Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Business
La Jolla Pharmaceutical Company (collectively with its wholly owned subsidiaries, “La Jolla” or the “Company”) is dedicated to the development and commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZATM (angiotensin II) for injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock.
On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. (“Tetraphase”), a biopharmaceutical company focused on commercializing its novel tetracycline, XERAVATM (eravacycline), to treat serious and life-threatening infections, for $43 million in upfront cash plus potential future cash payments of up to $16 million. XERAVA for injection is a novel fluorocycline of the tetracycline class of antibacterials that is approved by the FDA for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older. See Note 12.
As of June 30, 2020 and December 31, 2019, the Company had cash and short-term investments of $71.4 million and $87.8 million, respectively. Based on the Company’s current operating plans and projections, the Company expects that its existing cash and short-term investments will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”).
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020 (the “Form 10-K”). The accompanying condensed consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from these estimates. Certain amounts previously reported in the financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not affect net loss, shareholders’ (deficit) equity or cash flows. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year or any future interim periods. The accompanying condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated balance sheet as of December 31, 2019 contained in the Form 10-K.
Summary of Significant Accounting Policies
During the six months ended June 30, 2020, other than the short-term investments policy described below, there have been no changes to the Company’s significant accounting policies as described in the Form 10-K.
Short-term investments
Short-term investments are comprised of marketable equity securities that are “available-for-sale,” as such term is defined by the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 320. Marketable equity securities are classified as current assets. Short-term investments are measured at fair value, and unrealized gains and losses are recorded in other income (expense), net in the consolidated statements of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and accounts receivable. The Company maintains its cash in checking and savings accounts at federally insured financial institutions in excess of federally insured limits.
During the six months ended June 30, 2020, 409 hospitals in the U.S. purchased GIAPREZA. Hospitals purchase our products through a network of specialty and wholesale distributors (“Customers”). The Company does not believe that the loss of one of these distributors would significantly impact the ability to distribute GIAPREZA, as the Company expects that sales volume would be absorbed by the remaining distributors. The following table includes the percentage of U.S. net product sales and accounts receivable balances for the Company’s three major Customers, each of which comprised 10% or more of its U.S. net product sales:
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|
|
|
|
|
|
|
|
|
|
U.S. Net Product Sales
|
|
Accounts Receivable
|
|
Three Months Ended June 30, 2020
|
|
Six Months Ended June 30, 2020
|
|
As of June 30, 2020
|
Customer A
|
38
|
%
|
|
38
|
%
|
|
22
|
%
|
Customer B
|
33
|
%
|
|
31
|
%
|
|
41
|
%
|
Customer C
|
25
|
%
|
|
29
|
%
|
|
33
|
%
|
Total
|
96
|
%
|
|
98
|
%
|
|
96
|
%
|
Revenue Recognition
The Company has adopted FASB ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue when its customers obtain control of the Company’s product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations. There have been no contract assets or liabilities recorded to date relating to product sales.
Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:
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•
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Chargebacks—Chargebacks are discounts the Company provides to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to the Company’s customers.
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|
|
•
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Discounts—The Company offers customers various forms of incentives and consideration, including prompt-pay and other discounts. The Company estimates discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to the Company’s customers.
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|
|
•
|
Returns—The Company offers customers a limited right of return, generally for damaged or expired product. The Company estimates returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to the Company’s customers.
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|
|
•
|
Administrative Fees—The Company pays administrative fees to GPOs for services and access to data. Additionally, the Company pays an Industrial Funding Fee as part of the U.S. General Services Administration’s Federal Supply Schedules program. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency.
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The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements and has concluded that there are no recently issued accounting pronouncements that may have a material effect on the Company’s results of operations, financial condition or cash flows based on current information.
3. Net Loss per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding plus potential common shares. Convertible preferred stock, stock options and warrants are considered potential common shares and are included in the calculation of diluted net loss per share using the treasury stock method when their effect is dilutive. Potential common shares are excluded from the calculation of diluted net loss per share when their effect is anti-dilutive. As of June 30, 2020 and 2019, there were 10.2 million and 14.0 million potential common shares, respectively, that were excluded from the calculation of diluted net loss per share because their effect was anti-dilutive.
