UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from             to             

Commission File Number: 001-38503

 

Iterum Therapeutics plc

(Exact Name of Registrant as Specified in its Charter)

 

 

Ireland

98-1283148

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Block 2 Floor 3, Harcourt Centre,

Harcourt Street,

Dublin 2, Ireland

(Address of principal executive offices)




Not applicable

(Zip Code)

 

(+353) 1 903-8920

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Ordinary Shares, $0.01 par value per share

 

ITRM

 

The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of April 30, 2020, the registrant had 14,868,973 ordinary shares, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

 

i


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our use of cash reserves;

 

the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

 

our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;

 

our ability to advance product candidates into, and successfully complete, clinical trials;

 

the potential advantages of our product candidates;

 

the timing or likelihood of regulatory filings and approvals;

 

the commercialization of our product candidates, if approved;

 

our manufacturing plans;

•our sales, marketing and distribution capabilities and strategy;

 

market acceptance of any product we successfully commercialize;

 

the pricing, coverage and reimbursement of our product candidates, if approved;

 

the implementation of our business model, strategic plans for our business and product candidates;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and our ability to defend and enforce any such intellectual property rights;

 

our ability to enter into strategic arrangements, collaborations and/or commercial partnerships in the United States and other territories and the potential benefits of such arrangements;

 

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

 

our expectations regarding how far into the future our cash on hand will fund our ongoing operations;

 

the impact of COVID-19, including the responsive measures taken by governmental authorities and others, on our clinical trials, on future commercialization of, and future demand for, our products, available funding, our operations and the economy in general, which may precipitate or exacerbate other risks and/or uncertainties;

 

our financial performance; and

 

developments relating to our competitors and our industry.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report to conform these statements to new information, actual results or to changes in our expectations, except as required by law.

You should read this Quarterly Report and the documents that we have filed with the Securities and Exchange Commission (SEC), as exhibits to this Quarterly Report with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

ii

 


 

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

ITERUM THERAPEUTICS PLC

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

(Unaudited)

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,257

 

 

$

4,801

 

Prepaid expenses and other current assets

 

 

5,332

 

 

 

6,887

 

Current portion of restricted cash

 

 

30

 

 

 

30

 

Total current assets

 

 

28,619

 

 

 

11,718

 

Property and equipment, net

 

 

533

 

 

 

572

 

Restricted cash, less current portion

 

 

60

 

 

 

60

 

Other assets

 

 

13,100

 

 

 

13,401

 

Total assets

 

$

42,312

 

 

$

25,751

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,301

 

 

$

15,486

 

Accrued expenses

 

 

6,244

 

 

 

12,458

 

Derivative liability

 

 

25,359

 

 

 

 

Current portion of long-term debt

 

 

5,867

 

 

 

5,800

 

Current portion of royalty-linked notes

 

 

50

 

 

 

 

Income taxes payable

 

 

321

 

 

 

200

 

Other current liabilities

 

 

2,948

 

 

 

3,042

 

Total current liabilities

 

 

47,090

 

 

 

36,986

 

Long-term debt, less current portion

 

 

18,847

 

 

 

7,625

 

Royalty-linked notes, less current portion

 

 

10,965

 

 

 

 

Other liabilities

 

 

7,151

 

 

 

7,378

 

Total liabilities

 

$

84,053

 

 

$

51,989

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

 

Undesignated preferred shares, $0.01 par value per share: 100,000,000 shares

authorized at March 31, 2020 and December 31, 2019; no shares issued at

March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Ordinary shares, $0.01 par value per share: 50,000,000 shares authorized at

March 31, 2020 and December 31, 2019; 14,868,973 shares issued at

March 31, 2020 and December 31, 2019

 

 

149

 

 

 

149

 

Additional paid-in capital

 

 

209,133

 

 

 

208,536

 

Accumulated deficit

 

 

(251,023

)

 

 

(234,923

)

Total shareholders' deficit

 

$

(41,741

)

 

$

(26,238

)

Total liabilities and shareholders’ deficit

 

$

42,312

 

 

$

25,751

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


 

ITERUM THERAPEUTICS PLC

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

 

 

$

37

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

(9,743

)

 

$

(17,387

)

General and administrative

 

 

(3,151

)

 

 

(3,116

)

Total operating expenses

 

 

(12,894

)

 

 

(20,503

)

Operating loss

 

 

(12,894

)

 

 

(20,466

)

Interest expense, net

 

 

(2,596

)

 

 

(104

)

Private placement transaction costs

 

 

(2,130

)

 

 

 

Adjustments to fair value of derivatives

 

 

1,679

 

 

 

 

Other (expense) / income, net

 

 

(38

)

 

 

124

 

Total other (expense) / income

 

 

(3,085

)

 

 

20

 

Loss before income taxes

 

 

(15,979

)

 

 

(20,446

)

Income tax expense

 

 

(121

)

 

 

(134

)

Net loss and comprehensive loss

 

 

(16,100

)

 

 

(20,580

)

Net loss attributable to ordinary shareholders

 

$

(16,100

)

 

$

(20,580

)

Net loss per share attributable to ordinary shareholders – basic

   and diluted

 

$

(1.08

)

 

$

(1.44

)

Weighted average ordinary shares outstanding – basic and diluted

 

 

14,868,973

 

 

 

14,290,437

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


 

ITERUM THERAPEUTICS PLC

Condensed Consolidated Statements of Cash Flows

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,100

)

 

$

(20,580

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

39

 

 

 

35

 

Share-based compensation expense

 

 

597

 

 

 

540

 

Gain on short-term investments

 

 

 

 

 

(88

)

Non-cash gain on short-term investments

 

 

 

 

 

(9

)

Interest on short-term investments

 

 

 

 

 

(11

)

Amortization of debt discount and deferred financing costs

 

 

1,614

 

 

 

98

 

Interest on exchangeable notes - non-cash

 

 

652

 

 

 

 

Private placement transaction costs included in financing activities

 

 

2,130

 

 

 

 

Adjustments to fair value of derivatives

 

 

(1,679

)

 

 

 

Other

 

 

378

 

 

 

219

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

590

 

 

 

1,002

 

Accounts payable

 

 

(9,185

)

 

 

2,135

 

Accrued expenses

 

 

(6,214

)

 

 

1,662

 

Income taxes

 

 

121

 

 

 

134

 

Other liabilities

 

