TETRALOGIC PHARMACEUTICALS Corp - FORM 10-Q

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EX-32.2 - EX-32.2 - TETRALOGIC PHARMACEUTICALS Corp	tlog-20160930ex3225771cd.htm
EX-32.1 - EX-32.1 - TETRALOGIC PHARMACEUTICALS Corp	tlog-20160930ex3213ead07.htm
EX-31.2 - EX-31.2 - TETRALOGIC PHARMACEUTICALS Corp	tlog-20160930ex312893323.htm
EX-31.1 - EX-31.1 - TETRALOGIC PHARMACEUTICALS Corp	tlog-20160930ex311ae30d9.htm

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

☐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)


Delaware		42-1604756
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)


P.O. Box 1305
Paoli, Pennsylvania		19301
(Address of Principal Executive Offices)		(Zip Code)

(610) 889-9900

(Registrant’s Telephone Number, Including Area Code)

343 Phoenixville Pike

Malvern, PA 19355

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

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):


Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☒
(Do not check if a smaller reporting company)

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 28, 2016 was 24,769,083.

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Cautionary Note Regarding Forward-Looking Statements and Industry Data		3

PART I — FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements	6

	Consolidated Balance Sheets — December 31, 2015 and September 30, 2016 (unaudited)	6

	Unaudited Consolidated Statements of Operations and Comprehensive Loss — Three and nine months ended September 30, 2015 and 2016	7

	Unaudited Consolidated Statements of Cash Flows — Nine months ended September 30, 2015 and 2016	8

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 4.	Controls and Procedures	28

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon 8% Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

SIGNATURES		33

INDEX TO EXHIBITS		34

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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.

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:

if the planned sale of substantially all of our assets (the “Asset Sale”) to Medivir AB (“Medivir”) is not approved or consummated, we may have to file for bankruptcy and liquidation;

there can be no guarantee that the Asset Sale will be completed;

the entire cash payment from the Asset Sale will be used to partially redeem our 8% convertible 8% notes due 2019 (the “8% Notes”) and pay certain clinical trial expenses and will not be distributed to stockholders, and there may be no other recovery for any of our stockholders;

there can be no guarantee we will receive any future milestones or earn-out payments from the Asset Sale;

there can be no guarantee that Medivir will comply with its obligation to use commercially reasonable efforts in connection with the clinical trials of our product candidates;

holders of the 8% Notes and our to be issued preferred stock will have priority over our common stock on distributions, if any, following the consummation of the Asset Sale;

the asset purchase agreement with Medivir (the “APA”) limits our ability to sell our Business to a party other than Medivir;

we may be required to pay a $1.3 million termination fee to Medivir if we breach certain covenants, accept an unsolicited superior offer, or pursue an alternative transaction in the exercise of our board of directors’ fiduciary duties;

we will retain certain liabilities following consummation of the Asset Sale, including liabilities related to our current or former employees;

the APA with Medivir may expose us to indemnification obligations which could reduce future milestones and earn-out payments;

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the announcement and pendency of the Asset Sale, whether or not consummated, may adversely affect our financial condition and future strategic opportunities;

following consummation of the Asset Sale, we may no longer be required to file reports with the SEC;

if the Asset Sale is not completed, we may be unable to successfully pursue strategic alternatives for our company or our product candidates;

if the Asset Sale is not completed, we may be unable to restructure our existing debt or raise additional capital to fund our operations and make payments on our existing indebtedness when due;

the dilution of existing stockholders from our planned issuance of the preferred stock and conversion of such preferred stock;

our estimates regarding expenses and future revenues;

the risk of securities litigation;

the success and timing 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;

if the Asset Sale is not consummated, our plans and ability to develop and commercialize our product candidates;

if the Asset Sale is not consummated, our ability to acquire or license additional product candidates;

the size and growth of the potential markets for our product candidates, rate and degree of market acceptance of our product candidates and Medivir’s ability to serve those markets;

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

recently enacted and future legislation regarding the healthcare system;

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

obtaining and maintaining intellectual property protection for birinapant and SHAPE; and

the dependence on third parties for certain intellectual property rights and for the conduct of pre-clinical studies and clinical trials of our product candidates.

Birinapant and suberohydroxamic acid 4-methoxycarbonyl phenyl ester, or SHAPE, are our only 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.

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.

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You should also read carefully the factors described in the “Risk Factors” section of this report and Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2015, or the Annual 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 quarterly 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.

We obtained the industry, market and competitive position data in this quarterly report from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. We believe this data is accurate in all material respects as of the date of this report.

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PART I — FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

TETRALOGIC PHARMACEUTICALS CORPORATION

CONSOLIDATED BALANCE SHEETS


	December 31,		September 30,
	2015		2016
Assets				(unaudited)
Current assets:
Cash and cash equivalents	$	15,302,382	$	5,885,474
Short-term investments		5,106,627		—
Prepaid expenses and other current assets		1,561,705		488,106
Total current assets		21,970,714		6,373,580
Property and equipment, net		417,815		7,457
Intangible assets		41,575,516		36,406,516
Other assets		57,345		—
Total assets	$	64,021,390	$	42,787,553

Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	412,456	$	241,634
Accrued expenses		3,182,415		3,683,017
Derivative liabilities		64,877		1,235
Current portion of contingent consideration		—		9,408,000
Total current liabilities		3,659,748		13,333,886
Convertible notes payable, net of discount		28,278,875		30,809,129
Derivative liabilities		55,000		22,000
Deferred taxes		16,879,659		14,562,659
Contingent consideration and other liabilities		21,088,834		14,998,000
Total liabilities		69,962,116		73,725,674

Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.0001 par value; 25,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $0.0001 par value; 100,000,000 shares authorized, 24,769,083 shares issued and outstanding at December 31, 2015 and September 30, 2016		2,477		2,477
Additional paid‑in capital		169,683,829		171,147,476
Cumulative translation adjustment		(70,790)		(86,413)
Cumulative unrealized loss on investments		(971)		—
Accumulated deficit		(175,555,271)		(202,001,661)
Total stockholders’ deficit		(5,940,726)		(30,938,121)
Total liabilities and stockholders’ deficit	$	64,021,390	$	42,787,553

See accompanying notes to consolidated financial statements.

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TETRALOGIC PHARMACEUTICALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)


	Three Months Ended				Nine months ended
	September 30,				September 30,
	2015		2016		2015		2016

Revenue	$	—	$	—	$	—	$	—

Expenses:
General and administrative		2,523,104		1,471,191		8,542,635		6,825,473
Research and development		6,096,424		(38,256)		20,252,415		4,761,844
Impairment charge		—		5,169,000		—		5,169,000
Restructuring charges		—		1,458,065		—		3,499,960
Change in fair value of contingent consideration		1,123,000		1,164,000		3,252,000		3,326,000
Total expenses		9,742,528		9,224,000		32,047,050		23,582,277

Loss from operations		(9,742,528)		(9,224,000)		(32,047,050)		(23,582,277)

Change in fair value of derivative liabilities		431,358		23,481		2,073,581		96,642
Debt exchange expense		—		—		(818,541)		—
Loss on sale of equipment		—		—		—		(153,572)
Interest and other income		21,614		7,926		82,754		31,071
Interest expense		(1,606,402)		(1,758,926)		(4,742,731)		(5,155,254)
Loss before income tax benefit		(10,895,958)		(10,951,519)		(35,451,987)		(28,763,390)
Income tax benefit		—		2,317,000		—		2,317,000
Net loss	$	(10,895,958)	$	(8,634,519)	$	(35,451,987)	$	(26,446,390)

Per share information:
Net loss per common share:
Basic	$	(0.46)	$	(0.35)	$	(1.52)	$	(1.07)
Diluted	$	(0.46)	$	(0.35)	$	(1.52)	$	(1.07)

Weighted average shares outstanding:
Basic		23,830,978		24,769,083		23,329,464		24,769,083
Diluted		23,864,931		24,769,083		23,369,342		24,769,083

Net loss	$	(10,895,958)	$	(8,634,519)	$	(35,451,987)	$	(26,446,390)
Foreign currency gains (losses)		(13,300)		(20,216)		19,482		(15,623)
Unrealized gains (losses) on available-for-sale securities		3,796		—		9,645		971
Comprehensive loss	$	(10,905,462)	$	(8,654,735)	$	(35,422,860)	$	(26,461,042)

See accompanying notes to consolidated financial statements.

