UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

or

 

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

 

For the transition period from             to             

 

Commission File Number 001-36208

 

TetraLogic Pharmaceuticals Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

(610) 889-9900

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐.

 

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

 

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.0001 par value per share, as of October 31, 2014 was 22,316,460.

 

 

 

 

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TABLE OF CONTENTS

 

 

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Cautionary Note Regarding Forward-Looking Statements and Industry Data

 

In addition to historical facts or statements of current condition, this report and the documents into which this report is and will be incorporated contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “projects,” “intends,” “potential,” “may,” “could,” “might,” “will,” “should,” “approximately” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements appear in a number of places throughout this report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ability to develop and commercialize our product candidates, birinapant and suberohydroxamic acid phenyl-ester, or SHAPE; status, timing and results of pre-clinical studies and clinical trials; the potential benefits of our product candidates; the timing of seeking regulatory approval of our product candidates; our ability to obtain and maintain regulatory approval for our product candidates; our estimates of expenses and future revenues and profitability; our estimates regarding our capital requirements and our needs for additional financing; difficulties with increasing the size and complexity of our organization to assist with the expansion of our operations; our plans to develop and market our product candidates and the timing of our development programs; our estimates of the size of the potential markets for our product candidates; our selection and licensing of our product candidates; our ability to attract collaborators with acceptable development, regulatory and commercial expertise; the benefits to be derived from corporate collaborations, license agreements, and other collaborative or acquisition efforts, including those relating to the development and commercialization of our product candidates; sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements, and other collaborative efforts for the development and commercialization of products; our ability to create an effective sales and marketing infrastructure if we elect to market and sell our product candidates directly; the rate and degree of market acceptance of our product candidates; the timing and amount or reimbursement for our product candidates; the success of other competing therapies that may become available; the manufacturing capacity for our product candidates; our ability to manage the growth and size of our organization as a result of our acquisition of Shape Pharmaceuticals, Inc., or Shape Pharmaceuticals; our intellectual property position; our ability to maintain and protect our intellectual property rights; our results of operations; financial condition, liquidity, prospects, and growth and strategies; the industry in which we operate; the trends that may affect the industry or us; the market price of our stock; our potential obligation to repurchase certain shares of common stock; our ability to pay existing indebtedness; the effect of our indebtedness on our business and liquidity; the decrease in the market price of our common stock from the issuance of additional shares of or instruments convertible into common stock; the effect on our financial results from the conversion of our convertible notes; and the dilution of existing stockholders from the conversion of our convertible notes.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate are consistent with the forward-looking statements contained in this report, they may not be predictive of results or developments in future periods.

 

Actual results could differ materially from our forward-looking statements due to a number of factors, including risks related to:

 

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

 

the success and timing of our pre-clinical studies and clinical trials;

 

the difficulties with increasing the size and complexity of our organization to assist with the expansion of our operations;

 

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the potential that results of pre-clinical studies and clinical trials indicate birinapant or SHAPE is unsafe or ineffective;

 

our exposure to business disruptions;

 

our dependence on third parties in the conduct of our pre-clinical studies and clinical trials;

 

the difficulties and expenses associated with obtaining and maintaining regulatory approval of our product candidates, and the labeling under any approval we may obtain;

 

our plans and ability to develop and commercialize our product candidates;

 

our ability to acquire or license additional product candidates;

 

our failure to recruit or retain key scientific or management personnel or to retain our executive officers;

 

the size and growth of the potential markets for our product candidates, market acceptance of our product candidates and our ability to serve those markets;

 

legal and regulatory developments in the U.S. and foreign countries;

 

our ability to limit our exposure to product liability lawsuits;

 

our exposure to scrutiny and increased expenses as a result of being a public company;

 

the rate and degree of market acceptance of our product candidates;

 

obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology;

 

the successful development of our commercialization capabilities, including sales and marketing capabilities;

 

recently enacted and future legislation regarding the healthcare system;

 

the success of competing therapies and products that are or become available;

 

our ability to acquire products or product candidates with acceptable economics;

 

our ability to raise additional capital;

 

our ability to pay existing indebtedness;

 

the decrease in the market price of our common stock from the issuance of additional shares of or instruments convertible into common stock;

 

the effect on our financial results from the conversion of our convertible notes; and

 

the dilution of existing stockholders from the conversion of our convertible notes.

 

Birinapant and SHAPE are investigational drugs undergoing clinical development and have not been approved by the U.S. Food and Drug Administration, or FDA, or submitted to the FDA for approval. Birinapant and SHAPE have not been, nor may ever be, approved by any regulatory agency or marketed anywhere in the world. Statements contained in this report should not be deemed to be promotional.

 

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Any forward-looking statement that we make in this report speaks only as of the date of such statement, and, except as required by law, we undertake no obligation to update such statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

You should also read carefully the factors described in the “Risk Factors” section of this report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.

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TETRALOGIC PHARMACEUTICALS CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

 

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TETRALOGIC PHARMACEUTICALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

 

 

 

See accompanying notes to consolidated financial statements.

 

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TETRALOGIC PHARMACEUTICALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

See accompanying notes to consolidated financial statements.

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TETRALOGIC PHARMACEUTICALS CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2014

(unaudited)

 

1. Organization and Description of the Business

 

We are a clinical-stage biopharmaceutical company focused on discovering and developing novel small molecule therapeutics in oncology and infectious diseases. We have two clinical-stage product candidates in development: birinapant and suberohydroxamic acid phenyl ester (SHAPE).  We were originally incorporated in July 2001 as Apop Corp., a New Jersey corporation. Pursuant to a merger effective as of October 2003 with and into our wholly owned subsidiary, we became a Delaware corporation and commenced operations in 2003. Our name was changed to Apop Corporation in March 2004, to Gentara Corporation in June 2004 and to TetraLogic Pharmaceuticals Corporation in January 2006. Our operations to date have been directed primarily toward developing business strategies, raising capital, research and development activities, conducting pre-clinical testing and human clinical trials of our product candidates and recruiting personnel.