 

(334

)

 

 

(190

)

Net cash used in operating activities

 

 

(27,391

)

 

 

(15,053

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(10

)

Proceeds from sale of short-term investments

 

 

 

 

 

35,100

 

Net cash provided by investing activities

 

 

 

 

 

35,090

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(1,552

)

 

 

 

Proceeds from private placement, net of transactions costs

 

 

47,423

 

 

 

 

Proceeds from exercise of share options

 

 

 

 

 

49

 

Net cash provided by financing activities

 

 

45,871

 

 

 

49

 

Effect of exchange rates on cash and cash equivalents

 

 

(24

)

 

 

(34

)

Net increase in cash, cash equivalents and restricted cash

 

 

18,456

 

 

 

20,052

 

Cash, cash equivalents and restricted cash, at beginning of period

 

 

4,891

 

 

 

44,671

 

Cash, cash equivalents and restricted cash, at end of period

 

$

23,347

 

 

$

64,723

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

294

 

 

$

350

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

3


 

ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

1. Basis of Presentation

Iterum Therapeutics plc (the Company) was incorporated under the laws of the Republic of Ireland in June 2015 as a limited company and re-registered as a public limited company on March 20, 2018. The Company maintains its registered office at Block 2 Floor 3, Harcourt Centre, Harcourt Street, Dublin 2, Ireland. The Company commenced operations in November 2015. The Company licensed global rights to its novel anti-infective compound, sulopenem, from Pfizer Inc. (Pfizer). The Company is a clinical-stage pharmaceutical company dedicated to developing and commercializing sulopenem to be potentially the first and only oral and intravenous (IV) branded penem available globally.

Since inception, the Company has devoted substantially all of its efforts to research and development, recruiting management and technical staff, and raising capital, and has financed its operations through the issuance of ordinary and convertible preferred shares, debt raised under a financing arrangement with Silicon Valley Bank (SVB), a sub-award from the Trustees of Boston University under the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator (CARB-X) program and the proceeds of a private placement pursuant to which its wholly owned subsidiary, Iterum Therapeutics Bermuda Limited (Iterum Bermuda), issued and sold approximately $51.6 million aggregate principal amount of 6.500% Exchangeable Senior Subordinated Notes due 2025 (Exchangeable Notes) and $0.1 million aggregate principal amount of Limited Recourse Royalty-Linked Subordinated Notes (the RLNs, Royalty-Linked Notes and, together with the Exchangeable Notes, the Securities) to a group of accredited investors. The Company has not generated any product revenue. The Company is subject to risks and uncertainties common to early-stage companies in the pharmaceutical industry, including, but not limited to, the ability to secure additional capital to fund operations, failure to successfully develop and commercialize its product candidates, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and compliance with government regulations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization.

Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries.

On July 5, 2019, the Company filed a universal shelf registration statement on Form S-3 with the SEC, which was declared effective on July 16, 2019, and pursuant to which it registered for sale up to $150.0 million of any combination of its ordinary shares, preferred shares, debt securities, warrants and/or units from time to time and at prices and on terms that the Company may determine.

On January 21, 2020, the Company completed a private placement pursuant to which its wholly owned subsidiary, Iterum Bermuda, issued and sold approximately $51.6 million aggregate principal amount of Exchangeable Notes and $0.1 million aggregate principal amount of RLNs to a group of accredited investors (the Private Placement).  The Securities were sold in units (the Units) with each Unit consisting of an Exchangeable Note in the original principal amount of $1,000 and 50 RLNs. The Units were sold at a price of $1,000 per Unit.  The Exchangeable Notes are exchangeable for the Company’s ordinary shares, cash or a combination of ordinary shares and cash, at an initial exchange rate of 1,000 shares per $1,000 of principal and interest on the Exchangeable Notes (equivalent to an initial exchange price of approximately $1.00 per ordinary share), subject to specified limitations. The RLNs entitle holders to payments based on a percentage of the Company’s net revenues from potential U.S. sales of specified sulopenem products, subject to the terms and conditions of the indenture governing the RLNs.  Pursuant to the indenture governing the RLNs, the payments on the RLNs will be up to either 15% or 20% of net revenues from U.S. sales of such products, depending on the indication approved by the U.S. Food and Drug Administration (the FDA). The aggregate amount of payments on each RLN is capped at $160.00 (or 4,000 times the principal amount of such RLN). Iterum Bermuda received net proceeds from the sale of the Securities of approximately $46.4 million, after deducting placement agent fees and offering expenses.

In connection with the Private Placement, the Company agreed to undertake an offering of subscription rights to purchase additional Units (the Rights Offering) on a pro rata basis to its shareholders who did not participate in the Private Placement.

4


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

On April 3, 2020 the U.S. Small Business Administration (SBA) launched a Paycheck Protection Program (the Program) established following the signing of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) on March 27, 2020. On April 30, 2020, the Company’s wholly owned subsidiary, Iterum Therapeutics US Limited, (the Borrower) entered into a note with SVB (the Lender) under the Program, pursuant to the Company receiving a loan of $0.7 million with a fixed 1% annual interest rate and a maturity of two years. Under the terms of the agreement, there shall be no payments due by the Company during the six-month period beginning April 30, 2020 (the Deferral Period). Following the Deferral Period, equal monthly repayments of principal and interest will be due to fully amortize the principal amount outstanding on the note on the last day of the Deferral Period by the maturity date. Under the terms of the Program, the SBA will forgive the portion of loan proceeds used for payroll costs and other designated operating expenses for up to eight weeks, provided at least 75% of the loan proceeds are used for payroll costs. The Company expects to incur qualifying payroll costs and other operating expenses in the eight weeks from April 30, 2020 such that the Company may be able to request forgiveness of some portion of the loan from the Lender.

In accordance with Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date of issue of these quarterly condensed consolidated financial statements.

The Company has funded its operations to date primarily with proceeds from the sale of preferred shares and ordinary shares, debt raised under its financing arrangement with SVB, payments received under the CARB-X program and the proceeds of the Private Placement. The Company has incurred operating losses since inception, including net losses of $16,100 and $20,580 for the three months ended March 31, 2020 and 2019, respectively, and a net loss of $103,130 for the year ended December 31, 2019. The Company had an accumulated deficit of $251,023 as of March 31, 2020 and expects to continue to incur net losses for the foreseeable future. The Company’s future cash flows are dependent on key variables such as its ability to secure additional sources of funding in the form of public or private financing of debt or equity or collaboration agreements.