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TETRALOGIC PHARMACEUTICALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,
	2015		2016
Cash flows from operating activities
Net loss	$	(35,451,987)	$	(26,446,390)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		139,691		104,030
Stock‑based compensation expense		4,325,575		1,463,647
Change in fair value of derivative liabilities		(2,073,581)		(96,642)
Change in fair value of contingent consideration		3,252,000		3,326,000
Non‑cash interest expense		2,129,286		2,530,254
Debt exchange expense		818,541		—
Unrealized foreign currency loss		89,660
Loss on sale of equipment		—		153,572
Impairment charge		—		5,169,000
Deferred income tax benefit		—		(2,317,000)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		628,751		1,130,944
Accounts payable, accrued expenses and other liabilities		445,460		294,100
Net cash used in operating activities		(25,696,604)		(14,688,485)

Cash flows from investing activities
Purchase of property and equipment		(76,666)		—
Proceeds from sale of equipment		—		152,756
Purchase of short‑term investments		(19,292,969)		—
Sales and maturities of short‑term investments		46,299,020		5,107,598
Net cash provided by investing activities		26,929,385		5,260,354

Cash flows from financing activities
Proceeds from exercise of stock options and warrants		31,201		—
Retirement of convertible notes payable		(825,001)		—
Proceeds from issuance of common stock, net		2,583,889		—
Net cash used in financing activities		1,790,089		—
Effect of exchange rate changes on cash and cash equivalents		(186,256)		11,223
Net increase (decrease) in cash and cash equivalents		2,836,614		(9,416,908)
Cash and cash equivalents—beginning of period		13,073,137		15,302,382
Cash and cash equivalents—end of period	$	15,909,751	$	5,885,474

Supplemental disclosure of cash flow information
Noncash investing and financing activities:
Conversion of convertible notes to common stock	$	2,080,292	$	—
Cash paid for interest	$	1,750,000	$	1,750,000

See accompanying notes to consolidated financial statements.

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TETRALOGIC PHARMACEUTICALS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(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, infectious diseases and autoimmune diseases. We currently have two clinical-stage product candidates in development: birinapant and suberohydroxamic acid 4-methoxycarbonyl phenyl ester (SHAPE). 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.

Recent Events

On November 2, 2016, TetraLogic Pharmaceuticals Corporation (the “Company” or “TetraLogic”) and its wholly-owned subsidiary TetraLogic Research and Development Corporation (“TRDC”) entered into a definitive asset purchase agreement (the “APA”) to, subject to closing conditions, sell substantially all of their respective assets (the “Asset Sale”) to Medivir AB, a publicly traded Swedish company (Nasdaq Stockholm: MVIR) (“Buyer” or “Medivir”).

We have agreed to sell substantially all of the assets of TetraLogic and TRDC to Medivir for a purchase price of (i) $12 million payable in cash at closing plus an amount equal to the aggregate expense payable to INC Research, LLC to complete the SHAPE CTCL Phase 2 ongoing clinical trial currently estimated to be $275,000 (the “Closing Payment”), plus (ii) milestone payments based on the development and commercialization of our product candidates by Buyer and earn-out payments based on annual net sales of birinapant (the “Contingent Payments”). Buyer will also assume certain assumed liabilities (as defined in the APA) at the closing of the Asset Sale, including assuming contingent consideration liabilities due to the former owners of Shape Pharmaceuticals, Inc.

Following the closing of the Asset Sale, the Company may earn additional milestone payments of up to $153 million based on the development and commercialization of our product candidates, subject to certain conditions and limitations described below and in the APA. In addition, subject to the terms and conditions in the APA, the Company may receive earn-out payments based on net sales of any product containing birinapant as follows:

the Company will be entitled to 5% of annual net sales from $0 to $500,000,000;

the Company will be entitled to 7.5% of annual net sales from $500,000,000 to $1,000,000,000; and

the Company will be entitled to 10% of annual net sales above $1,000,000,000.

Buyer will acquire from TetraLogic and TRDC substantially all of their assets relating to the research, development, manufacture and commercialization of SMAC mimetics and HDAC inhibitors, including birinapant and SHP-141 (the “Business”), including (a) a specified list of contracts, (b) all inventory, supplies, materials and spare parts of TetraLogic and TRDC as of the closing of the Asset Sale, (c) 100% of the equity of their wholly-owned subsidiaries, TetraLogic Birinapant UK Ltd. and TetraLogic Shape UK Ltd., and (d) all intellectual property rights owned by TetraLogic and TRDC as of the closing of the Asset Sale. Specifically excluded from the Asset Sale and retained by TetraLogic and TRDC are other assets and liabilities of TetraLogic and TRDC identified in the APA, consisting primarily of cash on hand and certain prepaid assets and accrued liabilities related to the wind down of the business.

Completion of the Asset Sale requires the approval of our stockholders and holders of our outstanding 8% Convertible 8% Notes due 2019 (the “8% Notes”), the consent of certain third parties as well as the satisfaction or waiver of other customary conditions set forth in the APA.

The Company had approximately $43.7 million in aggregate principal amount of 8% Notes due 2019 outstanding as of November 2, 2016. In connection with the Asset Sale to Medivir, described above, on November 2, 2016, TetraLogic entered into a binding agreement (“Note Exchange Agreement”) with 100% of the holders of the 8% Notes pursuant to which the holders of 8% Notes agreed to exchange $2.2 million in aggregate principal amount of the 8% Notes for 12,222,222 newly-issued shares of TetraLogic convertible participating series A preferred stock. The exchange is expected to be consummated prior to November 14, 2016. Following the exchange, $41,550,000 in aggregate principal

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amount of our 8% Notes plus accrued but unpaid interest on all 8% Notes will remain outstanding. The Company has agreed that, upon consummation of the Asset Sale to Medivir, $12 million will be promptly distributed in cash to the holders of the 8% Notes remaining outstanding in partial redemption of $12 million in aggregate principal amount of such remaining 8% Notes and in priority to any payments to holders of capital stock. The holders of the 8% Notes have waived any put right in connection with a suspension of trading and delisting of the Company’s Common Stock from The Nasdaq Global Market as well as any right to receive current cash payment of the interest on the 8% Notes, and agreed instead that such interest will continue to accrue until paid off by the Company. The holders of the 8% Notes have also agreed to extend the maturity date of the remaining 8% Notes to June 15, 2024. These waivers and extensions are conditional on the consummation of the Asset Sale. If the Asset Sale is not consummated or if the APA is terminated, such waivers and extension will be of no further force and effect as if they had never been provided.

As a result of the transactions noted above, we will be terminating all remaining employees, with all terminations expected to be completed no later than December 2, 2016.

On October 18, 2016, TetraLogic received notice that the Nasdaq Hearings Panel (the “Panel”) had granted the Company’s request for an extension of the previously granted exception for continued listing on The Nasdaq Global Market. As previously reported in TetraLogic’s Current Report on Form 8-K filed on September 6, 2016, the Panel had granted the Company’s request for continued listing on The Nasdaq Global Market subject to certain conditions, including completion of a conversion of its outstanding 8% Notes into equity of the Company by October 15, 2016 (the “Restructuring”). On October 15, 2016, the Company informed the Panel that it had not yet completed the Restructuring, and subsequently on October 17, 2016, the Company requested that the Panel extend the exception deadline from October 15, 2016 to October 31, 2016 to complete the process of identifying the remaining holders of the 8% Notes and obtaining agreements for conversion of the 8% Notes.

On November 2, 2016, the Company received a notice from Nasdaq that it determined to delist our common stock and that it will suspend trading of our common stock effective at the open of business on November 4, 2016. As a result of the execution of the APA and agreement with the holders of the 8% Notes as described above, the Company notified Nasdaq on November 2, 2016 of its intent to request delisting from the Nasdaq Global Market. Delisting will be effective 10 days after the filing of a Form 25 with the SEC.

