HCRP. Pursuant to the terms of the Royalty-Backed Loan Agreement, upon the satisfaction of the conditions precedent set forth therein, the Subsidiary borrowed a $32.5 million loan, which was secured by, and will be repaid based upon, royalties from the Almirall Collaboration Agreement. On May 1, 2019, the Company received $27.8 million, net of $0.5 million lender discount, $0.2 million in lender expenses incurred, and $4.0 million that was deposited into an interest reserve account. The Company also paid $1.2 million in other lender fees related to the Royalty-Backed Loan Agreement. During the three months ended June 30, 2020, the Company paid $1.0 million to HCRP based upon royalties earned from the Almirall Collaboration Agreement and outstanding interest payments due to HCRP.

Under the Royalty-Backed Loan Agreement, the outstanding principal balance will bear interest at an annual rate of 12.0%.  Payments of interest under the Royalty-Backed Loan Agreement are made quarterly out of the Almirall Collaboration Agreement royalty payments received since the immediately preceding payment date. On each interest payment date, any royalty payments in excess of accrued interest on the loan will be used to repay the principal of the loan until the balance is fully repaid.  In addition, the Subsidiary made up-front payments to HCRP of (i) a 1.5% fee and (ii) up to $300,000 for HCRP’s expenses. The Royalty-Backed Loan Agreement matures on May 1, 2029, at which time, if not earlier repaid in full, the outstanding principal amount of the loan, together with any accrued and unpaid interest, and all other obligations then outstanding, shall be due and payable in cash. The Company has entered into a Pledge and Security Agreement in favor of HCRP, pursuant to which the Subsidiary’s obligations under the Loan Agreement are secured by a pledge of all of the Company’s holdings of the Subsidiary’s capital stock.

The Royalty-Backed Loan Agreement contains certain customary affirmative covenants, including those relating to: use of proceeds; maintenance of books and records; financial reporting and notification; compliance with laws; and protection of Company intellectual property. The Royalty-Backed Loan Agreement also contains certain customary negative covenants, barring the Subsidiary from: certain fundamental transactions; issuing dividends and distributions; incurring additional indebtedness outside of the ordinary course of business; engaging in any business activity other than related to the Almirall Collaboration Agreement; and permitting any additional liens on the collateral provided to HCRP under the Royalty-Backed Loan Agreement.

The Royalty-Backed Loan Agreement contains customary defined events of default, upon which any outstanding principal and unpaid interest shall be immediately due and payable. These include: failure to pay any principal or interest when due; any uncured breach of a representation, warranty or covenant; any uncured failure to perform or observe covenants; any uncured cross default under a material contract; any uncured breach of the Company’s representations, warranties or covenants under its Contribution and Servicing Agreement with the Subsidiary; any termination of the Almirall Collaboration Agreement; and certain bankruptcy or insolvency events. 

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The following table summarizes the impact of the Royalty-Backed Loan Agreement on the Company’s consolidated balance sheets at June 30, 2020 and December 31, 2019 (in thousands):

The Company recognized interest expense of $1.0 million and $2.0 million on the Royalty-Backed Loan Agreement for the three and six months ended June 30, 2020, respectively.

The short-term portion of long-term debt on the Company’s consolidated balance sheet at June 30, 2020 includes the carrying value of payments due under the Hercules Loan Agreement within 12 months of June 30, 2020. Long-term debt on the Company’s consolidated balance sheets at June 30, 2020 and December 31, 2019 includes the carrying value of the Hercules Loan Agreement, the Notes and the Royalty-Backed Loan Agreement.

15. Leases

Operating Leases

The Company leases its Boston, Massachusetts and King of Prussia, Pennsylvania office spaces under non-cancelable operating leases expiring in 2021 and 2024, respectively.

The Company entered into the original King of Prussia and Boston leases in January 2015 and April 2015, respectively. The lease terms under the original agreements were for six and four years, respectively. Each agreement had one renewal option for an extended term, which are not included in the measurement of these leases as these options are not reasonably certain to be exercised. The King of Prussia and Boston lease terms under the original agreements began in June 2015 and July 2015, respectively.  

The Company executed an amended lease agreement on its Boston office space in July 2016. The amended lease agreement added 4,153 rentable square feet of office space and extended the original lease term by two years. In accordance with the amended lease agreement, the Company paid a security deposit of $0.1 million. Subsequent to the amended lease agreement, the Company records monthly lease expense of approximately $49,000 for the Boston office space.

The Company executed an amended lease agreement on its King of Prussia office space in October 2016.  The amended lease agreement is for 19,708 rentable square feet of office space and the Company took control of this office space during the first quarter of 2017. The amended lease agreement contains rent escalation and a partial rent abatement period, which is accounted for as rent expense under the straight-line method. 

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The following tables contain a summary of the lease costs and other information pertaining to the Company’s operating leases for the three and six months ended June 30, 2020:

Future minimum operating lease obligations under non-cancelable operating leases with initial terms of more than one-year as of June 30, 2020, are as follows:

The total operating liability is presented on the Company’s condensed consolidated balance sheet based on maturity dates. $1.0 million of the total operating liabilities is classified under “other current liabilities” for the portion due within twelve months, and $1.6 million is classified under “long-term lease liability”.

The Company is party to a manufacturing and services agreement for which space within the manufacturing facility will be leased. This lease has not yet commenced as of the reporting date and is not included in the maturity table above.

16.   Income Taxes

The Company recorded no provision for income taxes for the three or six months ended June 30, 2020 and June 30, 2019.

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax bases of assets and liabilities using statutory rates. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance has been established against the Company’s otherwise recognizable net deferred tax assets.

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17. Product Revenue

To date, the Company’s only source of product revenue has been from NUZYRA product sales beginning in February 2019 when NUZYRA was launch in the U.S. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories (in thousands):