The Company may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company's shareholders. If the Company is unable to obtain funding, it could be forced to delay, reduce or eliminate some or all of its research and development programs or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue these plans, and the Company has successfully raised capital in the past, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

Based on the Company’s operating losses since inception, the expectation of continued operating losses for the foreseeable future and the need to raise additional capital to finance its future operations, management have concluded there is substantial doubt about the Company’s ability to continue as a going concern within one year from the date this Quarterly Report on Form 10-Q is issued. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

 

COVID-19 Global Pandemic

In December 2019, an outbreak of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and on March 13, 2020, President Donald J. Trump declared the virus a national emergency. This highly contagious disease has spread to most of the countries in the world and throughout the United States, creating a serious impact on customers, workforces, and suppliers, disrupting economies and financial markets and leading to a world-wide economic downturn. It has caused a disruption of the normal operations of many businesses, including the temporary closure or scale-back of business operations and/or the imposition of either quarantine or remote work or meeting requirements for employees, either by government order or on a voluntary basis. The pandemic may impact the ability of the Company’s strategic partners to operate and fulfill their contractual obligations, and result in an increase in their costs and cause delays in performance. These effects, and the direct effect of the virus and any potential disruption on the Company’s operations, may negatively impact the Company’s ability to meet the Company’s strategic targets. The Company’s employees, in most cases, are working remotely due to safety concerns and using various technologies to perform their functions. Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit the Company’s ability to access capital. Both the health and economic aspects of COVID-19 are highly fluid and the future course of each is uncertain. For these reasons and other reasons that may come to light if the coronavirus pandemic and associated protective or preventative measures expand, the Company may experience a material adverse effect on its business operations and financial condition; however, its ultimate impact is highly uncertain and subject to change.

5


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

The Company cannot foresee if and when the outbreak of COVID-19 will be effectively contained, nor can the Company predict the severity and duration of its impact. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the adverse effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity.

Interim Financial Information

The condensed consolidated balance sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of March 31, 2020, and for the three months ended March 31, 2020 and 2019, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2020, and results of operations for the three months ended March 31, 2020 and 2019, and cash flows for the three months ended March 31, 2020 and 2019 have been made. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

 

2. Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies, other than the addition of accounting policies for Exchangeable Notes, Derivative liabilities and RLNs and the adoption of accounting pronouncements as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual for research and development expenses, the valuation of restricted ordinary shares, the valuation of share-based compensation awards and the valuation of the RLNs and derivative liabilities. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results could differ materially from those estimates. The Company has contemplated the impact of COVID-19 within its financial statements and is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities.

Specifically, management has estimated variables used to calculate the discounted cash flow analysis (DCF) and assumptions used in the Black-Scholes and binomial lattice models to value derivative instruments (See Note 3 - Fair Value of Financial Assets and Liabilities).

Cash and Cash Equivalents

The Company’s cash and cash equivalents consist of cash balances and highly liquid investments with maturities of three months or less at the date of purchase. Accounts held at U.S. financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250, while accounts held at Irish financial institutions are insured under the Deposit Guarantee Scheme up to $110 (€100).

Cash accounts with any type of restriction are classified as restricted cash. If restrictions are expected to be lifted in the next twelve months, the restricted cash account is classified as current. Included within restricted cash on the Company’s consolidated balance sheet is a certificate of deposit for $90 which is being held by a third party bank as collateral for the irrevocable letter of credit issued in March 2018 to secure an office lease (see Note 6 - Leases).

6


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

    Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company has most of its cash and cash equivalents at two accredited financial institutions in the United States and Ireland, in amounts that exceed federally insured limits. The Company did not hold any short-term investments as of March 31, 2020. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Net Loss Per Ordinary Share

Basic and diluted net loss per ordinary share is determined by dividing net loss attributable to ordinary shareholders by the weighted-average ordinary shares outstanding during the period; in accordance with Accounting Standard Codification (ASC) 260, Earnings per Share. For the periods presented, the following ordinary shares underlying the options, unvested restricted ordinary shares, unvested restricted share units, unvested performance restricted share units and the warrants have been excluded from the calculation because they would be anti-dilutive.

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Options to purchase ordinary shares

 

 

1,133,208

 

 

 

1,091,238

 

Unvested restricted ordinary shares

 

 

-

 

 

 

60,250

 

Unvested restricted share units

 

 

25,664

 

 

 

36,924

 

Unvested performance restricted share units

 

 

1,127,000

 

 

 

50,000

 

Warrants

 

 

19,890

 

 

 

19,890

 

Total

 

 

2,305,762

 

 

 

1,258,302

 

 

Segment and Other Information

The Company determines and presents operating segments based on the information that is internally provided to the Chief Executive Officer, Chief Scientific Officer and Chief Financial Officer, who together are considered the Company’s chief operating decision maker, in accordance with ASC 280, Segment Reporting. The Company has determined that it operates as a single business segment, which is the development and commercialization of innovative treatments for drug resistant bacterial infections.

The distribution of total operating expenses by geographical area was as follows:

 

 

 

Three Months Ended March 31,

 

Operating expenses

 

2020

 

 

2019

 

Ireland

 

$

9,431

 

 

$

17,436

 

U.S.

 

 

3,463

 

 

 

3,067

 

Total

 

$

12,894

 

 

$

20,503

 

 

The distribution of long-lived assets by geographical area was as follows:

 

Long-lived assets

 

March 31, 2020

 

 

December 31, 2019

 

Ireland

 

$

10,865

 

 

$

10,936

 

U.S.

 

 

2,970

 

 

 

3,037

 

Total

 

$

13,835

 

 

$

13,973

 

 

Exchangeable Notes

The Company evaluates its debt and equity issuances to determine if those contracts, or embedded components of those contracts, qualify as derivatives under ASC 815, Derivatives and Hedging. Where embedded exchange features are determined to be derivatives, under ASC 815-15, which requires bifurcation, these contracts are recorded at fair value and deducted from the book value of the debt host as a debt discount. The debt host is subsequently measured at amortized cost. Debt discounts are recognized to interest expense over the term of the debt using the effective interest method.