 

Liquidity

 

At September 30, 2014, we had working capital of $60.6 million and cash, cash equivalents and investments of $65.1 million. We have not generated any product revenues and have not yet achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and pre-clinical testing, and commercialization of our products will require significant additional financing.

 

We believe that our existing cash and cash equivalents as of September 30, 2014 will enable us to fund our currently expected operating expenses and capital expenditure requirements through the end of 2015.   However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities. We plan to finance our future operations with a combination of proceeds from the issuance of equity securities, the issuance of additional debt, potential collaborations and revenues from potential future product sales, if any.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, or GAAP, for interim financial information. Certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC.

 

Unaudited Interim Financial Information

 

The accompanying unaudited consolidated balance sheet as of September 30, 2014, consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2013 and 2014, and consolidated statements of cash flows for the nine months ended September 30, 2013 and 2014 are unaudited. The interim unaudited consolidated financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our financial position as of September 30, 2014 and the results of our operations, our comprehensive loss and our cash flows for the three and nine months ended September 30, 2013 and 2014. The financial data and other information disclosed in these notes as of September 30, 2013 and 2014 and for the three and nine months ended September 30, 2013 and 2014 are unaudited. The results for the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the year ending December 31, 2014, any other interim periods, or any future year or period.

 

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Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-10, Development Stage Entities.  This Update eliminates the distinction between development stage entities and other reporting entities under GAAP and also eliminates the requirement to present inception-to-date information in financial statements.  The Update is effective for reporting periods beginning after December 31, 2014, but early adoption is permitted.  We have elected to adopt this Update beginning with the quarterly period ended June 30, 2014.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

 

Significant Accounting Policies

 

Our significant accounting policies are disclosed in our annual report on Form 10-K for the year ended December 31, 2013 filed on March 19, 2014, or the Form 10-K. Since the date of those financial statements, there have been no changes to our significant accounting policies.

 

3. Acquisitions

 

Shape Pharmaceuticals

 

On April 14, 2014 (“the acquisition date”), we acquired by merger 100% of Shape Pharmaceuticals.  Shape Pharmaceuticals was a development stage pharmaceutical company developing SHAPE, a novel, tissue-targeted HDAC inhibitor in a topical gel formulation to treat stage IA-IIA Cutaneous T-Cell Lymphoma (CTCL).  The acquisition added a second clinical-stage oncology compound to the TetraLogic portfolio.

 

The acquisition date fair value of consideration transferred totaled $13.0 million, all of which was in cash.

 

The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

 

 

The purchase price allocation is being finalized based on fair values of the acquired assets and liabilities. The intangible assets acquired represent indefinite-lived intangible assets relating to the technology acquired from Shape Pharmaceuticals.  These intangibles will not be amortized until FDA approval has been obtained for a product that uses this technology.  Goodwill results primarily from the recognition of deferred tax liabilities in connection with the acquisition.  There is no goodwill recognized or deductible for tax purposes.

 

The acquisition of Shape Pharmaceuticals includes a contingent consideration arrangement that may require us to pay additional consideration in the form of milestone payments and tiered royalty payments upon commercialization.  We currently estimate that the milestone payments will occur between 2016 and 2020.  The range of undiscounted amounts that we could be required to pay under our agreement for the milestone payments is between zero and $64.5 million.  We determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted

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cash flow analysis.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.  The fair value of the contingent consideration liability associated with future milestones was based on several factors including:

 

 

 

 

 

 

The fair value of the liability for the contingent consideration recognized on the acquisition date was $22.6 million.  The contingent consideration payments have been recorded as a liability and the fair value is evaluated quarterly or more frequently if circumstances dictate.  Changes in the fair value of contingent consideration are recorded in earnings.  The change in fair value that was recognized as an operating expense for the period between April 14, 2014 and September 30, 2014 was $1.9 million.  At September 30, 2014, the fair value of the liability was $24.5 million.

 

We recognized $0.4 million of acquisition related costs that were expensed in the nine months ended September 30, 2014.  These costs are included in operating expenses in our consolidated statement of operations.  For the three and nine months ended September 30, 2014, we have included $1.7 million and $2.8 million of net losses attributable to Shape in our consolidated financial statements, respectively.

 

The following unaudited pro forma information presents results as if the acquisition occurred at the beginning of each annual reporting period presented:

 

 

 

 

 

4. Fair Value Measurements

 

FASB accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, we use quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources

 

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The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

 

 

 

 

The following fair value hierarchy table presents information about each major category of our financial assets and liabilities measured at fair value on a recurring basis:

 

 

 

We had outstanding warrants to purchase our series B convertible preferred stock, or the 2006 Warrants, that converted into warrants to purchase our common stock at the time of our initial public offering in December 2013. The 2006 Warrants were redeemable for cash upon an event that was not within our control.  In accordance with the guidance for accounting for certain financial instruments with characteristics of both liabilities and equity, the 2006 Warrants are recorded as a derivative liability on our balance sheets with subsequent changes to fair value recorded through earnings at each reporting period on our statements  of operations and comprehensive loss as change in fair value of derivative liabilities. Each subsequent change in fair value is reflected in our statements of cash flows as a noncash adjustment to net loss under operating activities.  Upon exercise of these warrants, the cash inflow is recorded as a financing activity on the statements of cash flows.  The fair value of the warrant liability is estimated using an option-pricing model, which requires inputs such as the expected volatility based on comparable public companies  (90%), the fair value of our common stock, and the remaining contractual term of the warrant  (1.6 years). For this liability, we developed our own assumptions that do not have observable inputs or available market data to support the fair value.

