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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2022

☐	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: 1-36282

LA JOLLA PHARMACEUTICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware		33-0361285
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

201 Jones Road, Suite 400, Waltham, MA		02451
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (617) 715-3600

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

LJPC

The Nasdaq Capital Market

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, a 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.

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 August 1, 2022, there were 24,936,883 shares of common stock outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021	1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)	2

Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)	3

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures about Market Risk	26

Item 4. Controls and Procedures	26

PART II. OTHER INFORMATION	27

Item 1. Legal Proceedings	27

Item 1A. Risk Factors	29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3. Defaults upon Senior Securities	30

Item 4. Mine Safety Disclosures	30

Item 5. Other Information	30

Item 6. Exhibits	30

SIGNATURES	31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LA JOLLA PHARMACEUTICAL COMPANY

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

	June 30,			December 31,
	2022			2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	48,338		$	46,668
Short-term investments		323			-
Accounts receivable, net		5,927			8,610
Inventory, net		8,299			6,281
Prepaid expenses and other current assets		3,474			5,756
Total current assets		66,361			67,315
Goodwill		20,123			20,123
Intangible assets, net		12,545			13,321
Right-of-use lease assets		232			318
Property and equipment, net		65			113
Restricted cash		40			40
Total assets	$	99,366		$	101,230

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,125		$	2,278
Accrued expenses and other current liabilities		5,666			4,866
Accrued interest expense on deferred royalty obligation, current portion		5,696			5,163
Deferred revenue		2,849			2,849
Paycheck Protection Program loan		-			2,325
Lease liabilities, current portion		157			154
Total current liabilities		16,493			17,635
Deferred royalty obligation, net		124,536			124,503
Accrued interest expense on deferred royalty obligation, less current portion		26,794			24,590
Lease liabilities, less current portion		75			164
Fair value of contingent value rights		936			1,076
Total liabilities		168,834			167,968
Commitments and contingencies (Note 8)
Stockholders’ deficit:
Common Stock, $0.0001 par value; 100,000,000 shares authorized, 24,950,487 and 26,783,544 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		3			3
Series C-1² Convertible Preferred Stock, $0.0001 par value; 11,000 shares authorized, 3,906.5192257295 shares issued and outstanding at June 30, 2022 and December 31, 2021; and liquidation preference of $3,907 at June 30, 2022 and December 31, 2021		3,907			3,907
Additional paid-in capital		981,254			986,444
Accumulated deficit		(1,054,632	)		(1,057,092	)
Total stockholders’ deficit		(69,468	)		(66,738	)
Total liabilities and stockholders’ deficit	$	99,366		$	101,230

See accompanying notes to the condensed consolidated financial statements.

LA JOLLA PHARMACEUTICAL COMPANY

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Revenue
Net product sales	$	10,511		$	11,059		$	20,920		$	19,696
License and other revenue		32			5,000			48			30,500
Total revenue		10,543			16,059			20,968			50,196
Operating expenses
Cost of product sales		1,691			2,156			3,856			4,887
Cost of license and other revenue		6			-			11			3,600
Selling, general and administrative		9,762			8,996			20,035			17,751
Research and development		154			1,114			181			2,672
Total operating expenses		11,613			12,266			24,083			28,910
(Loss) income from operations		(1,070	)		3,793			(3,115	)		21,286
Other income (expense)
Interest expense		(2,372	)		(2,672	)		(4,774	)		(5,281	)
Gain on forgiveness of Paycheck Protection Program loan		-			-			2,325			-
Other income—related party		6,406			2,532			7,988			2,532
Other (expense) income		(489	)		80			54			(368	)
Total other income (expense), net		3,545			(60	)		5,593			(3,117	)
Income before income taxes		2,475			3,733			2,478			18,169
Provision for income taxes		17			-			18			18
Net income	$	2,458		$	3,733		$	2,460		$	18,151
Earnings per share
Basic	$	0.10		$	0.14		$	0.10		$	0.66
Diluted	$	0.08		$	0.11		$	0.08		$	0.53
Shares used in computing earnings per share
Basic		25,345			27,461			25,751			27,444
Diluted		32,081			34,201			32,496			34,192

See accompanying notes to the condensed consolidated financial statements.