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, 2016, consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2016, and consolidated statements of cash flows for the nine months ended September 30, 2015 and 2016 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 presentation of our financial position as of September 30, 2016 and the results of our operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2016, and our cash flows for the nine months ended September 30, 2015 and 2016. The financial data and other information disclosed in these notes as of September 30, 2016 and for the three and nine months ended September 30, 2015 and 2016 are unaudited. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016, any other interim periods, or any future year or period.

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Intangible Assets and Other Long‑Lived Assets

We review our indefinite lived intangible asset, which consists of our indefinite lived intangible asset acquired in our acquisition of SHAPE in 2014, for impairment on an annual basis in the fourth quarter of each year, as well as whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value to the fair value of the asset, which is usually based on the present value of the expected future cash flows associated with the use of the asset. We review other long‑lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount an impairment loss would be recognized if the carrying value of the asset exceeded its fair value. Fair value is generally determined using discounted cash flows.

During the third quarter of 2016, we identified an impairment indicator in the Shape asset group , which consists of the Shape indefinite-lived intangible asset that we acquired in April 2014 and the related contingent consideration liability (“Shape Asset Group”), based on expressions of interest to acquire this asset group from third parties at amounts below the current carrying value. In addition, on November 2, 2016, we entered into the APA with Medivir to acquire this asset group (as well as substantially all of the other assets) for total consideration of $12 million plus potential future milestones and royalties. The APA is subject to shareholder approval.

Accordingly, to estimate the fair value of the Shape Asset Group as of September 30, 2016, we used the $12 million purchase price from Medivir as our estimate of fair value, as all of the future milestones and royalties that may be earned under the arrangement are contingent on future events which are highly uncertain, and management believes the value attributable to the Company’s other assets to be de-minimus. We recognized an impairment charge of $5.2 million in the third quarter of 2016 based on the difference between the $12 million purchase price and the carrying value of Shape Asset Group as of September 30, 2016. Given the decrease in the Shape intangible asset, the Company also recorded a deferred tax benefit of $2.3 million during the third quarter of 2016 related to the decrease in the basis difference between book and tax for this asset.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the standard will have on the financial statements.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Statements—Overall (Subtopics 825-10)(“ASU 2016-01”). ASU 2016-01 provides updated guidance on the recognition and measurement of financial assets and financial liabilities that will supersede most current guidance. ASU 2016-01 primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The amendments in ASU 2016-01 supersede the guidance to classify equity securities with readily determinable fair values into different categories and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments under ASU 2016-01 are effective, for public business entities, for periods beginning after December 15, 2017, including interim periods within those fiscal years, and with early adoption permitted. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its results of operations, financial position or cash flows.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 simplifies the balance sheet classification of deferred taxes and requires that all deferred taxes be presented as noncurrent. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016 with

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early adoption permitted. The adoption of this update is not expected to have a material effect on the Company’s financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company for annual periods beginning after December 15, 2016 and for interim periods after that, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2014-15 on its consolidated financial statements.

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, 2015 filed on March 16, 2016, or the Form 10-K. Since the date of those financial statements, there have been no changes to our significant accounting policies.

3. 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.

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

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

Level 3 — Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.

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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:


	Level 1		Level 2		Level 3		Total
December 31, 2015
Assets
Money market funds (cash equivalents)	$	12,243,104	$	—	$	—	$	12,243,104
Short-term investments		—		5,106,627		—		5,106,627
Total assets	$	12,243,104	$	5,106,627	$	—	$	17,349,731
Liabilities
Interest make-whole derivative		—		—	$	55,000	$	55,000
Shape contingent consideration		—		—		21,080,000		21,080,000
Common stock warrant liability		—		—		64,877		64,877
Total liabilities	$	—	$	—	$	21,199,877	$	21,199,877
September 30, 2016
Assets
Money market funds (cash equivalents)	$	5,431,977	$	—	$	—	$	5,431,977
Total assets	$	5,431,977	$	—	$	—	$	5,431,977
Liabilities
Interest make-whole derivative		—		—	$	22,000	$	22,000
Shape contingent consideration		—		—		24,406,000		24,406,000
Common stock warrant liability		—		—		1,235		1,235
Total liabilities	$	—	$	—	$	24,429,235	$	24,429,235

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 mid-2017 and 2021. The range of undiscounted milestones we could be required to pay under our agreement is between zero and $64.5 million. The current and non-current potions of the contingent consideration liability are based upon the timing of when the Company anticipates achieving the various milestones associated with the arrangement, one of which is expected to be achieved within a year. 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:

estimated cash flows projected from the success of unapproved product candidates in the U.S. and ROW;

the probability of success for product candidates including risks associated with uncertainty, achievement and payment of milestone events;

the time and resources needed to complete the development and approval of product candidates;

the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the U.S. and ROW;

the risk adjusted discount rate for fair value measurement; and

the credit risk of TetraLogic.

In June 2014, we issued $47.0 million in aggregate principal amount of 8.00% convertible 8% notes due June 15, 2019 (the “8% Notes”), of which $43.75 million are outstanding at September 30, 2016. 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

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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, 2015 and 2016:


	December 31,								Change in		September 30,
	2014		Additions		Deductions		Conversions		Fair Value		2015
Interest make-whole derivative	$	2,400,000	$	—		—		(165,957)	$	(1,889,043)	$	345,000
Shape contingent consideration		31,491,686		—	$	—		—		3,252,000		34,743,686
Common stock warrant liability		256,027		—		—	$	—		(184,538)		71,489
Total liabilities	$	34,147,713	$	—	$	—	$	—	$	1,178,419	$	35,160,175


	December 31,								Change in		September 30,
	2015		Additions		Deductions		Conversions		Fair Value		2016
Interest make-whole derivative	$	55,000		—		—	$	—	$	(33,000)	$	22,000
Shape contingent consideration		21,080,000		—		—		—		3,326,000		24,406,000
Common stock warrant liability		64,877		—		—		—		(63,642)		1,235
Total liabilities	$	21,199,877	$	—	$	—	$	—	$	3,229,358	$	24,429,235

In the third quarter of 2016, we estimated the fair value of the Shape Asset Group at $12 million, based on the APA with Medivir to acquire this asset group (as well as substantially all of the other assets of the Company) for total consideration of $12 million plus potential future milestones and royalties. The Company recorded an impairment charge of $5.2 million based on the excess of the carrying value of the Shape Asset Group as compared to the $12 million estimated fair value as of September 30, 2016. There were no other non-recurring fair value measurements required during the three or nine months ended September 30, 2016 or 2015.

As of September 30, 2016, the fair value and carrying value of our convertible debt was as follows:


	Fair Value		Carrying Value		Face Value

8.00% convertible 8% notes due June 15, 2019	$	11,366,000	$	30,809,129	$	43,750,000

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. 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 total debt instrument was based on several factors including the terms of the instrument, our common stock price at the valuation date, the expected stock price volatility, the remaining term of the convertible notes, and the risk-free interest rate.

4. 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.

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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, 2015 and 2016. The Company recorded $3,796, $0, $9,645 and $971 of unrealized gains during the three months ended September 30, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, respectively. Realized gains and losses are included in interest income in the statements of operations. The Company did not record any realized gains or losses during the three and nine months ended September 30, 2015 and 2016. 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, 2016, 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.