Derivative Liability

The Company accounts for derivative instruments in accordance with ASC 815 which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other financial instruments or contracts,

7


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

which require bifurcation and measurement at fair value for accounting purposes on the balance sheet date. Any liabilities recorded at fair value are revalued each reporting period with the resulting change in fair value reflected in other (expense) / income, net.

In determining the appropriate fair values, the Company uses variety of valuation techniques applying Black-Scholes and binomial lattice models, which are discussed in Note 3 - Fair Value of Financial Assets and Liabilities. The Company’s derivative financial instrument consists of embedded options in the Exchangeable Notes. The embedded derivative includes provisions that provide the noteholder with certain exchange rights and protections on a change of control. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.

Royalty-Linked Notes

The RLNs qualify as debt instruments under ASC 470, Debt, and are initially recorded at fair value, applying a DCF model, and then subsequently measured at amortized cost. Amortization is recognized as interest expense over the term of the debt instrument using the effective interest method.

Income Taxes

The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision for the three months ended March 31, 2020, or to the Company’s net deferred tax assets as of March 31, 2020.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance within ASU 2016-13, along with related updates (collectively ASC 326) introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments by using all practical and relevant information. The new guidance became effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Further clarification on disclosures relating to the standard were released in March 2020, in ASU 2020-03, Codification Improvements to Financial Instruments, which outlined seven areas of improvements relating to financial instrument guidance. The new standards were effective January 1, 2020 and adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. This standard became effective for us on January 1, 2020, and did not have a material impact on the Company’s disclosures.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance is intended to simplify the accounting for income taxes by removing certain exceptions and by updating accounting requirements around franchise taxes, goodwill recognized for tax purposes, the allocation of current and deferred tax expense among legal entities, among other minor changes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2019-12 will have on the condensed consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in ASU 2020-01 clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing what impact ASU 2020-01 will have on the condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions if certain criteria are met in order to ease the potential accounting

8


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

and financial reporting burden associated with the expected market transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. The Company is currently assessing what impact ASU 2020-04 will have on the condensed consolidated financial statements.

 

3. Fair Value of Financial Assets and Liabilities

The following table presents information about the Company’s financial assets that were carried at fair value on a recurring basis on the condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Other asset – advance payment to supplier

 

$

3,734

 

 

 

 

 

 

 

 

 

3,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Other asset – advance payment to supplier

 

$

3,884

 

 

 

 

 

 

 

 

 

3,884

 

 

The other asset above relates to advance payments made to a supplier that were recorded at fair value using DCF analysis as of March 31, 2020 and December 31, 2019. The fair value measurements of these advance payments were determined based on significant unobservable inputs, including discount rates of 20% and 15%, as of March 31, 2020 and December 31, 2019, respectively, and the expected time to recovery of the payment. Changes to the inputs described above are not expected to have a material impact on the company’s financial position and results of operations in any given period.

The carrying amounts reported in the condensed consolidated balance sheets for prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate their fair value based on the short-term maturity of these instruments.

The following table presents information about the Company’s long-term debt, Exchangeable Notes, Derivative liabilities and RLNs. The Company’s long-term debt was carried at amortized cost on the condensed consolidated balance sheet as of March 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation inputs utilized to determine the approximate fair value:

 

March 31, 2020

 

Book

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

Value

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,867

 

 

$

5,867

 

 

 

 

 

 

5,867

 

 

 

 

Long-term debt, less current portion

 

 

6,122

 

 

 

5,837

 

 

 

 

 

 

5,837

 

 

 

 

Exchangeable Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term exchangeable note

 

 

12,725

 

 

 

27,099

 

 

 

 

 

 

27,099

 

 

 

 

Derivative liability - exchange option

 

 

25,359

 

 

 

25,359

 

 

 

 

 

 

 

 

 

25,359

 

Revenue Futures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of royalty linked notes

 

 

50

 

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Long-term royalty linked notes, less current portion

 

 

10,965

 

 

 

11,880

 

 

 

 

 

 

 

 

 

11,880

 

Total

 

$

61,088

 

 

$

76,092

 

 

 

 

 

 

38,803

 

 

 

37,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Book

 

 

Approximate

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

Value

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Current portion of long-term debt

 

$

5,800

 

 

$

5,800

 

 

 

 

 

 

5,800

 

 

 

 

Long-term debt, less current portion

 

 

7,625

 

 

 

7,213

 

 

 

 

 

 

7,213

 

 

 

 

Total

 

$

13,425

 

 

$

13,013

 

 

 

 

 

 

13,013

 

 

 

 

 

The book value of the current portion of long-term debt approximates its fair value due to the short-term nature of the balance. The fair value of long-term debt, less current portion was determined based on a DCF analysis using quoted market interest

9


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

rates, without consideration of transaction costs, which represents a Level 2 basis of fair value measurement. The counterparty to the long-term debt is a major international financial institution.

The fair value of long-term Exchangeable Notes was determined based on a DCF analysis using the fixed interest rate outlined in the Exchangeable Note indenture, without consideration of transaction costs, which represents a Level 2 basis of fair value measurement.

The Level 3 liabilities held as of March 31, 2020 consist of the embedded exchange option contained in the Exchangeable Notes (see Note 8 - Debt) and a separate financial instrument, that was issued during the Private Placement as part of the Units, the RLNs (see Note 9 – Royalty-Linked Notes). The exchange option met the criteria to be bifurcated and accounted for separately, from the host debt, in accordance with ASC 815-15, Derivatives and Hedging; Embedded Derivatives. The exchange option is presented as a derivative liability (the Derivative liability). The Exchangeable Notes are exchangeable for the Company’s ordinary shares, cash or a combination of ordinary shares and cash, at an initial exchange rate of 1,000 shares per $1,000 of principal and interest on the Exchangeable Notes (equivalent to an initial exchange price of approximately $1.00 per ordinary share), at any time beginning on the first anniversary of the issuance of the Exchangeable Notes, subject to specified limitations. The Derivative liability, representing the exchange option was recorded at fair value of $27,038 upon issuance of the Exchangeable Notes and is subsequently remeasured to fair value at the end of each reporting period. The fair value at March 31, 2020 amounted to $25,359.

The fair value of the derivative liability was determined using a valuation techniques applying Black-Scholes and binomial lattice models, without consideration of transaction costs, which represents a Level 3 basis of fair value measurement. The key inputs to valuing the Derivative liability as of January 21, 2020 and March 31, 2020 include the indenture terms of the Exchangeable Notes, the Company’s share price at the exchange date, the expected annual volatility of the Company’s ordinary shares, and a risk-adjusted discount rate. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs could result in a significantly higher or lower fair value.