 

In 2009 and 2010, we issued warrants to purchase our common stock, or the 2009/2010 Warrants, which contain a provision whereby the exercise price may be reduced upon the occurrence of certain events within our control, such as the future issuance of equity securities or rights to purchase equity securities at a price below the current exercise price of the 2009/2010 Warrants. Accordingly, the 2009/2010 Warrants are recorded as a derivative liability on our balance sheets, with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities. Each subsequent change in fair value is reflected in our statements of cash flows as a noncash adjustment to net loss under operating activities.  Upon exercise of these warrants, the cash inflow is recorded as a financing activity on the statements of cash flows.  The fair value of each 2009/2010 Warrant is estimated using an option-pricing model, which requires inputs such as the expected volatility based on comparable public companies  (90%), the fair value of the common stock, and the contractual term of the warrant  (5.2 to 5.5 years). For this liability, we developed our own assumptions that do not have observable inputs or available market data to support the fair value.  As of September 30, 2014, 6,004 of the 2009/2010 warrants have been exercised.

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Significant decreases in our stock price volatility will significantly decrease the overall valuation of our derivative liabilities, while significant increases in our stock price volatility will significantly increase the overall valuation. As discussed above, the strike price of our 2009/2010 Warrants may be decreased. Accordingly, a significant decrease in the strike price of the 2009/2010 Warrants will substantially increase the overall valuation.  In addition, changes in the market price of our common stock will have a significant effect on the overall valuation of the warrant liabilities.

 

In April 2014, we acquired by merger 100% of Shape Pharmaceuticals.  The acquisition of Shape Pharmaceuticals includes a contingent consideration arrangement that may require us to pay additional consideration in the form of milestone payments and tiered royalty payments upon commercialization.  We account for contingent consideration in accordance with applicable guidance provided within Accounting Standards Codification (ASC) 805, Business Combinations.  It is currently estimated that the Shape Pharmaceuticals milestone payments will occur between 2016 and 2020. The range of undiscounted milestones we could be required to pay under our agreement is between zero and $64.5 million.  We determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future milestone payments was based on several factors including:

 

 

In June 2014, we issued $47.0 million in aggregate principal amount of 8.00% convertible senior notes due June 15, 2019 (the “8% Notes”).  The 8% Notes include an interest make-whole feature whereby if a note holder converts any of the Notes after December 31, 2014, they are entitled, in addition to the other consideration payable or deliverable in connection with such conversion, to an interest make-whole payment through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date if the notes had not been so converted.  We have determined that this feature is an embedded derivative and have recognized the fair value of this derivative as a liability in our balance sheet, with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities.  The fair value of this embedded derivative was determined based on a binomial lattice model.

 

The following tables set forth a summary of changes in the fair value of Level 3 liabilities for the nine months ended September 30, 2014:

 

 

 

 

As of September 30, 2014, the fair value and carrying value of our convertible debt, based on quoted market prices was:

 

 

 

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^The fair value shown above represents the fair value of the total debt instrument, inclusive of both the liability and equity components, while the carrying value represents the carrying value of the liability.

 

 

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5. Investments

 

The Company’s investments are classified as available-for-sale pursuant to ASC 320, Investments—Debt and Equity Securities. The Company classifies investments available to fund current operations as current assets on its balance sheets. We consider all investments that have maturities of three months or less when acquired to be cash equivalents.  Investments are classified as long-term assets on the balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.

 

Investments are carried at fair value with unrealized gains and losses included as a component of accumulated other comprehensive loss, until such gains and losses are realized. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is transferred from other comprehensive loss to the statements of operations. There were no charges taken for other-than-temporary declines in fair value of short-term or long-term investments during the three and nine months ended September 30, 2013 and 2014. The Company recorded $0,  $(1,635),  $0 and $369 of unrealized (gains)/losses during the three months ended September 30, 2013 and 2014, and the nine months ended September 30, 2013 and 2014, respectively. Realized gains and losses are included in interest income in the statements of operations. During the three and nine months ended September 30, 2014, the Company sold investments for gross proceeds of $0 and $2,496,731. The Company recorded $0,  $0,  $0 and $148 of realized gains during the three months ended September 30, 2013 and 2014, and the nine months ended September 30, 2013 and 2014, respectively. The Company utilizes the specific identification method as a basis to determine the cost of securities sold.

 

The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers the intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to year end. As of September 30, 2014, there were no investments with a fair value that was significantly lower than the amortized cost basis or any investments that had been in an unrealized loss position for a significant period.

 

At December 31, 2013, cash and cash equivalents consisted of $13.1 million in cash accounts and $42.0 million in money market accounts.  We did not hold any investments at December 31, 2013.

 

Cash, cash equivalents and investments at September 30, 2014 consist of the following:

 

 

 

 

 

 

 

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6. Accrued Expenses

 

At December 31, 2013 and September 30, 2014, accrued expenses consisted of the following:

 

 

 

 

 

 

7.  Notes Payable

 

8% Convertible Senior Notes Due 2019

 

On June 23, 2014, we issued through a private placement $47.0 million in aggregate principal amount of 8% convertible senior notes due June 15, 2019 (the “8% Notes”), all of which remain outstanding as of September 30, 2014. Interest on the 8% Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2014.

 

The 8% Notes are general unsecured and unsubordinated obligations and will rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to the notes, rank equal in right of payment to our existing and future indebtedness and other liabilities that are not so subordinated, are effectively subordinated to any of our future secured indebtedness to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all indebtedness and other liabilities incurred by our subsidiaries, including trade payables. We may not redeem the 8% Notes prior to maturity. The 8% Notes are convertible prior to maturity, subject to certain conditions described below, into shares of our common stock at an initial conversion rate of 148.3019 shares per $1,000 principal amount of the 8% Notes (equivalent to an initial conversion price of approximately $6.74 per share of common stock).  This conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest.   If we receive stockholder approval, we will satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination thereof, at our election.

 

The Holders of the 8% Notes may surrender their notes for conversion any time prior to the close of business immediately preceding February 15, 2019 only if any of the following conditions is satisfied:

 

 

Holders also may surrender their 8% Notes for conversion at any time on or after February 15, 2019 and on or prior to the close of business on the business day immediately prior to the stated maturity date regardless if any of the foregoing conditions have been satisfied.