Cash, cash equivalents and investments at December 31, 2015 and September 30, 2016 consist of the following:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2015
Cash and cash equivalents:
Cash and money market accounts	$	15,302,382		—		—	$	15,302,382
Total cash and cash equivalents	$	15,302,382	$	—	$	—	$	15,302,382
Short-term investments:
Corporate bonds	$	3,108,516		—	$	(1,069)	$	3,107,447
Commercial paper		1,999,082		98		—		1,999,180
Total short-term investments	$	5,107,598	$	98	$	(1,069)	$	5,106,627
Total cash, cash equivalents, and investments	$	20,409,980	$	98	$	(1,069)	$	20,409,009

September 30, 2016
Cash and cash equivalents:
Cash and money market accounts	$	5,885,474		—		—	$	5,885,474
Total cash and cash equivalents	$	5,885,474	$	—	$	—	$	5,885,474

5. Restructuring

In January, 2016, we authorized the implementation of a 19 person reduction in staff to control operating expenses and reduce ongoing cash requirements. The actions associated with these reductions were completed in April 2016. These termination benefits consist of a severance payment equal to 3 months’ salary or, in the case of certain senior executives, consist of benefits pursuant to the provisions of their employment agreements, and outplacement assistance. The estimated liability for these termination benefits was scheduled to be paid out over 18 months and was recorded at fair value during the first quarter of 2016.

During the third quarter of 2016, we recorded an additional restructuring charge for severance payments related to the termination of our remaining 8 employees. In addition, we recorded an adjustment for amendments for certain existing severances that reduced the amounts of benefits payable and allowed for the payment for all benefits by the end of 2016.

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In total, we recorded a restructuring charge of $3.5 million during the nine months ended September 30, 2016. A total of $1.3 million has been paid through September 30, 2016, and the remaining $2.2 million is scheduled to be paid by December 31, 2016.

Total charges and payments related to the restructuring plans recognized in the consolidated statement of operations are as follows:


	Nine Months Ended
	September 30,
		2016
Restructuring accrual, January 1, 2016	$	-
Severance costs		3,499,960
Payments		(1,302,307)
Restructuring accrual, September 30, 2016	$	2,197,653

In March 2016, we sold all of our laboratory equipment for proceeds of $152,756, which resulted in a loss on sale of equipment of $153,572 during the nine months ended September 30, 2016.

6. Notes Payable

8% Convertible 8% Notes Due 2019

On June 23, 2014, we issued through a private placement $47.0 million in aggregate principal amount of 8% convertible 8% notes due June 15, 2019 (the “8% Notes”), of which $43.75 million remain outstanding as of September 30, 2016. 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 8% 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 at our option prior to maturity based on the terms of the indenture. 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. 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.

The Holders of the 8% Notes may surrender their notes for conversion any time prior to the close of business immediately preceding February 15, 2024 only if any of the following conditions is satisfied:

during any fiscal quarter (and only during such fiscal quarter) commencing after December 31, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock for each such trading day is greater than or equal to 100% of the applicable conversion price on such trading day;

during the five consecutive business day period immediately following any 10 consecutive trading day period, or the “measurement period”, in which, for each trading day of such measurement period, the “trading price” per $1,000 principal amount of notes for such trading day was less than 98% of the product of the last reported sale price of our common stock for such trading day and the applicable conversion rate on such trading day; or

upon the occurrence of specified corporate events.

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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. As of December 31, 2015 and September 30, 2016, the 8% Notes were not convertible.

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. We may deliver upon conversion cash, shares, or a combination thereof, at our election. With respect to any conversions, settlement amounts will be computed as follows:

if we elect (or are deemed to have elected) physical settlement, we will deliver to the converting holder in respect of each $1,000 principal amount of notes being converted a number of shares of common stock equal to the conversion rate in effect on the conversion date together with cash in lieu of fractional shares issuable upon conversion and the interest make-whole payment, if applicable;

if we elect cash settlement, we will pay to the converting holder in respect of each $1,000 principal amount of notes being converted cash in an amount equal to the sum of the daily conversion values for each of the 60 consecutive trading days during the related observation period and the interest make-whole payment, if applicable; and

if we elect combination settlement, we will pay or deliver, as the case may be, to the converting holder in respect of each $1,000 principal amount of notes being converted a “settlement amount” equal to the sum of the daily settlement amounts for each of the 60 consecutive trading days during the relevant observation period (plus cash in lieu of any fractional share of our common stock issuable upon conversion) and the interest make-whole payment, if applicable.

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

cash equal to the lesser of (i) the maximum cash amount per $1,000 principal amount of notes to be received upon conversion as specified in the notice specifying our chosen settlement method (the “specified dollar amount”), if any, divided by 60 (such quotient, the “daily measurement value”) and (ii) the daily conversion value; and

if the daily conversion value exceeds the daily measurement value, a number of shares equal to (i) the difference between the daily conversion value and the daily measurement value, divided by (ii) the daily volume-weighted average price for such trading day.

“Daily conversion value” means, for each of the 60 consecutive trading days in the observation period for a note, one ninetieth (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, including the delisting of our common stock from the Nasdaq Global Market, 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 may pay any interest make-whole payment either in cash or in shares of our common stock, at our election. If we pay an interest make-whole payment in shares of our common stock, then the number of shares of

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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. In the note exchange agreement effective October 28, 2016, the holders of 8% Notes have waived any put right in connection with a suspension of trading and delisting of the Company’s Common Stock from The Nasdaq Global Market as well as any right to receive current cash payment of the interest on the 8% Notes, and agreed instead that such interest will continue to accrue until paid off by the Company. The maturity date of the remaining Notes has been extended until June 15, 2024.

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.

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 carrying value of our 8% Notes is net of debt discount of $12,940,871 and $15,471,125 at September 30, 2016 and December 31, 2015, respectively.

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 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. As of December 31, 2015 and September 30, 2016, the 8% Notes were classified as long-term liabilities.

Transaction costs of $2.9 million related to the issuance of the 8% Notes were 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.

In March 2015, we agreed to exchange $3.25 million aggregate principal amount of our 8% Notes in separately negotiated transactions for cash payments totaling $0.8 million and the issuance of 0.5 million shares of our common stock. We recognized $0.8 million of debt exchange expense for the three months ended September 30, 2015 in connection with these exchanges, which represents the additional consideration (cash and shares) that was provided to these noteholders pursuant to their exchange agreements.

The following table summarizes how the 8% Notes are reflected in our balance sheet at September 30, 2016:


	September 30, 2016
Face value of outstanding notes	$	43,750,000
Conversion option reported in equity		(15,002,020)
Interest make-whole derivative		(2,889,043)
Unamortized debt issuance costs		(952,760)
Cumulative amortization of debt discount		5,902,952
Carrying value	$	30,809,129

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The following table sets forth our interest expense incurred for the three and nine months ended September 30, 2015 and 2016:


	Three months ended September 30,				Nine Months Ended September 30,
	2015		2016		2015		2016

8% Convertible 8% Notes due 2019 - coupon	$	875,000	$	875,000	$	2,613,445	$	2,625,000
8% Convertible 8% Notes due 2019 - amortization of debt discount		644,788		797,312		1,864,549		2,270,411
Amortization of deferred financing costs		86,614		86,614		264,737		259,843
	$	1,606,402	$	1,758,926	$	4,742,731	$	5,155,254

In connection with the Asset Sale to Medivir described above, on November 2, 2016, TetraLogic entered into a binding agreement with 100% of the holders of the 8% Notes pursuant to which the holders of the 8% Notes agreed to exchange $2.2 million in aggregate principal amount of the 8% Notes for 12,222,222 newly-issued shares of TetraLogic convertible participating series A preferred stock. The exchange is expected to be consummated prior to November 14, 2016. Following the exchange, $41,550,000 in aggregate principal amount of our 8% Notes plus accrued but unpaid interest on all 8% Notes will remain outstanding. The Company has agreed that, upon consummation of the Asset Sale to Medivir, $12 million will be promptly distributed in cash to the holders of the 8% Notes remaining outstanding in redemption of $12 million in aggregate principal amount of such remaining 8% Notes and in priority to any payments to holders of capital stock. The holders of the 8% Notes have waived any put right in connection with a suspension of trading and delisting of the Company’s Common Stock from The Nasdaq Global Market as well as any right to receive current cash payment of the interest on the 8% Notes, and agreed instead that such interest will continue to accrue until paid off by the Company. The holders of the 8% Notes have also agreed to extend the maturity date of the remaining 8% Notes to June 15, 2024. These waivers and extensions are conditional on the consummation of the Asset Sale. If the Asset Sale is not consummated or if the APA is terminated such waivers and extensions will be of no further force and effect as if they had never been provided.