LA JOLLA PHARMACEUTICAL COMPANY

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)

(in thousands)

	Series C-1² Convertible Preferred Stock				Common Stock					Additional Paid-in			Accumulated			Total Stockholders’
	Shares		Amount		Shares			Amount		Capital			Deficit			Deficit
Balance at December 31, 2021		4	$	3,907		26,784		$	3	$	986,444		$	(1,057,092	)	$	(66,738	)
Share-based compensation expense		-		-		-			-		1,262			-			1,262
Issuance of common stock under ESPP		-		-		42			-		159			-			159
Purchases of common stock under stock repurchase plan		-		-		(1,162	)		-		(5,179	)		-			(5,179	)
Net income		-		-		-			-		-			2			2
Balance at March 31, 2022		4	$	3,907		25,664		$	3	$	982,686		$	(1,057,090	)	$	(70,494	)
Share-based compensation expense		-		-		-			-		1,352			-			1,352
Issuance of common stock under ESPP		-		-		31			-		101			-			101
Purchases of common stock under stock repurchase plan		-		-		(745	)		-		(2,885	)		-			(2,885	)
Net income		-		-		-			-		-			2,458			2,458
Balance at June 30, 2022		4	$	3,907		24,950		$	3	$	981,254		$	(1,054,632	)	$	(69,468	)

	Series C-1² Convertible Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
Balance at December 31, 2020		4	$	3,907		27,403	$	3	$	984,755	$	(1,076,752	)	$	(88,087	)
Share-based compensation expense		-		-		-		-		1,116		-			1,116
Issuance of common stock under 2013 Equity Plan		-		-		29		-		154		-			154
Issuance of common stock under ESPP		-		-		17		-		81		-			81
Net income		-		-		-		-		-		14,418			14,418
Balance at March 31, 2021		4	$	3,907		27,449	$	3	$	986,106	$	(1,062,334	)	$	(72,318	)
Share-based compensation expense		-		-		-		-		1,024		-			1,024
Issuance of common stock under 2013 Equity Plan		-		-		-		-		1		-			1
Issuance of common stock under ESPP		-		-		33		-		117		-			117
Net income		-		-		-		-		-		3,733			3,733
Balance at June 30, 2021		4	$	3,907		27,482	$	3	$	987,248	$	(1,058,601	)	$	(67,443	)

See accompanying notes to the condensed consolidated financial statements.

LA JOLLA PHARMACEUTICAL COMPANY

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Six Months Ended
	June 30,
	2022			2021
Operating activities
Net income	$	2,460		$	18,151
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash interest expense		2,771			3,718
Share-based compensation expense		2,614			2,140
Amortization of intangible assets		776			776
Unrealized loss on short-term investments and securities sold, not yet purchased		406			-
Amortization of right-of-use lease assets		86			117
Depreciation expense		48			56
Gain on forgiveness of Paycheck Protection Program loan		(2,325	)		-
Gain on sale of non-controlling equity interest		(699	)		-
(Gain) loss on change in fair value of contingent value rights		(140	)		370
Loss on foreign currency exchange		385			-
Inventory fair value step-up adjustment included in cost of product sales		-			850
Changes in operating assets and liabilities:
Accounts receivable, net		2,683			(2,762	)
Inventory, net		(2,018	)		(318	)
Prepaid expenses and other current assets		1,896			(1,813	)
Accounts payable		(153	)		(920	)
Accrued expenses and other current liabilities		499			1,217
Deferred revenue		-			2,849
Lease liabilities		(86	)		(117	)
Net cash provided by operating activities		9,203			24,314
Investing activities
Proceeds from securities sold, not yet purchased		271			-
Net cash provided by investing activities		271			-
Financing activities
Purchases of common stock under stock repurchase plan		(8,064	)		-
Net proceeds from issuance of common stock under ESPP		260			198
Net proceeds from issuance of common stock under 2013 Equity Plan		-			155
Net cash (used for) provided by financing activities		(7,804	)		353
Net increase in cash, cash equivalents and restricted cash		1,670			24,667
Cash, cash equivalents and restricted cash, beginning of period		46,708			21,261
Cash, cash equivalents and restricted cash, end of period	$	48,378		$	45,928
Supplemental disclosure of non-cash investing and financing activities
Forgiveness of Paycheck Protection Program loan	$	2,325		$	-
Sale of non-controlling equity interest	$	699		$	-
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents	$	48,338		$	45,888
Restricted cash		40			40
Total cash, cash equivalents and restricted cash	$	48,378		$	45,928

See accompanying notes to the condensed consolidated financial statements.

LA JOLLA PHARMACEUTICAL COMPANY

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Business

La Jolla Pharmaceutical Company (collectively with its wholly owned subsidiaries, “La Jolla” or the “Company”) is dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZA^® (angiotensin II) injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. XERAVA^® (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older.