 

Each $1,000 principal amount of 8% Notes is convertible into shares of our common stock equal to the conversion rate in effect on the conversion date, together with cash in lieu of fractional shares issuable upon conversion.  If we receive stockholder approval prior to the relevant conversion date, we may deliver upon conversion cash, shares, or a combination thereof, at our election.  With respect to any conversions after obtaining stockholder approval, settlement amounts will be computed as follows:

 

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“Daily settlement amount” means, for each of the 60 consecutive trading days in the relevant observation period:

 

 

“Daily conversion value” means, for each of the 60 consecutive trading days in the observation period for a note, one sixtieth (1/60th) of the product of (i) the applicable conversion rate on such trading day and (ii) the daily volume-weighted average price on such trading day.

 

If the 8% Notes are converted in connection with certain fundamental changes that occur prior to maturity of the 8% Notes, we may also be obligated to pay an additional (or “make whole”) premium with respect to the 8% Notes so converted. In addition, if certain fundamental changes occur with respect to TetraLogic, holders of the 8% Notes will have the option to require us to purchase for cash all or a portion of the 8% Notes at a purchase price equal to 100% of the principal amount of the 8% Notes plus accrued and unpaid interest.

 

On or after December 31, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending within five trading days prior to a conversion date the last reported sale price of our common stock exceeds the applicable conversion price on each such trading day, we will, in addition to the other consideration payable or deliverable in connection with such conversion, make an interest make-whole payment to the converting holder equal to the present value of all scheduled payments of interest (using a discount rate equal to 2%) through the earlier of (i) the date that is three years after the conversion date and (ii) the maturity date if the notes had not been so converted.  We will satisfy our obligation to pay any interest make-whole payment in shares of our common stock, without a cash payment in lieu of any fractional shares and without further obligation to deliver any shares of our common stock or pay any cash in excess of the threshold described in the succeeding paragraph. However, if we receive stockholder approval, we may pay any interest make-whole payment either in cash or in shares of our common stock, at our election.  Notwithstanding the foregoing, until we receive stockholder approval, the number of shares we may deliver in connection with a conversion of notes, including those delivered in connection with an interest make-whole payment, will not exceed 163.1321 shares per $1,000 principal amount of notes, subject to adjustment at the same time and in the same manner as the conversion rate adjustments on the 8% Notes, including those adjustments made in connection with certain fundamental changes.  If we pay an interest make-whole payment in shares of our common stock, then the number of shares of common stock a holder will receive will be that number of shares that have a value equal to the amount of the interest make-whole payment to be paid to such holder in shares, divided by the product of the simple average of the daily value weighted average price of our common stock for the 10 trading days immediately preceding the conversion date multiplied by 92.5%.  Notwithstanding the foregoing, if in connection with any conversion the conversion rate is adjusted for a make-whole fundamental change, then such holder will not receive the interest make-whole payment with respect to such note.

 

The indenture for the notes contains certain covenants which limit our and our subsidiaries’ ability to incur certain additional indebtedness except for certain permitted debt, and to incur liens except for certain permitted liens.

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We account for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) by recording the liability and equity components of the convertible debt separately. The liability component is computed based on the fair value of a similar liability that does not include the conversion option. The liability component includes both the value of the embedded interest make-whole derivative and the carrying value of the 8% Notes.  The equity component is computed based on the total debt proceeds less the fair value of the liability component. The equity component is also recorded as debt discount and amortized as interest expense over the expected term of the 8% Notes.

 

The liability component of the 8% Notes on the date of issuance was computed as $30.8 million, consisting of the value of the embedded interest make-whole derivative of $3.1 million and the carrying value of the 8% Notes of $27.7 million. Accordingly, the equity component on the date of issuance was $16.2 million.  The discount on the 8% Notes is being amortized to interest expense over the term of the Notes, using the effective interest method.  The carrying value of the 8% Notes was $28.4 million at September 30, 2014.

 

The liability component of our convertible notes will be classified as current liabilities and presented in current portion of long-term debt and the equity component of our convertible debt will be considered a redeemable security and presented as redeemable equity on our consolidated balance sheet if our debt is considered current at the balance sheet date.

 

Transaction costs of $2.9 million related to the issuance of the 8% Notes are allocated to the liability and equity components in proportion to the allocation of the proceeds and accounted for as deferred financing costs and equity issuance costs, respectively. Approximately $1.0 million of this amount was allocated to equity and the remaining $1.9 million have been capitalized as deferred financing costs and are being amortized over the term of the 8% Notes.

 

The following table summarizes how the issuance of the 8% Notes is reflected in our balance sheet at September 30, 2014:

 

 

 

The following table sets forth our interest expense incurred for the three and nine months ended September 30, 2014:

 

 

 

 

8. Stockholders’ Equity

 

Common Stock

 

We are authorized to issue 100,000,000 shares of common stock, with a par value of $0.0001, of which 22,199,256 and 22,307,138 were issued and outstanding at December 31, 2013 and September 30, 2014, respectively.

 

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Stock-based compensation expense

 

Stock-based payments to employees, including grants of employee stock options, are recognized in the statements of operations and comprehensive loss based on fair value. Stock-based payments to non-employees are recognized at fair value on the date of grant and re-measured at each subsequent reporting date through the settlement of the instrument. The fair value of stock options is calculated using the Black-Scholes valuation model, and is recognized over the vesting period.

 

Stock-based compensation expense recognized by award type is as follows:

 

 

 

Total compensation cost recognized for all stock-based compensation awards in the statements of operations and comprehensive loss is as follows:

 

 

 

During the nine months ended September 30, 2014, stock options to purchase 172,500 shares of common stock were awarded to employees at a weighted average exercise price of $6.67 per share, 111,071 stock options were exercised at an average exercise price of $1.47 per share, and 84,931 stock options were forfeited.  As of September 30, 2014, there were 3,239,915 stock options outstanding and the number of shares of common stock reserved for issuance under our existing equity incentive plans was 2,991,559.  There have been no significant changes to the assumptions used to calculate fair value from those disclosed in our audited financial statements for the year ended December 31, 2013.