The following summary table shows the assumptions used in the Black-Scholes and binomial lattice pricing models to estimate the fair value of the exchange option:

 

 

March 31, 2020

 

 

January 21, 2020

(Issuance Date)

 

Expected term in years

 

4.79

 

 

4.98

 

Volatility

 

 

100

%

 

 

80

%

Risk-free interest rate

 

 

0.37

%

 

 

1.57

%

Dividend rate

 

 

0

%

 

 

0

%

Discount rate

 

 

22

%

 

 

21

%

 The RLNs liability is carried at amortized cost on the condensed consolidated balance sheet as of March 31, 2020 (see Note 9 – Royalty-Linked Notes). The total fair value of $11,880 was determined using DCF analysis, without consideration of transaction costs, which represents a Level 3 basis of fair value measurement. The key inputs to valuing the RLNs were the indenture terms of the RLNs, the expected cash flows to be received by holders of the RLNs based on management’s revenue forecasts of U.S. sulopenem sales and a risk-adjusted discount rate to derive the net present value of expected cash flows. The RLNs will be subject to a maximum return amount, including all principal and royalty payments and certain default interest in respect of uncurable defaults, of $160.00 (or 4,000 times the principal amount of such note). The discount rate applied during the duration of the model was in the range of 18% - 22%. The book value of the current portion of the RLN approximates its fair value due to the short-term nature of the balance. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs could result in a significantly higher or lower fair value.

There have been no transfers of assets or liabilities between the fair value measurement levels.

10


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

4. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Prepaid research and development expenses

 

 

2,260

 

 

 

1,679

 

Short-term deposits

 

 

1,211

 

 

 

1,139

 

Research and development tax credit receivable

 

 

1,027

 

 

 

1,036

 

Deferred financing expenses (1)(2)

 

 

312

 

 

 

2,339

 

Prepaid insurance

 

 

237

 

 

 

569

 

Other prepaid assets

 

 

206

 

 

 

50

 

Value added tax receivable

 

 

66

 

 

 

68

 

Interest receivable

 

 

13

 

 

 

7

 

Total

 

$

5,332

 

 

$

6,887

 

 

 

 

 

 

 

 

 

 

(1) Deferred financing expenses as of March 31, 2020 relate to Rights Offering expenses - See Note 1 for further details

 

(2) See Notes 8 and 9 to the condensed consolidated financial statements for further details on movements in deferred financing expenses

 

 

5. Property and Equipment

Property and equipment and related accumulated depreciation are as follows:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Leasehold improvements

 

$

592

 

 

$

592

 

Furniture and fixtures

 

 

120

 

 

 

120

 

Laboratory equipment

 

 

81

 

 

 

81

 

Computer equipment

 

 

132

 

 

 

132

 

 

 

 

925

 

 

 

925

 

Less: accumulated depreciation

 

 

(392

)

 

 

(353

)

 

 

$

533

 

 

$

572

 

 

Depreciation expense was $39 for the three months ended March 31, 2020 and $152 for the year ended December 31, 2019.

 

6. Leases

The Company has entered into a number of operating leases, primarily for office space and commercial property. These leases have terms which range from four to 19 years, and generally include one or more options to terminate or renew. The termination options can reduce the lease term for periods ranging from two to 10 years, however the remaining lease terms do not represent these early termination dates as management have concluded that it is reasonably certain that the Company will not exercise these options. The renewal terms can extend the lease term for additional periods ranging from three to five years. These renewal options are represented in the remaining lease term as management have concluded that it is reasonably certain that the Company will exercise the renewal option. Certain leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement. Certain agreements contain both lease and non-lease components. The Company has elected to separately account for these components in determining the lease liabilities and right-of-use assets. The Company’s lease agreements generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate was determined based on information available at lease commencement date for the purposes of determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for all leases that commenced prior to that date. All operating lease expenses are recognized on a straight-line basis over the lease term. The Company recognized $252 and $254 of operating lease costs for right-of-use assets during the three months ended March 31, 2020 and 2019, respectively.

 

11


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

Information related to the Company’s right-of-use assets and related lease liabilities is as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

December 31,

2019

 

Cash paid for operating lease liabilities

 

$

333

 

 

$

190

 

Right-of-use assets obtained in exchange for new operating lease obligation

 

 

 

 

 

7,622

 

 

 

 

March 31, 2020

 

 

December 31,

2019

 

Weighted-average remaining lease term

 

12.3 years

 

 

12.5 years

 

Weighted-average discount rate

 

 

7.6

%

 

 

7.6

%

Right-of-use assets and lease liabilities for the Company’s operating leases were recorded in the condensed consolidated balance sheet as follows, representing the Company’s right to use the underlying asset for the lease term (“Other assets”) and the Company’s obligation to make lease payments (“Other current liabilities” and “Other liabilities”):

 

 

 

March 31, 2020

 

 

December 31,

2019

 

Other assets

 

$

7,019

 

 

$

7,144

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

513

 

 

$

580

 

Other liabilities

 

 

6,521

 

 

 

6,748

 

Total lease liabilities

 

$

7,034

 

 

$

7,328

 

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of March 31, 2020 for the following five fiscal years and thereafter were as follows:

 

Due in 12 month period ended March 31,

 

 

 

 

2021

 

$

1,008

 

2022

 

 

1,013

 

2023

 

 

1,024

 

2024

 

 

1,027

 

2025

 

 

1,031

 

Thereafter

 

 

5,299

 

 

 

$

10,402

 

Less imputed interest

 

 

(3,368

)

Total lease liabilities

 

$

7,034

 

 

7. Accrued Expenses

Accrued expenses consist of the following:

 

 

March 31,

2020

 

 

December 31,

2019

 

Accrued clinical trial costs

 

$

3,676

 

 

$

9,866

 

Accrued payroll and bonus expenses

 

 

1,456

 

 

 

1,207

 

Accrued manufacturing expenses

 

 

193

 

 

 

136

 

Accrued other expenses

 

 

919

 

 

 

1,249

 

Total

 

$

6,244

 

 

$

12,458

 

 

 

12


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

8. Debt

 