4. Balance Sheet Details
Restricted Cash
Restricted cash as of June 30, 2020 and December 31, 2019 represents a standby letter of credit for the Company’s building lease in lieu of a security deposit during the term of such lease (see Note 6). There is a requirement to maintain $0.6 million of cash collateral in an account pledged as security for such letter of credit.
Inventory, Net
Inventory, net consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Work-in-process
|
|
$
|
1,801
|
|
|
$
|
1,505
|
|
Finished goods
|
|
1,319
|
|
|
706
|
|
Total inventory, net
|
|
$
|
3,120
|
|
|
$
|
2,211
|
|
As of June 30, 2020 and December 31, 2019, total inventory is recorded net of inventory reserves of $0.2 million and $0.1 million, respectively.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Leasehold improvements
|
|
$
|
14,504
|
|
|
$
|
14,504
|
|
Furniture and fixtures
|
|
2,549
|
|
|
2,598
|
|
Computer hardware
|
|
1,296
|
|
|
1,296
|
|
Software
|
|
733
|
|
|
733
|
|
Lab equipment
|
|
—
|
|
|
9,665
|
|
Total property and equipment, gross
|
|
19,082
|
|
|
28,796
|
|
Accumulated depreciation and amortization
|
|
(6,255
|
)
|
|
(10,407
|
)
|
Total property and equipment, net
|
|
$
|
12,827
|
|
|
$
|
18,389
|
|
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
Accrued interest expense
|
|
$
|
3,530
|
|
|
$
|
2,692
|
|
Accrued manufacturing costs
|
|
1,369
|
|
|
1,339
|
|
Accrued clinical study costs
|
|
815
|
|
|
3,496
|
|
Accrued other
|
|
1,058
|
|
|
1,785
|
|
Total accrued expenses
|
|
$
|
6,772
|
|
|
$
|
9,312
|
|
5. Deferred Royalty Obligation
In May 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the royalty rate will be a maximum of 10%. Starting January 1, 2022, the maximum royalty rate may increase by 4% if an agreed-upon, cumulative net product sales threshold has not been met, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if a different agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.
On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three months ended June 30, 2020 and 2019, the Company recognized interest expense, including amortization of the obligation discount, of $2.5 million and $2.8 million, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized interest expense, including amortization of the obligation discount, of $4.9 million and $5.5 million, respectively. The carrying value of the deferred royalty obligation as of June 30, 2020 was $124.4 million, net of unamortized obligation discount of $0.6 million, and was classified as noncurrent. The related accrued interest expense was $18.8 million and $15.5 million as of June 30, 2020 and December 31, 2019, respectively, of which $15.3 million and $12.8 million was classified as other noncurrent liabilities, respectively. During the three and six months ended June 30, 2020, the Company made royalty payments to HCR of $0.8 million and $1.5 million, respectively, and, as of June 30, 2020, the Company recorded royalty obligations payable of $0.6 million in accrued expenses. The deferred royalty obligation is classified as Level 3 in the ASC 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.
Under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. In the event that La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the Company determined that the fair value of the embedded derivatives is immaterial as of June 30, 2020 and December 31, 2019. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the consolidated statements of operations.
6. Commitments and Contingencies
Lease Commitments
On December 29, 2016, the Company entered into an agreement with BMR-Axiom LP (the “Landlord”) to lease office and laboratory space as its corporate headquarters located at 4550 Towne Centre Court, San Diego, California (the “Lease”) for a period of 10 years commencing on October 30, 2017 (the “Initial Lease Term”). The Company has an option to extend the Lease for an additional 5 years at the end of the Initial Lease Term.