 

Warrants

 

We presently have the following warrants outstanding to purchase shares of our common stock:

 

 

 

Our 2006 Warrants and 2009/2010 Warrants are classified as derivative liabilities on our balance sheets with subsequent changes to fair value recorded through earnings at each reporting period on our statements of operations and comprehensive loss as change in fair value of derivative liabilities. See Note 4 with respect to fair value.

 

9. Loss Per Share of Common Stock

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period.  Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period.

 

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In accordance with ASC Topic 260, Earnings per Share, when calculating diluted net loss per common share, the gain associated with the decrease in the fair value of certain warrants classified as derivative liabilities results in an adjustment to the net loss; and the dilutive impact of the assumed exercise of the warrants results in an adjustment to the weighted average common shares outstanding. We utilize the treasury stock method to calculate the dilutive impact of the assumed exercise of the warrants.  For the three and nine months ended September 30, 2014, the effect of the adjustments for our 2006 Warrants and our 2009/2010 Warrants were dilutive.  For the three and nine months ended September 30, 2013, the effect of the adjustments for all warrants classified as derivative liabilities was non-dilutive.

 

The following table sets forth the computation of diluted net loss per share for the three and nine months ended September 30, 2013 and 2014:

 

 

 

The following potentially dilutive securities outstanding at September 30, 2013 and 2014 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive: 

 

 

 

In addition, the common shares issuable upon conversion of the 8% notes have been excluded from the computation of diluted weighted average shares outstanding.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing in this report, and in conjunction with financial statements included in the Form 10-K.  Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.  As a result of many factors, including those factors set forth in the “Risk Factors” section of this report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a clinical-stage biopharmaceutical company focused on discovering, acquiring and developing novel product candidates to treat cancer and infectious diseases. We currently have two clinical-stage product candidates in development: birinapant and SHAPE. Birinapant is designed to mimic the activity of an endogenous protein, the Second Mitochondrial Activator of Caspases, or SMAC, which is involved in the regulation of the apoptotic process within cells. Avoidance of apoptosis is a critical step in tumor development and in the survival of intracellular pathogens. SHAPE is a histone deacetylase inhibitor, or HDACi. Altered expression of histone deacetylases, or HDACs, has been linked to tumor development and several drugs approved for systemic use in the treatment of cancers take advantage of this mechanism.

 

Birinapant, our lead clinical-stage product candidate, was selected from our internally-discovered library of over 3,000 small-molecule compounds, including SMAC-mimetics, designed to inhibit Inhibitor of Apoptosis Proteins, or IAPs, and to cause or enable abnormal cells that are resistant to the body’s immune system to self-destruct. This mechanism of action is potentially applicable across a variety of cancers and viral and mycobacterial infections. Birinapant is currently being tested in Phase 1 and Phase 2 clinical trials. Our clinical trials of birinapant as of September 30, 2014 have enrolled over 300 subjects. Our composition of matter patents on birinapant in the U.S. expire in the range of March 2026 and June 2030, including the U.S. composition of matter patent on birinapant that expires in June 2030, without accounting for possible patent term extensions under the Drug Price Competition and Patent Term Restoration Act of 1984, or for possible pediatric exclusivity. 

 

Our clinical and pre-clinical programs with birinapant are focused on:

 

 

In May 2014, we announced that, based upon data from our Phase 1b study of birinapant in combination with azacitidine in patients with higher risk MDS who are either relapsed/refractory or naïve to azacitidine, we initiated a randomized Phase 2 clinical trial in first line higher risk patients. While the primary objective of the Phase 1b clinical study was to characterize the safety and tolerability and determine the recommended Phase 2 dose of birinapant when administered in combination with azacitidine, we did observe bone marrow responses in a number of patients who had relapsed or were refractory to azacitidine.  We currently expect interim data from the Phase 2 study in the middle of 2015.    

 

 

We completed a Phase 1/2 clinical trial of birinapant administered with irinotecan in CRC, and we are continuing to evaluate initiation of a randomized clinical trial of birinapant administered with a chemotherapy regimen containing irinotecan plus Avastin in second line KRAS-mutant CRC subjects.

 

 

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Enrollment continues in a signal-seeking Phase 1/2 clinical trial in combination with conatumumab, Amgen’s TRAIL agonist antibody, in 3rd line ovarian cancer. We currently expect data around the end of 2014.

 

 

In a mouse model, we have generated data demonstrating that birinapant induces apoptosis in mouse hepatocytes infected with hepatitis B, while sparing normal hepatocytes.  In the mouse model we have seen clearance of surface antigen (HBsAg). We are commencing enrollment in a multiple ascending dose study of birinapant in subjects with chronic hepatitis B in the fourth quarter of 2014.  We currently expect data to be generated around the middle of 2015. The trial will be conducted in subjects over the age of 18 with hepatitis B who are receiving treatment with either tenofavir or entecavir and who are HBsAg positive. The trial is expected to enroll approximately 6 cohorts of 8 subjects each, who will receive 4 weekly treatments with either birinapant or placebo in a 3:1 ratio. The study is being conducted at multiple clinical sites in Australia and New Zealand. Although predominantly a safety and tolerability study, patients will also be monitored for reductions in hepatitis B surface antigen as an indication of therapeutic activity. 

In April 2014, we acquired, by merger, Shape Pharmaceuticals, a development-stage pharmaceutical company developing the product candidate SHAPE. We acquired this company to add a second clinical-stage oncology compound to the TetraLogic portfolio. We paid $13 million in cash at closing and entered into a contingent consideration arrangement that may require us to pay additional consideration, including milestone payments and tiered royalty payments upon commercialization.