7. Stockholders’ Equity

Preferred Stock

We are authorized to issue 25,000,000 shares of preferred stock, with a par value of $0.0001, of which none were issued and outstanding at December 31, 2015 and September 30, 2016.

In connection with the Asset Sale to Medivir, described above, on November 2, 2016, TetraLogic entered into a binding agreement with 100% of the holders of the 8% Notes pursuant to which the holders of 8% Notes agreed to exchange $2.2 million in aggregate principal amount of the 8% Notes for 12,222,222 newly-issued shares of TetraLogic convertible participating Series A preferred stock (the “Preferred Stock”). The exchange is expected to be consummated prior to November 14, 2016.

Each outstanding share of Preferred Stock shall be convertible at any time at the option of the holder thereof and without payment of additional consideration into fully paid and non-assessable shares of common stock. The number of shares of common stock into which each share of Preferred Stock shall initially be convertible (the “Conversion Ratio”) into shall be one (1). The Conversion Ratio shall be subject to customary adjustments for stock splits, dividends and equity issuances.

The Preferred Stock will entitle its holders to a preferred dividend when, as and if declared by the board of directors of the Company, at a rate of 8%. Dividends shall be cumulative, whether or not declared by the Board and shall accrue semi-annually from the date of issuance of the Preferred Stock or from the most recent date on which dividends were paid or provided for. Dividends on the Preferred Stock shall be payable prior to and in preference to any payment of any dividend or other distribution on stock which ranks junior to the Preferred Stock, including the common stock (collectively, the “Junior Stock”). No dividends or other distributions shall be made on Junior Stock prior to all payments on the Preferred Stock having been made in full. After all accrued but unpaid dividends have been paid on the Preferred Stock, the holders of Preferred Stock shall also be entitled to any additional dividends or other distributions paid on the common stock by the Company in an amount per share of Preferred Stock equal to the amount paid or

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distributed per share of common stock as if the Preferred Stock had been converted into common stock at the Conversion Ratio.

Common Stock

We are authorized to issue 100,000,000 shares of common stock, with a par value of $0.0001, or Common Stock, of which 24,769,083 were issued and outstanding at December 31, 2015 and September 30, 2016.

At the Market Offering

On March 13, 2015, we entered into a Sales Agreement with Guggenheim Securities, LLC, or Guggenheim, to offer shares of our Common Stock from time to time through Guggenheim, as our sales agent for the offer and sale of the shares. We may offer and sell shares for an aggregate offering price of up to $25 million. We did not make any sales under the Sales Agreement during the three and nine months ended September 30, 2015 and 2016.

Purchase Agreement

On August 24, 2015, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we have the right to sell to LPC up to $17,000,000 in shares of our Common Stock, subject to certain limitations and conditions set forth in the Purchase Agreement, over the period from August 24, 2015 to March 1, 2018.

As consideration for entering into the Purchase Agreement, we issued to LPC 103,364 shares of Common Stock on the date of the Purchase Agreement. As consideration for LPC’s purchase of up to an additional $15,000,000 in shares of Common Stock, we will issue up to 34,455 shares of Common Stock to LPC on a pro-rata basis on each purchase date. We will not receive any cash proceeds from the issuance of these shares.

Under the Purchase Agreement, on any business day and as often as every business day over the 30-month term of the Purchase Agreement, and up to an aggregate amount of an additional $15,000,000 (subject to certain limitations) in shares of Common Stock, we have the right at our sole discretion and subject to certain conditions to direct LPC to purchase up to 100,000 shares of Common Stock (with such amounts increasing up to 175,000 shares as the stock price increases, but not to exceed $1,000,000 in total purchase proceeds per purchase date). The purchase price of shares of Common Stock pursuant to the Purchase Agreement will be based on the prevailing market price at the time of sale as set forth in the Purchase Agreement. We will control the timing and amount of any sales of Common Stock to LPC. In addition, we may direct LPC to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the Common Stock is not below the “threshold price” as set forth in the Purchase Agreement. We have the right to terminate the Purchase Agreement at any time, on one business days’ notice, at no cost or penalty. We have agreed with LPC that we will not enter into any “variable rate” transactions with any third party from the date of the Purchase Agreement until the expiration of the 30-month period following the date of the Purchase Agreement, subject to certain exceptions.

From the effective date of the Purchase Agreement through December 31, 2015, we issued a total of 1,435,612 shares of Common Stock to LPC, including 105,379 shares of Common Stock issued to LPC as consideration for entering into the Purchase Agreement and purchasing additional shares, for gross proceeds of $2.9 million. We did not issue any shares under the Purchase Agreement during the three and nine months ended September 30, 2016.

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.

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


	Three Months Ended				Nine months ended
	September 30,				September 30,
	2015		2016		2015		2016
Options awards	$	1,214,856	$	532,381	$	3,776,013	$	2,192,085
Restricted stock awards		196,875		(561,094)		549,562		(728,438)
Total stock-based compensation expense	$	1,411,731	$	(28,713)	$	4,325,575	$	1,463,647

The credits recorded for restricted stock awards during the three and six months ended September 30, 2016 relates to the reversal of previously recognized expense for awards subject to cliff vesting which have been forfeited.

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


	Three Months Ended				Nine months ended
	September 30,				September 30,
	2015		2016		2015		2016
Research and development	$	385,376	$	22,112	$	1,202,335	$	86,751
General and administrative		1,026,355		(50,825)		3,123,240		1,376,896
Total stock-based compensation expense	$	1,411,731	$	(28,713)	$	4,325,575	$	1,463,647

A summary of activity for all options for the nine months ended September 30, 2016 is presented below:



		Weighted Average		Weighted Average	Aggregate
		Exercise Price		Contractual	Intrinsic
	Shares	Per Share		Life (In Years)	Value
Outstanding—December 31, 2015	4,020,783	$	5.48	7.8	$	—
Granted	—		—
Exercised	—		—
Forfeited	(1,652,793)		5.91
Outstanding—September 30, 2016	2,367,990	$	5.18	6.6	$	—
Vested and expected to vest—September 30, 2016	2,363,144	$	5.18	6.6	$	—
Exercisable at September 30, 2016	2,024,758	$	5.14	6.5	$	—

We had 0 and 450,000 shares of unvested restricted stock outstanding at September 30, 2016 and December 31, 2015, respectively. During the three and nine months ended September 30, 2016, 225,000 and 450,000 shares of unvested restricted stock were forfeited, respectively.

As of September 30, 2016, there was $1.1 million, net of estimated forfeitures, of total unrecognized compensation expense related to unvested stock options which we expect to recognize as compensation expense over a weighted average attribution period of 1.0 years, subject to acceleration if the market condition is met for those awards that contain a market condition.

Warrants

We currently have the following warrants outstanding to purchase shares of our Common Stock:


		Number of
		Shares	Exercise
Warrant Series	Underlying Equity Security	Issuable	Price		Expiration Date
2007 Warrant	common stock	1,961	$	7.65	May 2017
2009/2010 Warrants	common stock	52,815	$	0.85	November 2019-March 2020

Our 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

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change in fair value of derivative liabilities. See Note 3 with respect to fair value. A total of 21,786 of our 2006 Warrants expired unexercised in March 2016 and May 2016.

8. 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.

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, 2015, 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, 2016, the effect of the adjustments for our 2006 Warrants and our 2009/2010 Warrants were non-dilutive.