Secured Credit Facility

On April 27, 2018, the Company’s subsidiaries, Iterum Therapeutics International Limited, Iterum Therapeutics US Holding Limited and Iterum Therapeutics US Limited (the Borrowers), entered into a Loan and Security Agreement with SVB pursuant to which SVB agreed to lend the Borrowers up to $30,000 in two term loans. $15,000 of the secured credit facility was funded on closing. A second draw of up to $15,000 was available to the Company through October 31, 2019, upon satisfaction of either of the following: (i) the achievement by the Company of both non-inferiority and superiority primary endpoints from its Phase 3 uncomplicated urinary tract infection (uUTI) trial, as well as reporting satisfactory safety data from the trial, or (ii) the achievement of non-inferiority primary endpoints from both its Phase 3 uUTI and complicated urinary tract infection (cUTI) trials, as well as reporting satisfactory safety data from the trials. A non-utilization fee of 1.50% of the aggregate undrawn principal amount was to apply if the Company satisfied the above conditions but chose not to draw down the second term loan. The Company did not satisfy the conditions for the second draw above before the deadline of October 31, 2019.

Required monthly amortization payments for the initial $15,000 draw commenced on November 1, 2019 and total principal repayments of $1,552 were made during the three months ended March 31, 2020. Interest accrues at a floating per annum rate equal to the greater of (i) 8.31%; or (ii) 3.89% above the Wall Street Journal prime rate, and is payable monthly in arrears. All outstanding principal, plus a 4.20% final interest payment, will be due and payable on the earliest to occur of March 1, 2022 (the maturity date), the acceleration of the term loan or the prepayment of the term loan. The final payment fee of $630, which represents 4.2% of the funded loan, is accreted using the effective interest method over the life of the loan as interest expense. Voluntary prepayments are permitted at any time, subject to a prepayment fee of 4.00% in the first year, 3.00% in the second year, and 2.00% thereafter.

In connection with the initial $15,000 draw, the Company issued SVB and Life Sciences Fund II LLC (LSF) warrants to purchase an aggregate of 19,890 Series B convertible preferred shares (which converted into warrants to purchase 19,890 ordinary shares upon the Company’s IPO) at an exercise price of $18.85 per share. If the second term loan had been drawn down, each of SVB and LSF would have been automatically entitled to purchase additional ordinary shares in an aggregate amount equal to 2.50% of the second term loan divided by the applicable exercise price.

The loan proceeds were allocated based on the relative fair values of the debt instrument and the warrant instrument. The fair value of the warrants and the closing costs were recorded as debt discounts and are being amortized using the effective interest rate method over the term of the loan. The effective annual interest rate of the outstanding debt is approximately 9.78% as of March 31, 2020. The Company recognized $410 and $448 of interest expense related to the loan agreement during the three months ended March 31, 2020 and 2019, respectively, including $116 and $98 related to the accretion of the debt discounts and deferred financing costs during the three months ended March 31, 2020 and 2019, respectively.

 

2025 Exchangeable Notes

On January 21, 2020, the Company completed a Private Placement pursuant to which its wholly owned subsidiary, Iterum Bermuda issued and sold approximately $51.6 million aggregate principal amount of 6.500% Exchangeable Notes and $0.1 million aggregate principal amount of RLNs, to a group of accredited investors. The Securities were sold in Units with each Unit consisting of an Exchangeable Note in the original principal amount $1,000 and 50 RLNs. The Units were sold at a price of $1,000 per Unit.  

The Exchangeable Notes are exchangeable for the Company’s ordinary shares, cash or a combination of ordinary shares and cash, at an initial exchange rate of 1,000 shares per $1,000 of principal and interest on the Exchangeable Notes (equivalent to an initial exchange price of approximately $1.00 per ordinary share), at any time beginning on the first anniversary of the issuance of the Exchangeable Notes, subject to specified limitations.

In addition, the Exchangeable Notes will become due and payable by the Company upon the occurrence of a fundamental change (Fundamental Change) as defined in the Exchangeable Notes indenture. The Company will be required to pay the holder of the Exchangeable Notes the greater of three times the outstanding principal amount of such Exchangeable Note and the consideration that would be received by the holder of such Exchangeable Note in connection with such Fundamental Change if the holder had exchanged its note for ordinary shares immediately prior to the consummation of such Fundamental Change.

The Company evaluates its debt and equity issuances to determine if those contracts, or embedded components of those contracts, qualify as derivatives under ASC 815-15, Derivatives and Hedging, requiring separate recognition in the Company’s financial statements. The Company evaluated the accounting for the issuance of the Exchangeable Notes and concluded that the embedded exchange option is considered a derivative liability under ASC 815-15 requiring bifurcation, from the Exchangeable Notes, as it does not qualify for the scope exceptions for contracts in an entity’s own equity given the terms of the Exchangeable Notes. The exchange option is accounted for as a derivative liability, under ASC 815-15, and is required to be separated and recorded as a

13


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

liability, which is revalued each reporting period with the resulting change in fair value reflected in other (expense) / income, net, in the condensed consolidated statements of operations and comprehensive loss.         

The fair value of the exchange option at January 21, 2020 was $27,038, which was recorded as a reduction to the book value of the host debt contract. This debt discount is being amortized to interest expense over the term of the debt using the effective interest method. Transaction costs amounting to $2,130 were allocated to the exchange option. These costs are reflected in private placement transaction costs in the condensed consolidated statements of operations and comprehensive loss for three months ended March 31, 2020. Transaction costs, amounting to $2,135, were allocated to the debt host and capitalized in the host debt book value.    

In circumstances where the embedded exchange option in a convertible instrument is required to be bifurcated, and there are other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the derivative instruments are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not settlement of the derivative instrument is expected within twelve months of the balance sheet date.

The Company determined that all other features of the Exchangeable Notes were clearly and closely associated with a debt host and did not require bifurcation as a derivative liability, or that the fair value of the feature was immaterial to the Company's condensed consolidated financial statements.