 

SHAPE, our second clinical-stage product candidate, is an HDAC inhibitor being developed for topical use for the treatment of cutaneous T-cell lymphoma, or CTCL. HDAC is a validated cancer target and HDAC inhibitors are a proven class of anti-cancer drugs. SHAPE is a novel therapeutic designed to maximize HDAC inhibition locally in the skin with limited systemic exposure. As a result, SHAPE has characteristics that could allow it to be used topically over large body surface areas with minimal systemic absorption. By potentially avoiding toxicities typical of orally-administered HDACi, SHAPE may provide a more favorable safety profile than an HDAC inhibitor delivered systemically.

 

We are advancing SHAPE into a randomized Phase 2 clinical trial in early stage CTCL in the fourth quarter of 2014.  We currently expect data around the end of 2015.  SHAPE’s composition of matter patent in the U.S. extends until at least 2028; in addition, SHAPE has been granted U.S. orphan drug designation for CTCL. We have acquired worldwide development and commercialization rights to SHAPE for all indications.

We were originally incorporated in July 2001 as Apop Corp., a New Jersey corporation. Pursuant to a merger effective as of October 2003 with and into our wholly owned subsidiary, we became a Delaware corporation and commenced operations in 2003. Our name was changed to Apop Corporation in March 2004, to Gentara Corporation in June 2004 and to TetraLogic Pharmaceuticals Corporation in January 2006.

 

We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our accumulated deficit through September 30, 2014 was $113.9 million, and we expect to continue to incur substantial losses in future periods.

 

We incurred research and development expenses of $2.1 million, $6.0 million, $6.4 million and $14.0 million during the three months ended September 30, 2013 and 2014 and the nine months ended September 30, 2013 and 2014, respectively. We anticipate that a significant portion of our operating expenses will continue to be related to research and development as we continue to advance our clinical-stage product candidates, birinapant and SHAPE. We funded our operations as a private company primarily through the sale of preferred stock and the issuance of convertible notes for gross proceeds totaling $85.4 million, which have been converted into shares of our common stock in connection with our initial public offering. We also received amounts under collaboration and grant arrangements totaling $13.7 million. In addition, in December 2013 we sold 8,222,115 shares of common stock in our initial public offering for net proceeds of $49.1 million after payment of underwriting fees and other expenses, and in June 2014 we issued convertible notes for proceeds of $44.1 million, net of underwriting fees and other expenses.  As of December 31, 2013 and September 30, 2014, we had $55.1 million and $65.1 million in cash, cash equivalents and investments, respectively.

 

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We are highly dependent on the success of our research, development and licensing efforts and, ultimately, upon regulatory approval and market acceptance of birinapant and SHAPE. Our short- and long-term capital requirements depend upon a variety of factors, including our clinical development plan and various other factors discussed below. We believe that our existing cash, cash equivalents and investments as of September 30, 2014 will enable us to fund our operating expenses and capital expenditure requirements through the end of 2015. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to our product candidates.

 

Our future funding requirements, both near- and long-term, will depend on many factors, including, but not limited to the:

 

 

 

 

 

 

 

 

 

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations for the three and nine months ended September 30, 2013 and 2014, and our financial condition as of December 31, 2013 and September 30, 2014.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our critical accounting policies and significant judgments and estimates are disclosed in our annual report on Form 10-K for the year ended December 31, 2013. Since the date of those financial statements, there have been no changes to our critical accounting policies and significant judgments and estimates.

 

Financial Overview

 

Revenue

 

We have not generated any revenue from commercial product sales since we commenced operations. In the future, if either birinapant or SHAPE is approved for commercial sale, we may generate revenue from product sales, or alternatively, we may choose to select a collaborator or licensee to commercialize birinapant or SHAPE.

 

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General and Administrative Expenses

 

General and administrative expenses consist principally of salaries and related costs for executive and other administrative personnel, including stock-based compensation and travel expenses. Other general and administrative expenses include professional fees for legal, patent review, consulting and accounting services. General and administrative expenses are expensed when incurred.

 

For the three months ended September 30, 2013 and 2014, and the nine months ended September 30, 2013 and 2014, our general and administrative expenses totaled $2.2 million, $2.6 million, $4.1 million, and $8.1 million, respectively. The increase in general and administrative expenses for the three and nine months ended September 30, 2014 is due primarily to the increase in ongoing costs associated with becoming a public company in December 2013 ($0.7 million and $1.7 million, respectively), including increases in headcount ($0.2 million and $0.6 million, respectively), and to stock compensation expense associated with the issuance of stock options in the second half of 2013 ($0.3 million and $1.4 million, respectively).  We also recognized $0.4 million of transaction costs during the nine months ended September 30, 2014 related to our acquisition of Shape Pharmaceuticals.  The increase in general and administrative expenses for the three and nine months ended September 30, 2014 was offset by the recognition of severance and consulting expenses of $0.6 million for a former executive during the three and nine months ended September 30, 2013. We anticipate that our general and administrative expenses will continue to increase in the future as a result of hiring new management and other scaling operations commensurate with supporting more advanced clinical trials and public company infrastructure. These increases will likely include increased costs for insurance, hiring of additional personnel, board committees, outside consultants, investor relations, lawyers and accountants, among other expenses.

 

Research and Development Expenses

 

Our research and development expenses have consisted primarily of costs incurred for the development of our product candidates, which include:

 

 

 

 

 

 

Research and development costs are expensed when incurred. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by our vendors.

 

During the three months ended September 30, 2013 and 2014, and the nine months ended September 30, 2013 and 2014, we incurred $2.1 million, $6.0 million, $6.4 million, and $14.0 million, respectively, in research and development expenses. Research and development expenses increased during the three and nine months ended September 30, 2014, compared to the comparable prior periods, primarily due to increased manufacturing and formulation activities related to birinapant and SHAPE and increased expenses relating to our MDS, ovarian, HBV and SHAPE clinical trials, offset by a decrease in expenses relating to our CRC clinical trial.

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We do not currently utilize a formal time allocation system to capture expenses on a project-by-project basis as the majority of our past expenses have been in support of birinapant, and our future expenses will be in support of birinapant and SHAPE. However, we do allocate some portion of our research and development expenses by functional area, as shown below.