The Company provided a standby letter of credit for $0.9 million in lieu of a security deposit. This amount decreased to $0.6 million after year two of the Initial Lease Term and will decrease to $0.3 million after year 5 of the Initial Lease Term. As of June 30, 2020, $0.6 million of cash was pledged as collateral for such letter of credit and recorded as restricted cash. The annual rent under the Lease is subject to escalation during the term. In addition to rent, the Lease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises. The Lease contains customary default provisions, representations, warranties and covenants. The Lease is classified as an operating lease.
Future minimum lease payments under the Lease as of June 30, 2020 are as follows (in thousands):
|
|
|
|
|
2020
|
$
|
2,039
|
|
2021
|
4,174
|
|
2022
|
4,294
|
|
2023
|
4,417
|
|
2024
|
4,544
|
|
Thereafter
|
13,590
|
|
Total future minimum lease payments
|
33,058
|
|
Less: discount
|
(5,168
|
)
|
Total lease liability
|
$
|
27,890
|
|
The Company recorded a lease liability for the Lease based on the present value of the Lease payments over the Initial Lease Term, discounted using the Company’s incremental borrowing rate. The Company recorded a corresponding right-of-use lease asset based on the lease liability, adjusted for incentives received prior to the Lease commencement date. The option to extend the Initial Lease Term was not recognized as a part of either the Company’s lease liability or right-of-use lease asset. Lease expense was $0.7 million and $1.4 million for the three and six months ended June 30, 2020, respectively, and for the same periods in 2019. Amortization for the right-of-use lease asset was $0.4 million and $0.7 million for the three and six months ended June 30, 2020, respectively, and was $0.3 million and $0.6 million for the three and six months ended June 30, 2019, respectively.
Contingencies
From time to time, the Company may become subject to claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is it aware of any material pending or threatened litigation.
7. Shareholders’ Equity
Preferred Stock
As of June 30, 2020 and December 31, 2019, 3,906 shares of Series C-12 Convertible Preferred Stock (“Series C-12 Preferred”) were issued, outstanding and convertible into 6,735,378 shares of common stock. In January 2019, the Company issued 782,031 shares of common stock upon the conversion of 2,737 shares of Series F Convertible Preferred Stock. As of June 30, 2020 and December 31, 2019, there were no shares of Series F Convertible Preferred Stock issued and outstanding.
Warrants
As of June 30, 2020 and December 31, 2019, the Company had outstanding warrants to purchase 10,000 shares of common stock. The Company did not recognize share-based compensation expense for these outstanding warrants for the three and six months ended June 30, 2020 and 2019.
8. Equity Incentive Plans
2013 Equity Incentive Plan
A total of 9,600,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2013 Equity Incentive Plan (the “2013 Equity Plan”). As of June 30, 2020, 5,940,653 shares of common stock remained available for future grants under the 2013 Equity Plan.
2018 Employee Stock Purchase Plan
A total of 750,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2018 Employee Stock Purchase Plan (the “ESPP”). As of June 30, 2020, 499,805 shares of common stock remained available for future grants under the ESPP.
Equity Awards
The activity related to equity awards, which are comprised of stock options and inducement grants, during the six months ended June 30, 2020 is summarized as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards
|
|
Weighted-
average
Exercise Price
per Share
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2019
|
5,616,840
|
|
|
$
|
19.50
|
|
|
|
|
|
Granted
|
806,923
|
|
|
$
|
5.27
|
|
|
|
|
|
Exercised
|
(94,219
|
)
|
|
$
|
6.42
|
|
|
|
|
|
Cancelled/forfeited
|
(2,883,533
|
)
|
|
$
|
19.43
|
|
|
|
|
|
Outstanding at June 30, 2020
|
3,446,011
|
|
|
$
|
16.59
|
|
|
5.87 years
|
|
$
|
35,037
|
|
Exercisable at June 30, 2020
|
2,144,609
|
|
|
$
|
20.84
|
|
|
4.27 years
|
|
$
|
—
|
|
Share-based Compensation Expense
The classification of share-based compensation expense is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Research and development
|
$
|
964
|
|
|
$
|
3,960
|
|
|
$
|
2,527
|
|
|
$
|
7,893
|
|
Selling, general and administrative
|
626
|
|
|
2,361
|
|
|
1,470
|
|
|
5,210
|
|
Total share-based compensation expense
|
$
|
1,590
|
|
|
$
|
6,321
|
|
|
$
|
3,997
|
|
|
$
|
13,103
|
|
As of June 30, 2020, total unrecognized share-based compensation expense related to unvested equity awards was $8.6 million, which is expected to be recognized over a weighted-average period of 2.2 years. As of June 30, 2020, there was no unrecognized share-based compensation expense related to shares of common stock issued under the ESPP.