The following table sets forth the computation of diluted net loss per share for the three and nine months ended September 30, 2015 and 2016:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2016		2015		2016
Numerator:
Net loss	$	(10,895,958)	$	(8,634,519)	$	(35,451,987)	$	(26,446,390)
Less: income from change in fair value of warrant liability		(26,358)		—		(184,538)		—
Numerator for diluted net loss per common share	$	(10,922,316)	$	(8,634,519)	$	(35,636,525)	$	(26,446,390)
Denominator:
Basic weighted average common shares outstanding		23,830,978		24,769,083		23,329,464		24,769,083
Dilutive common shares from assumed warrant exercises		33,953		—		39,878		—
Diluted weighted average shares of common stock outstanding		23,864,931		24,769,083		23,369,342		24,769,083
Diluted net loss per share of common stock	$	(0.46)	$	(0.35)	$	(1.52)	$	(1.07)

The following potentially dilutive securities outstanding for the three and nine months ended September 30, 2015 and 2016 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2016	2015	2016
Warrants	23,747	54,776	23,747	54,776
Stock options	4,030,132	2,701,314	3,653,221	3,194,387
Common shares issuable upon conversion of the 8% Notes	8,058,271	8,058,271	8,058,271	8,058,271
	12,112,150	10,814,361	11,735,239	11,307,434

9. Subsequent Events

On November 2, 2016, TetraLogic and TRDC entered into the APA to, subject to closing conditions, sell substantially all of their respective assets to Medivir. See Recent Events in Note 1 for further information.

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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 our financial statements included in the Annual Report. 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 under the caption “Cautionary Note Regarding Forward-Looking Statements and Industry Data” in this quarterly report and Part I, Item 1A “Risk Factors” of the Annual 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

On November 2, 2016, TetraLogic and its wholly-owned subsidiary TRDC entered into the APA to, subject to closing conditions, sell substantially all of their respective assets to Medivir.

We have agreed to sell substantially all of the assets of TetraLogic and TRDC to Medivir for a purchase price of (i) $12 million payable in cash at closing plus an amount equal to the aggregate expense payable to INC Research, LLC to complete the SHAPE CTCL Phase II ongoing trial currently estimated to be $275,000, plus (ii) milestone payments based on the development and commercialization of our product candidates by Buyer and earn-out payments based on annual net sales of birinapant. Buyer will also assume certain assumed liabilities (as defined in the APA) at the closing of the Asset Sale, including assuming contingent consideration liabilities due to the former owners of Shape Pharmaceuticals, Inc.

Following the closing of the Asset Sale, the Company may earn additional milestone payments of up to $153 million based on the development and commercialization of our product candidates, subject to certain conditions and limitations described below and in the APA. In addition, subject to the terms and conditions in the APA, the Company may receive earn-out payments based on annual net sales of any product containing birinapant as follows:

the Company will be entitled to 5% of annual net sales from $0 to $500,000,000;

the Company will be entitled to 7.5% of annual net sales from $500,000,000 to $1,000,000,000; and

the Company will be entitled to 10% of annual net sales above $1,000,000,000.

Buyer will acquire from TetraLogic and TRDC substantially all of their assets relating to the research, development, manufacture and commercialization of SMAC mimetics and HDAC inhibitors, including birinapant and SHP-141, including (a) a specified list of contracts, (b) all inventory, supplies, materials and spare parts of TetraLogic and TRDC as of the closing of the Asset Sale, (c) 100% of the equity of their wholly-owned subsidiaries, TetraLogic Birinapant UK Ltd. and TetraLogic Shape UK Ltd., and (d) all intellectual property rights owned by TetraLogic and TRDC as of the closing of the Asset Sale. Specifically excluded from the Asset Sale and retained by TetraLogic and TRDC are other assets and liabilities of TetraLogic and TRDC identified in the APA, consisting primarily of cash on hand and certain prepaid assets and accrued liabilities related to the wind down of the business.

Completion of the Asset Sale requires the approval of our stockholders and holders of our outstanding 8% Notes, the consent of certain third parties as well as the satisfaction or waiver of other customary conditions set forth in the APA.

The Company had approximately $43.7 million in aggregate principal amount of 8% Notes outstanding as of November 2, 2016. In connection with the Asset Sale to Medivir described above, on November 2, 2016, TetraLogic entered into a binding agreement with 100% of the holders of the 8% Notes pursuant to which the holders of 8% Notes agreed to exchange $2.2 million in aggregate principal amount of the 8% Notes for 12,222,222 newly-issued shares of TetraLogic convertible participating series A preferred stock. The exchange is expected to be consummated prior to November 14, 2016. Following the exchange, $41,550,000 in aggregate principal amount of our 8% Notes plus accrued but unpaid interest on all 8% Notes will remain outstanding. The Company has agreed that, upon consummation of the Asset Sale to Medivir, $12 million will be promptly distributed in cash to the holders of the 8% Notes remaining outstanding in redemption of $12 million in aggregate principal amount of such remaining 8% Notes and in priority to

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any payments to holders of capital stock. The holders of the 8% Notes have waived any put right in connection with a suspension of trading and delisting of the Company’s Common Stock from The Nasdaq Global Market as well as any right to receive current cash payment of the interest on the 8% Notes, and agreed instead that such interest will continue to accrue until paid off by the Company. The holders of the 8% Notes have also agreed to extend the maturity date of the remaining 8% Notes to June 15, 2024. These waivers and extensions are conditional on the consummation of the Asset Sale. If the Asset Sale is not consummated or if the APA is terminated, such waivers and extension will be of no further force and effect as if they had never been provided.

As a result of the transactions noted above, we will be terminating all remaining employees, with all terminations expected to be completed no later than December 2, 2016.

On October 18, 2016, the Panel granted the Company’s request to extend the exception deadline through the end of the month. The Panel noted that the remaining exception deadlines, reported on Company’s Form 8-K filed on September 6, 2016, are still in place. As a result of the execution of the APA and agreement with the holders of the 8% Notes as described above, the Company notified Nasdaq on November 2, 2016 of its intent to request delisting from the Nasdaq Global Market. On November 2, 2016, the Company received a notice from Nasdaq that it determined to delist our common stock and that it will suspend trading of our common stock effective at the open of business on November 4, 2016. As a result of the execution of the APA and agreement with the holders of the 8% Notes as described above, the Company notified Nasdaq on November 2, 2016 of its intent to request delisting from the Nasdaq Global Market. Delisting will be effective 10 days after the filing of a Form 25 with the SEC.

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, 2015 and 2016, and our financial condition as of December 31, 2015 and September 30, 2016.

Critical Accounting Policies and Significant Judgments and Estimates

Our critical accounting policies and significant judgments and estimates are disclosed in our Annual Report. Since the date of those financial statements, there have been no changes to our critical accounting policies and significant judgments and estimates, other than the change noted below in Indefinite-lived Intangible Assets.

Financial Overview

Revenue

We have not generated any revenue from commercial product sales since we commenced operations.

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.

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For the three months ended September 30, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, our general and administrative expenses totaled $2.5 million, $1.5 million, $8.5 million and $6.8 million, respectively. The decrease in general and administrative expenses from the three months ended September 30, 2015 to the three months ended September 30, 2016 is due to a decrease in personnel and stock compensation expenses resulting from our reduction in staff implemented in the first quarter of 2016, offset by an increase in financial advisory expenses related to our exploration of strategic alternatives during 2016. The decrease in general and administrative expenses from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 is due to the changes in personnel, stock compensation, and financial advisory expenses noted above, also offset by an increase in legal patent and restructuring expenses in 2016 as compared to 2015.

Research and Development Expenses

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

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

expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials and pre-clinical studies;

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

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

costs associated with pre-clinical activities and regulatory operations.

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, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, we incurred $6.1 million, $(38,000), $20.3 million and $4.8 million, respectively, in research and development expenses. Research and development expenses decreased for both the three and nine months ended September 30, 2016 as compared to the three and nine months ended September 30, 2015, due to decreases in clinical trial expenses for all indications, decreases in manufacturing, product development, and pre-clinical expenses, and decreases in personnel and stock compensation expenses resulting from the reduction in force implemented in the first quarter of 2016. The MDS trial was terminated in January 2016 due to disappointing results. The HBV trial was temporarily halted in May 2015. We completed enrollment in the Phase 1/2 open-label, non –randomized clinical trial of birinapant administered with conatumumab in third-line ovarian cancer trial in the second quarter of 2015, and based on results observed to date, we do not expect to advance this program beyond this study at this time. In addition, we received and recorded a research and development reimbursement credit from the Australian government during the third quarter of 2016 related to level of research and development work performed in that jurisdiction, which further reduced research and development expense in the third quarter of 2016.