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The following table summarizes our research and development expenses for the three and nine months ended September 30, 2013 and 2014:

 

 

 

 

The following table summarizes our research and development expenses by targeted indication for the three and nine months ended September 30, 2013 and 2014:

 

 

 

We will need to secure additional funding in the future in order to carry out all of our planned research and development activities with respect to our product candidates.  We will incur substantial costs beyond our present and planned clinical trials in order to file NDAs in target indications for both birinapant and SHAPE, and in each case, the nature, design, size and cost of further studies and trials will depend in large part on the outcome of preceding studies and trials and discussions with regulators.

 

It is difficult to determine with certainty the costs and duration of our current or future clinical trials and pre-clinical studies, or if, when or to what extent we will generate revenues from the commercialization and sale of our product candidates if we obtain regulatory approval. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical trials and pre-clinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation.

 

In addition, the probability of success for our product candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. See Risk Factors below and in our Annual Report.

 

Market acceptance of our product candidates, if we receive approval, depends on a number of factors, including the:

 

 

 

 

 

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We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of our product candidates, as well as an assessment of their commercial potential.

 

Change in fair value of contingent consideration

 

The acquisition of Shape includes a contingent consideration arrangement that may require us to pay additional consideration in the form of milestone payments and tiered royalties.  We recorded the liability for the contingent consideration based on its fair value on the date of the acquisition, and we record any change in fair value of the contingent consideration in our statements of operations and comprehensive loss as a change in fair value of contingent consideration included in loss from operations.  The change in fair value of the contingent consideration of $0.9 million and $1.9 million recorded for the three and nine months ended September 30, 2014, respectively, was due to accretion related to the passage of time.

 

Change in fair value of derivative liabilities

 

Certain of our warrants to purchase our common stock are classified as derivative liabilities and recorded at fair value. These derivative liabilities are subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations and comprehensive loss as a change in fair value of the derivative liability.  The change in the fair value of these derivative liabilities of $(0.1) million and $(0.5) million for the three and nine months ended September 30, 2014, respectively, is due primarily to the decrease in the value of our common stock from December 2013 to September 2014.  The change in the fair value of these derivative liabilities of $1.4 million and $1.3 million for the three and nine months ended September 30, 2013, respectively, is due primarily to the increase in the value of our common stock during the period.

 

We have classified the interest make-whole provision of our 8% Notes due 2019 issued in June 2014 as a derivative liability that is recorded at fair value.  This derivative liability is subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations and comprehensive loss as a change in fair value of the derivative liability.  The change in the fair value of this derivative liability of $(1.7) million and $(1.2) million for the three and nine months ended September 30, 2014, respectively, is due primarily to the change in the value of our common stock from the date of issuance of our 8% Notes to September 30, 2014.

 

Interest and Other Income

 

Interest and other income consist principally of interest income earned on cash, cash equivalents and investments.

 

Interest Expense

 

Interest expense is mostly attributable to coupon interest on our convertible notes and to non-cash interest expense resulting from the accretion of the debt discount and beneficial conversion feature associated with our convertible notes.  Interest expense recognized for the three and nine months ended September 30, 2013 represented interest expense and the accretion of debt discount in connection with our convertible notes issued in November 2012 and April 2013, plus

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interest expense on our collaboration loan received in May 2013.  All of our then outstanding convertible notes and the collaboration loan were converted into our common stock in December 2013.  Interest expense recognized for the three and nine months ended September 30, 2014 is related to our 8% Notes issued in June 2014.

 

Cash Flows

 

Operating Activities.  Cash used in operating activities during the nine months ended September 30, 2014 increased to $21.1 million as compared to $10.1 million used in the nine months ended September 30, 2013. This increase was driven primarily by increased costs for both research and development and administration.

 

Investing Activities.  Cash used in investing activities was $0.1 million and $61.3 million for the nine months ended September 30, 2013 and 2014, respectively.  Cash used in investing activities for the nine months ended September 30, 2014 is attributable primarily to the purchase of Shape Pharmaceuticals in April 2014 and to the purchase of short-term investments in corporate bonds and commercial paper during 2014.

 

Financing Activities.  Cash provided by financing activities was $8.1 million and $44.3 million for the nine months ended September 30, 2013 and 2014, respectively.  Cash provided by financing activities is attributable to proceeds from the issuance of our 8% Notes in 2014 and from the issuance of convertible notes and the receipt of a collaboration loan in 2013.

 

JOBS Act

 

We are an “emerging growth company” under Section 107 of the JOBS Act. As an emerging growth company, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Liquidity and Capital Resources

 

Since our inception, we have incurred net losses and negative cash flows from our operations. We incurred net losses of $6.0 million, $9.3 million, $13.3 million, and $24.0 million for the three months ended September 30, 2013 and 2014, and the nine months ended September 30, 2013 and 2014, respectively. Our operating activities used $10.1 million and $21.1 million of cash flows during the nine months ended September 30, 2013 and 2014, respectively. At September 30, 2014, we had an accumulated deficit of $113.9 million, working capital of $60.6 million and cash, cash equivalents and investments of $65.1 million. We funded our operations as a private company primarily through the sale of preferred stock and the issuance of convertible notes for gross proceeds totaling $85.4 million, which were converted into shares of our common stock in connection with our initial public offering.  We also received amounts under collaboration and grant arrangements totaling $13.7 million. In addition, in December 2013 we sold 8,222,115 shares of common stock in our initial public offering for net proceeds of $49.1 million after payment of underwriting fees and other expenses, and in June 2014 we issued our 8% Notes for proceeds of $44.1 million, net of underwriting fees and other expenses, as further described below.