9. Other Income—Related Party
The Company has a non-voting profits interest in a related party, which provides the Company with the potential to receive a portion of the future distributions of profits, if any. Investment funds affiliated with the Chairman of the Company’s board of directors have a controlling interest in the related party. During the six months ended June 30, 2020, the Company received distributions of $4.1 million in connection with this profits interest.
10. George Washington University License
In December 2014, the Company entered into a patent license agreement with George Washington University (“GW”), which was amended and restated on March 1, 2016 (the “GW License”) and subsequently assigned to La Jolla Pharma, LLC. Pursuant to the GW License, GW exclusively licensed to the Company certain intellectual property rights relating to GIAPREZA, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA. Under the GW License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a one-time license initiation fee, annual maintenance fees, an amendment fee, additional payments following the achievement of certain development and regulatory milestones and royalties. As a result of the EC’s approval of GIAPREZA in August 2019, the Company made a milestone payment to GW in the amount of $0.5 million in the first quarter of 2020. The Company is obligated to pay a 6% royalty on net sales of GIAPREZA. The patents and patent applications covered by the GW License are expected to expire between 2029 and 2034, and the obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA.
11. Company-wide Realignments
On December 2, 2019, the Board of Directors of the Company approved a restructuring plan (the “2019 Realignment”) that reduced the Company’s headcount. The 2019 Realignment did not result in any reductions in headcount in the Company’s commercial organization supporting GIAPREZA. For the year ended December 31, 2019, total expense was comprised of $5.8 million for one-time termination benefits to the affected employees, including severance and health care benefits, offset by a $0.9 million reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. As of June 30, 2020, the Company had paid $4.8 million of the $5.8 million cash severance and health care benefits charges, and the remaining $1.0 million of the health care benefits charges were included in accrued payroll and related expenses.
On May 28, 2020, the Board of Directors of the Company approved a restructuring plan (the “2020 Realignment”) to align its organization with the Company’s sole focus on the commercialization of GIAPREZA. The 2020 Realignment reduced the Company’s headcount. For the three months ended June 30, 2020, total expense was comprised of $4.1 million for one-time termination benefits to the affected employees, including severance and health care benefits, offset by a $0.4 million reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. As of June 30, 2020, the Company had paid $0.7 million of the $4.1 million cash severance and health care benefits charges, and the remaining $3.4 million of the cash severance and health care
benefits charges were included in accrued payroll and related expenses. The Company expects to make substantially all of the remaining payments resulting from the 2020 Realignment in the third quarter of 2020.
12. Subsequent Events
Acquisition of Tetraphase Pharmaceuticals, Inc.
On June 24, 2020, La Jolla entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tetraphase, a biopharmaceutical company focused on commercializing its novel tetracycline XERAVA to treat serious and life‑threatening infections, and TTP Merger Sub, Inc., a wholly owned subsidiary of La Jolla. On July 28, 2020, La Jolla completed its acquisition of Tetraphase for $43 million in upfront cash plus potential future cash payments of up to $16 million pursuant to contingent value rights (“CVRs”). The holders of the CVRs are entitled to receive potential future cash payments of up to $16 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $2.5 million if 2021 XERAVA U.S. net sales are at least $20 million; (ii) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (iii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024. Following the acquisition, Tetraphase became a wholly owned subsidiary of La Jolla. The acquisition of Tetraphase will be accounted for as a business combination pursuant to FASB ASC Topic 805.