The Company recognized $652 of interest expense related to the Exchangeable Notes during the three months ended March 31, 2020 and $1,589 related to the amortization of the debt discounts and deferred financing costs. These amounts are recorded in interest expense in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020. The balance of the Exchangeable Notes as of March 31, 2020 is as follows:

 

 

 

March 31,

2020

 

 

 

Principal

 

Accrued Interest

 

January 2020 $1,000 Exchangeable Notes exchangeable into ordinary shares at $1 per share, 6.5% interest, due January 31, 2025 (2025 Exchangeable Notes)

 

$

51,588

 

$

652

 

 

 

 

 

 

 

 

 

2025 Exchangeable Notes

 

 

51,588

 

 

652

 

Unamortized discount and debt issuance costs

 

 

(39,515

)

 

 

2025 Exchangeable Notes, net

 

$

12,073

 

$

652

 

 

Scheduled principal payments on outstanding debt, as of March 31, 2020, for the following five fiscal years and thereafter were as follows:

 

Year Ending March 31, (unaudited)

 

 

 

 

2021

 

$

6,207

 

2022

 

 

6,207

 

2023

 

 

 

2024

 

 

 

2025

 

 

51,588

 

Thereafter

 

 

 

 

 

$

64,002

 

 

9. Royalty-Linked Notes

 

Liability Related to Sale of Future Royalties  

On January 21, 2020, as part of the Private Placement, the Company issued 2,579,400 RLNs to a group of accredited investors. The RLNs will entitle the holders thereof to royalty payments, at the applicable payment rate, based solely on a percentage of the Company’s net revenues from U.S. sales of specified sulopenem products earned through December 31, 2045, but will not entitle the holders thereof to any royalty payments unless the Company receives FDA approval for one or more specified sulopenem

14


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

products prior to December 31, 2025 and the Company earns net revenues on such product. If any portion of the principal amount of the outstanding RLNs, equal to $0.04 per RLN ($2.00 per Unit), has not been paid as of the end date on December 31, 2045 (or December 31, 2025, in the event that the Company has not yet received FDA approval with respect to one or more specified sulopenem products by such date), Iterum Bermuda must pay the unpaid portion of the principal amount. The RLNs will earn default interest if the Company breaches certain obligations under the indenture governing the RLNs (but do not otherwise bear interest) and will be subject to a maximum return amount, including all principal and royalty payments and certain default interest in respect of uncurable defaults, of $160.00 (or 4,000 times the principal amount of such note). Accordingly, the RLN Maximum Return Amount for each Unit, each of which contains 50 RLNs, is equal to $8,000.00. The RLNs will be redeemable at the Company’s option.

In accordance with exceptions allowed under ASC 815-10, Derivatives and Hedging, due to a limit on the amount of royalties that the noteholders can earn under the RLN, this transaction is accounted for as a debt liability under ASC 470, Debt, that is being amortized using the effective interest method over the life of the arrangement. The Company has no obligation to pay any amount to the noteholders until the net revenue of the specified products are earned. In order to record the amortization of the liability, the Company is required to estimate the total amount of future net revenue to be earned in each period under the RLN indenture and the payments that will be passed through to the noteholders over the life of the RLN indenture.

The note proceeds were allocated based on the relative fair value of the debt instrument, less transactions costs amounting to $940, as debt discounts. The Company imputes interest on the amortized cost of the liability using an estimated effective interest rate of 21.9%. Royalties paid to the noteholders in each period, related to sale of future royalties, will offset the liability. The Company periodically assesses the revenue forecasts of the specified royalty products and the related royalty payments, and to the extent such royalty payments are greater or less than the initial estimate, the Company adjusts the amortization of the liability and interest rate, to ensure the liability is fully amortized on fulfilment of the agreement.

The Company recognized $25 of interest expense related to the RLNs, in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020, related to the accretion of the debt discounts and deferred financing costs. These amounts are recorded in interest expense in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020. The balance of the RLNs as of March 31, 2020 is as follows:

 

 

 

March 31,

2020

 

Total liability related to the sale of future royalties, on inception

 

$

10,990

 

Amortization of discount and debt issuance costs

 

 

25

 

Total liability related to the sale of future royalties at March 31, 2020

 

$

11,015

 

Current Portion

 

 

50

 

Long-term Portion

 

$

10,965

 

 

10. Shareholders’ (Deficit) / Equity

The following tables present a reconciliation of the Company’s beginning and ending balances in shareholders’ (deficit) / equity for the three months ended March 31, 2020 and 2019:

 

 

 

Total

Shareholders'

Equity

 

Shareholders' deficit at January 1, 2020

 

$

(26,238

)

Share-based compensation expense

 

 

597

 

Net loss

 

 

(16,100

)

Shareholders' deficit at March 31, 2020

 

$

(41,741

)

 

 

 

Total

Shareholders'

Equity

 

Shareholders' equity at January 1, 2019

 

$

71,622

 

Exercise of share options

 

 

48

 

Share-based compensation expense

 

 

540

 

Net loss

 

 

(20,580

)

Shareholders' equity at March 31, 2019

 

$

51,630

 

15


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

The Company’s capital structure consists of ordinary shares and undesignated preferred shares. Under Irish law, the Company is prohibited from allotting shares without consideration. Accordingly, at least the nominal value of the shares issued underlying any restricted share award, restricted share unit, performance share award, bonus share or any other share based grant must be paid pursuant to the Irish Companies Act 2014 (Irish Companies Act).

Ordinary Shares

On December 14, 2018, the Company and Iterum Therapeutics International Limited (ITIL) entered into a subscription agreement with a supplier of ITIL pursuant to which the supplier agreed to subscribe for ordinary shares in the Company in satisfaction of amounts due and owing under certain commercial agreements entered into between the supplier and ITIL (the Subscription Agreement). Pursuant to the terms of the Subscription Agreement, upon receipt by ITIL of a valid invoice from the supplier, the Company can elect to require the supplier to subscribe for ordinary shares in the capital of the Company (up to a maximum of 700,000 ordinary shares in total) to the value of the invoiced amount (a Subscription). On a Subscription, the supplier will direct ITIL to pay the Company such invoiced amount as subscription monies on the supplier’s behalf in satisfaction of the invoiced amount. 

On July 15, 2019, the Company elected that the supplier subscribe for 17,222 ordinary shares for an aggregate subscription price of $0.11 million (the July Subscription Monies) upon receipt by ITIL of valid invoices up to that amount from the supplier.  On that date, the Company, ITIL and the supplier executed a payment direction letter pursuant to which the parties directed ITIL to pay $0.11 million (€0.10 million) to the Company in satisfaction of the supplier’s obligation to pay the Subscription Monies to the Company and ITIL’s obligation to pay the invoiced amount to the supplier.