As of June 30, 2022, La Jolla had $48.7 million of cash, cash equivalents and short-term investments compared to $46.7 million as of December 31, 2021. The Company expects that its existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company expects to fund future operations with existing cash or cash generated from operations.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The Company’s condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of SEC Regulation S-X. Accordingly, certain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 9, 2022 (the “Form 10-K”). The accompanying condensed consolidated financial statements include the accounts of La Jolla Pharmaceutical Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from these estimates. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future interim or annual periods. The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of December 31, 2021 contained in the Form 10-K.

Certain amounts previously reported in the financial statements have been reclassified to conform to the current presentation. Such reclassifications did not affect net income, stockholders’ deficit or cash flows.

Summary of Significant Accounting Policies

During the six months ended June 30, 2022, other than the short-term investments policy described below, there have been no changes to the Company’s significant accounting policies as described in Note 2 of the Form 10-K.

Short-term Investments

Short-term investments are comprised of marketable equity securities and measured at fair value on a recurring basis in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 321, Investments—Equity Securities. Any unrealized gain (loss) is recorded in other

income (expense), net. Marketable equity securities are classified as Level 1 in the ASC Topic 820-10, three-tier fair value hierarchy.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. The Company maintains its cash in checking and savings accounts at federally insured financial institutions in excess of federally insured limits.

Hospitals and other healthcare organizations generally purchase our products through a network of specialty distributors. These specialty distributors are considered our customers for accounting purposes. The Company does not believe that the loss of one of these distributors would significantly impact the ability to distribute our products, as the Company expects that sales volume would be absorbed by the remaining distributors. The following table includes the percentage of U.S. net product sales and accounts receivable balances for the Company’s three major customers, each of which comprised 10% or more of its U.S. net product sales:

	U.S. Net Product Sales						Accounts Receivable
	Three Months Ended June 30, 2022			Six Months Ended June 30, 2022			As of June 30, 2022
Customer A		36	%		37	%		45	%
Customer B		28	%		28	%		29	%
Customer C		29	%		29	%		19	%
Total		93	%		94	%		93	%

Revenue Recognition

Pursuant to FASB ASC Topic 606—Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when its customers obtain control of the Company’s product, which typically occurs on delivery. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following 5 steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations.

Product Sales

Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks, discounts, returns, rebates and administrative fees. Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These items include:

•

Chargebacks—Chargebacks are discounts the Company provides to distributors in the event that the sales prices to end users are below the distributors’ acquisition price. This may occur due to a direct contract with a health system, a group purchasing organization (“GPO”) agreement or a sale to a government facility. Chargebacks are estimated based on known chargeback rates and recorded as a reduction of revenue on delivery to the Company’s customers.

•

Discounts—The Company offers customers various forms of incentives and consideration, including prompt-pay and other discounts. The Company estimates discounts primarily based on contractual terms. These discounts are recorded as a reduction of revenue on delivery to the Company’s customers.

•

Returns—The Company offers customers a limited right of return, generally for damaged or expired product. The Company estimates returns based on an internal analysis, which includes actual experience. The estimates for returns are recorded as a reduction of revenue on delivery to the Company’s customers.

•

Rebates—We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally within three months after the quarter in which product was sold. Additionally, the Company may offer customers incentives and consideration in the form of volume-based or other rebates. The estimates for rebates are recorded as a reduction of revenue on delivery to the Company’s customers.

•

Administrative Fees—The Company pays administrative fees to GPOs for services and access to data. Additionally, the Company pays an Industrial Funding Fee as part of the U.S. General Services Administration’s Federal Supply Schedules program. These fees are based on contracted terms and are paid after the quarter in which the product was purchased by the applicable GPO or government agency. Administrative fees are recorded as a reduction of revenue on delivery to customers.

The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these estimates accordingly.

License and Other Revenue

We enter into out-license agreements with counterparties to develop and/or commercialize our products in territories outside of the U.S. in exchange for: (i) nonrefundable, upfront license fees; (ii) development and regulatory milestone payments; and/or (iii) sales-based royalties and milestones.

If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of progress and related revenue recognition.

At the inception of each arrangement that includes milestone and other payments, other than sales-based milestone payments and nonrefundable, upfront license fees, we evaluate whether achieving each milestone payment or other payment is considered probable and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control, such as approvals from regulators or where attainment of the specified event is dependent on the development activities of a third party, are not considered probable of being achieved until those approvals are received or the specified event occurs.