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 have not utilized 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 SHAPE. However, we have allocated 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, 2015 and 2016:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2015	2016		2015		2016
Clinical development	$	3,396,136	$	91,360	$	9,898,209	$	3,021,786
Manufacturing and formulation		690,388		1,968		2,607,049		153,124
Personnel related		1,399,265		361,919		4,878,750		2,015,798
Stock-based compensation		385,376		22,112		1,202,335		86,751
Consulting		87,573		—		430,785		—
Other research and non-clinical development		137,686		(515,615)		1,235,287		(515,615)
	$	6,096,424	$	(38,256)	$	20,252,415	$	4,761,844

The following table summarizes our research and development expenses by targeted indication for the three and nine months ended September 30, 2015 and 2016:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2015	2016		2015		2016
Blood cancers (MDS)	$	4,790,292	$	(77,137)	$	12,244,848	$	2,757,018
Solid tumors		370,531		—		1,734,392		—
Infectious diseases (HBV)		(57,888)		—		1,090,567		—
Shape (CTCL)		795,604		38,881		3,343,546		2,004,826
Other pre-clinical and non-indication specific		197,885		—		1,839,062		—
	$	6,096,424	$	(38,256)	$	20,252,415	$	4,761,844

Impairment Charge

During the third quarter of 2016, we identified an impairment indicator in the Shape asset group, which consists of the Shape indefinite-lived intangible asset that we acquired in April 2014, and the related contingent consideration liability (“Shape Asset Group”), based on expressions of interest to acquire this asset group from third parties at amounts below the current carrying value. In addition, in October 2016, we entered into the APA with Medivir to acquire this asset group (as well as substantially all the other assets of the Company) for total consideration of $12 million plus potential future milestones and royalties. The APA is subject to shareholder approval.

Accordingly, to estimate the fair value of the Shape Asset Group as of September 30, 2016, we used the $12 million purchase price from Medivir as our estimate of fair value, as all of the future milestones and royalties that may be earned under the arrangement are contingent on future events which are highly uncertain, and management believes the value attributable to the Company’s other assets are de minimus. We recognized an impairment charge of $5.2 million in the third quarter of 2016 based on the difference between the $12 million purchase price and the carrying value of Shape Asset Group as of September 30, 2016. Given the decrease in the Shape intangible asset, the Company also recorded a deferred tax benefit of $2.3 million during the third quarter of 2016 related to the decrease in the basis difference between book and tax for this asset.

Restructuring charge

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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 consolidated statements of operations and comprehensive loss as a change in fair value of contingent consideration included in loss from operations. For the three months ended September 30, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, we recorded a change in fair value of contingent consideration of $1.1 million, $1.2 million, $3.3 million and $3.3 million, respectively. The change in fair value of the contingent consideration recorded for the three and nine months ended September 30, 2015 and 2016 was due primarily 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 consolidated statements of operations and comprehensive loss as a change in fair value of the derivative liability. For the three months ended September 30, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, we recorded a change in fair value of these derivative liabilities of $0, $0, $0.2 million and $0.1 million, respectively. The change in the fair value of these derivative liabilities is due primarily to the decrease in the value of our Common Stock during those periods.

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 consolidated statements of operations and comprehensive loss as a change in fair value of the derivative liability. For the three months ended September 30, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, we recorded a change in fair value of this derivative liability of $0.4 million, $20,000, $1.9 million and $33,000, respectively. The change in the fair value of this derivative liability is due primarily to the change in the value of our Common Stock during those periods.

Interest and Other Income

Interest and other income consist principally of interest income earned on cash and cash equivalent balances.

Loss on sale of equipment

In March 2016, we sold all of our laboratory equipment with a net book value of $306,000 for net proceeds after selling costs of $152,000, resulting in a loss on sale of equipment of $154,000.

Interest Expense

Interest expense for the three months ended September 30, 2015 and 2016, and the nine months ended September 30, 2015 and 2016, was $1.6 million, $1.8 million, $4.7 million and $5.2 million, respectively. This interest expense is attributable to coupon interest on our 8% Notes and to non-cash interest expense resulting from the accretion of the debt discount and beneficial conversion feature associated with our 8% Notes issued in June 2014.

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Cash Flows

Operating Activities. Cash used in operating activities during the nine months ended September 30, 2016 decreased to $14.7 million from $25.7 million used in the nine months ended September 30, 2015. This decrease was driven primarily by lower operating costs in 2016 as compared to 2015, due to the previously discussed restructuring actions implemented during 2016.

Investing Activities. Cash provided by investing activities was $5.3 million for the nine months ended September 30, 2016 as compared to cash provided by investing activities of $26.9 million for the nine months ended September 30, 2015. Cash provided by investing activities for 2015 and 2016 is attributable primarily to the excess of maturities over purchases of short-term investments during the period.

Financing Activities. There were no cash flows from financing activities during the nine months ended September 30, 2016. Cash provided by financing activities was $1.8 million for the nine months ended September 30, 2015, due primarily to proceeds from the issuance of common stock offset by payments made to retire convertible notes during the period.

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

See Footnote 1 for a discussion of our APA, agreement with the holders of the 8% Notes and Nasdaq delisting.

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.

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, 2016. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2016, our disclosure controls and procedures were effective at the reasonable assurance level.

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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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below, together with other information contained in this Form 10-Q, including our financial statements and the related notes appearing in this Form 10-Q. In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the factors discussed in Part 1, Item 1A “Risk Factors” of the Annual Report. The risks described in this Form 10-Q, in the Annual Report and under the caption “Cautionary Note Regarding Forward-Looking Statements and Industry Data” in this quarterly report are not the only risks that we face.

There can be no guarantees that the Asset Sale will be completed and, if not completed, we may have to file for bankruptcy and liquidation.

The consummation of the Asset Sale is subject to the satisfaction or waiver of various conditions, including the approval of the Asset Sale by our stockholders and holders of the 8% Notes and certain other third parties. We cannot guarantee that the closing conditions set forth in the APA will be satisfied. If we are unable to satisfy the closing conditions in Buyer’s favor or if other mutual closing conditions are not satisfied, Buyer will not be obligated to complete the Asset Sale. If the Asset Sale is not completed, our board of directors, in discharging its fiduciary obligations to our stockholders, will evaluate other strategic alternatives that may be available, which alternatives may not be as favorable to our stockholders as the Asset Sale and may include a bankruptcy and liquidation of the Company.

The entire Closing Payment will be used to pay the 8% Notes remaining outstanding and will not be distributed to stockholders, and there may be no other recovery for any of our stockholders if we receive no Contingent Payments or only a limited amount of Contingent Payments.

If the Asset Sale is consummated, $12 million of the Closing Payment for the Business will be paid to the holders of the remaining 8% Notes then outstanding in redemption of $12 million in aggregate principal amount of such 8% Notes, with the remainder of the Closing Payment being used to pay INC Research, LLC to complete the SHAPE CTCL Phase II ongoing trial. There will therefore be no distributions to the holders of Common Stock or Preferred Stock with the closing cash proceeds from the Asset Sale.

Following the consummation of the Asset Sale we will no longer have any employees or operations and will only have very limited assets (including approximately $1.5 million in cash and the contractual right to potentially receive Contingent Payments). We will also have no revenues following consummation of the Asset Sale. Our sole source of future revenues will be the Contingent Payments. We will continue to have $41,550,000 in aggregate principal amount of 8% Notes outstanding as well as 12,222,222 shares of Preferred Stock with priority rights on any future distributions of cash of the Company over the holders of Common Stock. Assuming the closing of the Asset Sale were to take place on November 30, 2016, approximately $29,550,000 would remain due and owing under the 8% Notes after payment of the Closing Payment in partial redemption of the 8% Notes.

Any future Contingent Payments, if received, will be used first to pay all remaining accrued but unpaid obligations under the 8% Notes until paid in full. Thereafter, all future Contingent Payments, if received, will be used to pay all accrued but unpaid dividends and other amounts on the outstanding shares of Preferred Stock.