On August 17, 2019, the Company elected that the supplier subscribe for 245,493 ordinary shares for an aggregate subscription price of $1.67 million (the August Subscription Monies) upon receipt by ITIL of valid invoices up to that amount from the supplier.  On that date, the Company, ITIL and the supplier executed a payment direction letter pursuant to which the parties directed ITIL to pay $1.67 million (€1.50 million) to the Company in satisfaction of the supplier’s obligation to pay the Subscription Monies to the Company and ITIL’s obligation to pay the invoiced amount to the supplier.

On September 30, 2019, the Company elected that the supplier subscribe for 199,056 ordinary shares for an aggregate subscription price of $1.26 million (the September Subscription Monies) upon receipt by ITIL of valid invoices up to that amount from the supplier.  On that date, the Company, ITIL and the supplier executed a payment direction letter pursuant to which the parties directed ITIL to pay $1.26 million (€1.15 million) to the Company in satisfaction of the supplier’s obligation to pay the Subscription Monies to the Company and ITIL’s obligation to pay the invoiced amount to the supplier.

The Company has authorized ordinary shares of 50,000,000 ordinary shares of $0.01 par value each as of March 31, 2020.The holders of ordinary shares are entitled to one vote for each share held. The holders of ordinary shares have no preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to such shares.

Undesignated Preferred Shares

The Company has authorized undesignated preferred shares of 100,000,000 undesignated preferred shares of $0.01 par value each as of March 31, 2020. The Directors are authorized by the Company’s Articles of Association to determine the rights attaching to the undesignated preferred shares including rights of redemption, rights as to dividends, rights on winding up and conversion rights.

 

11. Share-Based Compensation

On November 18, 2015, the Company’s Board of Directors adopted and approved the 2015 Equity Incentive Plan (the 2015 Plan), which authorized the Company to grant up to 223,424 ordinary shares in the form of incentive share options, nonstatutory share options, share appreciation rights, restricted share awards, restricted share units and other share awards. The types of share-based awards, including the rights, amount, terms, and exercisability provisions of grants are determined by the Company’s Board of Directors. The purpose of the 2015 Plan is to provide the Company with the flexibility to issue share-based awards as part of an overall compensation package to attract and retain qualified personnel. On May 18, 2017, the Company amended the 2015 Plan to increase the number of ordinary shares available for issuance under the 2015 Plan by 219,605 shares to 443,029 shares.

On March 14, 2018, the Company’s Board of Directors adopted and approved the 2018 Equity Incentive Plan (the 2018 Plan), which became effective upon the execution and delivery of the underwriting agreement related to the Company’s initial public offering (IPO) in May 2018. No further grants will be made under the 2015 Plan. The ordinary shares underlying any options that are

16


ITERUM THERAPEUTICS PLC

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

forfeited, cancelled, repurchased or are otherwise terminated by the Company under the 2015 Plan will not be added back to the ordinary shares available for issuance.

The 2018 Plan authorizes the Company to grant up to 1,018,459 ordinary shares in the form of incentive share options, nonstatutory share options, share appreciation rights, restricted share awards, restricted share units, performance share awards, performance cash awards and other share awards. The types of share-based awards, including the amount, terms, and exercisability provisions of grants are determined by the Company’s Board of Directors. The ordinary shares underlying any options that are forfeited, cancelled, repurchased or are otherwise terminated by the Company under the 2018 Plan will be added back to the ordinary shares available for issuance under the 2018 Plan.

On December 5, 2018, pursuant to powers delegated to it by the Board of Directors of the Company, the Compensation Committee approved an increase in the number of ordinary shares available to be granted pursuant to the 2018 Plan by 4% of the total number of shares of the Company’s issued share capital on December 31, 2018, being 574,081 ordinary shares.

On February 14, 2020, pursuant to powers delegated to it by the Board of Directors of the Company, the Compensation Committee approved, by written resolution, an increase of 594,758 to the number of ordinary shares available to be granted pursuant to the 2018 Plan, being just under 4% of the total number of the Company’s ordinary shares outstanding shares on December 31, 2019, in accordance with the terms of the 2018 Plan.

On March 11, 2020, upon the recommendation of the Compensation Committee, the Company’s Board of Directors resolved that, subject to shareholder approval at the Annual General Meeting to be held on June 10, 2020, the 2018 Plan be amended and restated to, among other things, increase the number of ordinary shares reserved for issuance under the 2018 Plan by 2,250,000 ordinary shares.

Restricted Ordinary Shares

In connection with the Company’s formation, 413,110 restricted ordinary shares were issued on October 14, 2015 to the Company’s founders at par value. These ordinary shares are subject to various restrictions pursuant to ordinary share purchase agreements between the Company and each founder, including restrictions on transfer and a Company right of repurchase. The restricted ordinary shares were 25% vested as of October 14, 2016 and 1/36th of the remaining restricted ordinary shares vest on a monthly basis thereafter (subject to acceleration of vesting in connection with certain change of control transactions). A change in status occurred on November 18, 2015 when the founders became employees of the Company. The grant date of these shares is now considered to be November 18, 2015 when the fair value was $3.14 per share.

Restricted ordinary shares were fully vested as of December 31, 2019 and there was no restricted ordinary share activity for the three months ended March 31, 2020.

The Company recorded share-based compensation expense for the restricted ordinary shares based on the grant date fair value. The Company recorded an expense of $85 for the three months ended March 31, 2019. Total unamortized compensation expense related to restricted ordinary shares was $175 as of March 31, 2019 expected to be recognized over a weighted average period of 0.54 years as of March 31, 2019.

Share Options

The Company granted 2,000 and 442,500 share options to employees and directors during the three months ended March 31, 2020 and 2019, respectively, under the 2018 Plan. There were 605,486 and 984,913 unvested employee options outstanding as of March 31, 2020 and March 31, 2019, respectively. Total expense recognized related to employee share options was $347 and $307 for the three months ended March 31, 2020 and 2019, respectively. Total unamortized compensation expense related to employee share options was $2,621 and $4,168 as of March 31, 2020 and March 31, 2019, respectively, which is expected to be recognized over a remaining average vesting period of 2.28 years and 3.30 years as of March 31, 2020 and March 31, 2019, respectively.

The assumptions that the Company used to determine the grant date fair value of employee and director options granted were as follows, presented on a weighted average basis:

 

 

 

Three Months Ended March 31,