 

On June 23, 2014, we issued through a private placement $47.0 million in aggregate principal amount of our 8% Notes, all of which remain outstanding as of September 30, 2014. Interest on our 8% Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2014.  Our 8% Notes are general unsecured and unsubordinated obligations and rank senior in right of payment to all of our indebtedness that is expressly subordinated in right of payment to the notes, rank equal in right of payment to our existing and future indebtedness and other liabilities that are not so subordinated, are effectively subordinated to any of our future secured indebtedness to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all indebtedness and other liabilities incurred by our subsidiaries, including trade payables. We may not redeem our 8% Notes prior to maturity. Our 8% Notes are convertible prior to maturity, subject to certain conditions described below, into shares of our common stock at an initial conversion rate of 148.3019 shares per $1,000 principal amount of our 8% Notes (equivalent to an initial conversion price of approximately $6.74 per share of common stock).  This conversion rate is subject to

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adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest.  If we receive stockholder approval, we may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination thereof, at our election.  See Note 7 of Notes to Consolidated Financial Statements for additional information.  The indenture for our 8% Notes contains certain covenants which limit our and our subsidiaries’ ability to incur certain additional indebtedness except for certain permitted debt, and to incur liens except for certain permitted liens.  We will also be restricted from taking certain actions that could result in an adjustment to the conversion rate of our 8% Notes until we receive stockholder approval.  We are in compliance with all the covenants set forth in the indenture governing our 8% Notes.

 

In April 2014, we acquired by merger Shape Pharmaceuticals, a development stage pharmaceutical company developing SHAPE.  We acquired this company to add a second clinical-stage oncology compound to the TetraLogic portfolio.  We paid $13 million in cash at closing and entered into a contingent consideration arrangement that may require us to pay additional consideration, including milestone payments and tiered royalty payments upon commercialization.  We currently estimate that the milestone payments will occur between 2016 and 2020.  The range of undiscounted amounts that we could be required to pay under our agreement for the milestone payments is between zero and $64.5 million.

 

Similar to other clinical-stage biopharmaceutical companies, our access to traditional bank credit is limited. Although we have had a revolving line of credit in the past, we do not currently have an open revolving line of credit or access to bank finance. We have limited assets which can be used as collateral to secure potential indebtedness. Moreover, as noted above, we have not received any material revenues since inception. Therefore, our ability to fund our operations and sustain our clinical development programs is dependent on equity and equity-linked investments. None of our current investors is required to invest any additional capital in us. Thus, there can be no assurances that we will be able to raise sufficient capital in the future from these or other similar sources or the public markets to fund our operations, and failure to do so could have a material adverse effect on our operations. In addition, the need to raise capital is expected to consume management resources, time and attention and, to a lesser extent, the time and attention of our scientific staff.

 

Operating and Capital Expenditure Requirements

 

We have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase in the near term as we fund our planned clinical trials for birinapant and SHAPE. Following our initial public offering, we are now a publicly traded company and will incur significant legal, accounting and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC and the NASDAQ Stock Market, requires public companies to implement specified corporate governance practices that were inapplicable to us as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.  We estimate that we will incur approximately $2.0 to $3.0 million in incremental costs per year associated with being a publicly traded company, although it is possible that our actual incremental costs will be higher than we currently estimate.

 

We believe that our existing cash, cash equivalents and investments as of September 30, 2014 will enable us to fund our operating expenses and capital expenditure requirements through the end of 2015. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to birinapant and SHAPE. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible debt securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business, results of operations, and financial condition. Our future capital requirements will depend on many factors, including:

 

 

 

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In April 2014, we acquired by merger Shape Pharmaceuticals, a development stage pharmaceutical company developing SHAPE.  We acquired this company to add a second clinical-stage oncology compound to the TetraLogic portfolio.  We paid $13 million in cash at closing and entered into a contingent consideration arrangement that may require us to pay additional consideration, including milestone payments and tiered royalty payments upon commercialization.  We may in-license or acquire additional assets or companies in the future to further expand our technology base.  However, we may not have sufficient cash reserves or other liquid assets to consummate such acquisitions and it may be necessary for us to raise additional funds to complete future transactions.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2014. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Company Website

 

From time to time we will post updated versions of our corporate presentation slides on our website.  Such updates may include information regarding our pipeline, including adjustments of expected timing of certain events, and other information about the progress of our business.

 

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently a party to any legal proceedings.

 

ITEM 1A.  RISK FACTORS

 

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” in Part I of the Form 10-K and Part II of our quarterly report on Form 10-Q for the quarter ended June 30, 2014 filed on August 5, 2014, or the Second Quarter 2014 Form 10-Q. In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part 1, Item 1A “Risk Factors” of the Form 10-K and the Second Quarter 2014 Form 10-Q. The risks described in the Form 10-K and the Second Quarter 2014 Form 10-Q are not the only risks that we face. Additional risks not presently known to us or that we do not currently consider significant may also have an adverse effect on us. If any of the risks actually occur, our business, results of operations, cash flows or financial condition could suffer.

 

 

ITEM 2.  UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

None.

 

Use of Proceeds

 

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-191811) that was declared effective by the Securities and Exchange Commission on December 11, 2013, which registered an aggregate of 8,222,115 shares of our common stock. On December 17, 2013, 7,150,000 shares of common stock were sold on our behalf at an initial public offering price of $7.00 per share, for aggregate gross proceeds of $50.0 million, managed by Oppenheimer & Co., Guggenheim Securities, LLC, and Needham & Co., LLC. On December 31, 2013, in connection with the exercise by the underwriters of our initial public offering of a portion of the over-allotment option granted to them in connection with the initial public offering, 1,072,115 additional shares of common stock were sold on our behalf at the initial public offering price of $7.00 per share, for aggregate gross proceeds of approximately $7.5 million.   From the effective date of our Registration Statement on Form S-1 (File No. 333-191811) through September 30, 2014, we used approximately $35.1 million of the net offering proceeds for the acquisition of Shape Pharmaceuticals and for capital expenditures and general working capital purposes.

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As of September 30, 2014, we had invested the remaining proceeds into money market funds, corporate bonds and commercial paper.

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

Not applicable.

 

ITEM 6.  EXHIBITS

 

Reference is made to the Exhibit Index to this quarterly report for a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this quarterly report on Form 10-Q.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

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ITEM 6.  EXHIBITS

 

 

 

 

 

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