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There are no guarantees that we will receive any Contingent Payments or that any amount of Contingent Payments we receive is enough to satisfy all amounts owed under the 8% Notes and the Preferred Stock and therefore there may be no recovery for our common stockholders following the consummation of the Asset Sale.

There can be no guarantees that we will receive any Contingent Payments.

Under the APA, we will earn milestones based on the development and commercialization of our product candidates and earn-out payments based on annual net sales of birinapant. Buyer has no obligations to achieve those milestones or sales. Because of the developmental state of our product candidates, there are high risks related to the commercialization of our product candidates and there can be no guarantees that any of the milestones or sales targets set forth in the APA will be achieved and that we will receive any future Contingent Payments. In addition, any future Contingent Payments may be further reduced by any amounts payable by us under our indemnification obligations under the APA.

There can be no guarantee that Buyer will comply with its obligation to use commercially reasonable efforts in connection with the clinical trials of our product candidates.

Buyer has agreed to use commercially reasonable efforts to take certain steps in connection with three clinical trials of our product candidates. Although the results of these clinical trials may contribute to achieving the milestones and/or annual net sales of birinapant, there is no guarantee that Buyer will take the steps set forth in the APA or that such trials, if completed, will result in the successful commercialization and sales of our product candidates.

Our holders of 8% Notes and Preferred Stock will have priority over the Common Stock on distributions following consummation of the Asset Sale

After all accrued but unpaid dividends and other amounts owed on the Preferred Stock have been paid in full, the holders of Preferred Stock will also be entitled to share equally with the Common Stock on any additional dividends or other distributions on an as-converted basis.

As a result, there may never be any, or may be very little, recovery to the holders of our Common Stock.

The APA limits our ability to sell the Business to a party other than Buyer.

The APA contains provisions that make it more difficult for us to sell the Business to a party other than Buyer, including a non-solicitation provision and a provision requiring us to notify Buyer of any solicitation or offer made by any third party in connection with the sale of the Business or any similar transaction. These provisions could discourage a third party that might have an interest in acquiring all of or a significant part of our Business from considering or proposing such an acquisition, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by Buyer.

We may be required to pay a termination fee to Buyer if we breach certain covenants, accept an unsolicited superior offer, or pursue an alternative transaction in the exercise of our Board’s fiduciary duties.

In the event we terminate the APA to accept an unsolicited superior offer from a third party, or we breach our covenants regarding third party proposals, or if Buyer terminates the APA because we pursued an alternative transaction in the exercise of our Board’s fiduciary duties, Buyer will be due a termination fee totaling $1,300,000, plus expenses incurred in connection with the APA and Asset Sale.

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Buyer is not assuming any of the excluded liabilities under the APA.

Under the APA, Buyer is only assuming certain specific liabilities as set forth in the APA and is not assuming all of the liabilities associated with the Business. Certain liabilities will remain with TetraLogic post-closing. For example, Buyer is not assuming any liability relating to our current or former employees. While we believe that we have adequately accrued for these liabilities or are adequately insured against certain of the risks associated with such excluded liabilities, there can be no assurances that additional expenditures will not be incurred in resolving these liabilities.

The APA may expose us to contingent liabilities.

We have agreed to indemnify Buyer for certain breaches of representations, warranties or covenants made by us in the APA. We have agreed that if we cannot pay our indemnification obligations, Buyer will have set-off rights against future Contingent Payments. Significant indemnification claims by Buyer could further materially and adversely affect our financial condition or further reduce any future Contingent Payments.

The announcement and pendency of the Asset Sale, whether or not consummated, may adversely affect our financial condition or future strategic opportunities.

The announcement and pendency of the Asset Sale, whether or not consummated, may adversely affect the trading price of our Common Stock and/or our relationships with partners and employees. In addition, pending the completion of the Asset Sale, our management’s focus and attention and employee resources may be diverted from identifying strategic alternatives during the pendency of the Asset Sale.

In the event that the Asset Sale is not completed, the announcement of the termination of the APA may also adversely affect the trading price of our Common Stock on any trading market on which our Common Stock may be trading at the time, our relationships with partners (including the holders of the 8% Notes) and employees and/or our ability to pay our creditors.

Following consummation of the Asset Sale, we may no longer be required to file reports with the SEC.

We intend to file a notice terminating our reporting obligations under the Securities Exchange Act of 1934. Once effective, we may no longer required to file reports with the SEC, stockholders will have very little public information available about us and our operations which will further affect the trading and liquidity of our Common Stock.

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. We cannot assure you that any of the events discussed under the caption “Cautionary Note Regarding Forward-Looking Statements and Industry Data” in this quarterly report or in the risk factors in the Annual Report will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition and cash flows and, if so, our future prospects would likely be materially and adversely affected. If any of such events were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment. You should understand that it is not possible to predict or identify all such risks. Consequently, you should not consider the risk factors in this Form 10-Q, in the Annual Report or under the caption “Cautionary Note Regarding Forward-Looking Statements and Industry Data” in this quarterly report to be a complete discussion of all potential risks or uncertainties.

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

Recent Sales of Unregistered Securities

See Footnote 1 for a discussion of our planned issuance of 12,222,222 newly-issued shares of our convertible participating Series A preferred stock which we expect to complete by November 14, 2016.

Use of Proceeds

None.

Issuer Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

The Company had approximately $43.7 million in aggregate principal amount of 8% Notes due 2019 outstanding as of November 2, 2016. In connection with the Asset Sale to Medivir described above, on November 2, 2016, TetraLogic entered into a binding agreement with 100% of the holders of the 8% Notes pursuant to which the holders of 8% Notes agreed to exchange $2.2 million in aggregate principal amount of the 8% Notes for 12,222,222 newly-issued shares of TetraLogic convertible participating series A preferred stock. The exchange is expected to be consummated prior to November 14, 2016. Following the exchange, $41,550,000 in aggregate principal amount of our 8% Notes plus accrued but unpaid interest on all 8% Notes will remain outstanding. The Company has agreed that, upon consummation of the Asset Sale to Medivir, $12 million will be promptly distributed in cash to the holders of the 8% Notes remaining outstanding in redemption of $12 million in aggregate principal amount of such remaining 8% Notes and in priority to any payments to holders of capital stock. The holders of the 8% Notes have waived any put right in connection with a suspension of trading and delisting of the Company’s Common Stock from The Nasdaq Global Market as well as any right to receive current cash payment of the interest on the 8% Notes, and agreed instead that such interest will continue to accrue until paid off by the Company. The holders of the 8% Notes have also agreed to extend the maturity date of the remaining 8% Notes to June 15, 2024. These waivers and extensions are conditional on the consummation of the Asset Sale. If the Asset Sale is not consummated or if the APA is terminated, such waivers and extension will be of no further force and effect as if they had never been provided.

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.


	TETRALOGIC PHARMACEUTICALS CORPORATION

Date: November 3, 2016	By:	/s/ J. KEVIN BUCHI
		J. Kevin Buchi
		President and Chief Executive Officer (Principal Executive Officer)


Date: November 3, 2016	By:	/s/ PATRICK HUTCHISON
		Patrick Hutchison
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS


Exhibit Number		Exhibit Description

31.1		Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United States Code.
32.2		Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United States Code.
101.ins		XBRL Instance Document
101.sch		XBRL Taxonomy Extension Schema
101.cal		XBRL Taxonomy Extension Calculation Linkbase
101.def		XBRL Taxonomy Extension Definition Linkbase
101.lab		XBRL Taxonomy Extension Label Linkbase
101.pre		XBRL Taxonomy Extension Presentation Linkbase


		Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liability of that section, nor shall any of such exhibits be deemed to be incorporated by reference in any filing of TetraLogic Pharmaceuticals Corporation under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise stated in such filing.

TETRALOGIC PHARMACEUTICALS Corp - FORM 10-Q - November 3, 2016

Attached files

TETRALOGIC PHARMACEUTICALS Corp Reports