For arrangements that include sales-based royalties and milestone payments, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of: (i) when the related sales occur; or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied.

We enter into commercial supply agreements with our out-licensees to supply our products in territories outside the U.S. in exchange for: (i) nonrefundable, upfront fees; and/or (ii) the reimbursement of manufacturing costs, plus a margin in certain cases. The Company is considered the principal in these arrangements for accounting purposes as it controls the promised goods before transferring these goods to the out-licensee. The Company recognizes revenue when out-licensees obtain control of the Company’s product, which typically occurs on delivery.

Recent Accounting Pronouncements

The Company has considered all recently issued accounting pronouncements and has concluded that there are no recently issued accounting pronouncements that may have a material impact on its results of operations, financial condition or cash flows based on current information.

3. Earnings per Share

Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus potential common shares. Convertible preferred stock and stock options are considered potential common shares and are included in the calculation of diluted earnings per share using the if-converted method and treasury stock method, respectively, when their effect is dilutive. Potential common shares are excluded from the calculation of diluted earnings per share when their effect is anti-dilutive.

For the three months ended June 30, 2022, there were 6.7 million potential common shares that were included in the calculation of diluted earnings per share, which consists of: (i) 6.7 million shares of common stock issuable upon conversion of existing convertible preferred stock; and (ii) 1,000 stock options. For the six months ended June 30, 2022, there were 6.7 million potential common shares that were included in the calculation of diluted earnings per share, which consists of: (i) 6.7 million shares of common stock issuable upon conversion of existing convertible preferred stock; and (ii) 9,000 stock options. For the three and six months ended June 30, 2022, there were 6.5 million and 6.4 million, respectively, of potential common shares that were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

For the three months ended June 30, 2021, there were 6.7 million potential common shares that were included in the calculation of diluted earnings per share, which consists of: (i) 6.7 million shares of common stock issuable upon conversion of existing convertible preferred stock; and (ii) 5,000 stock options. For the six months ended June 30, 2021, there were 6.7 million potential common shares that were included in the calculation of diluted earnings per share, which consists of: (i) 6.7 million shares of common stock issuable upon conversion of existing convertible preferred stock; and (ii) 13,000 stock options. For the three and six months ended June 30, 2021, there were 4.1 million of potential common shares that were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

4. Balance Sheet Details

Restricted Cash

Restricted cash as of June 30, 2022 and December 31, 2021 consisted of a $40,000 security deposit for the Company’s corporate purchasing credit card.

Inventory, Net

Inventory, net consisted of the following (in thousands):

	June 30,		December 31,
	2022		2021
Raw materials	$	1,180	$	802
Work-in-process		4,954		3,844
Finished goods		2,165		1,635
Total inventory, net	$	8,299	$	6,281

As of June 30, 2022, and December 31, 2021, total inventory is recorded net of inventory reserves of $1.3 million and $0.8 million, respectively.

Prepaid Expenses and Other Current Assets

	June 30,		December 31,
	2022		2021
Refundable withholding tax	$	2,335	$	3,375
Prepaid regulatory filing fees		277		831
Prepaid manufacturing costs		191		113
Prepaid insurance		133		473
Other prepaid expenses and current assets		538		964
Total prepaid expenses and other current assets	$	3,474	$	5,756

Prepaid expenses and other current assets consisted of the following (in thousands):

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

	June 30,			December 31,
	2022			2021
Computer hardware	$	319		$	319
Furniture and fixtures		309			309
Software		203			203
Total property and equipment, gross		831			831
Accumulated depreciation and amortization		(766	)		(718	)
Total property and equipment, net	$	65		$	113

Intangible Assets, Net

Intangible assets, net consisted of the following (in thousands):

	Useful Life	June 30,			December 31,
	(years)	2022			2021
Technology	10	$	14,000		$	14,000
Trade name	10		1,520			1,520
Total intangible assets, gross			15,520			15,520
Accumulated amortization			(2,975	)		(2,199	)
Total intangible assets, net		$	12,545		$	13,321

The Company recorded amortization expense of $0.4 million and $0.8 million for the three and six months ended June 30, 2022, respectively. The Company recorded amortization expense of $0.4 million and $0.8 million for the three and six months ended June 30, 2021, respectively. The estimated aggregate amortization expense for each of the 5 succeeding years is $1.6 million.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other consisted of the following (in thousands):

	June 30,		December 31,
	2022		2021
Accrued payroll and related expenses	$	1,678	$	1,991
Accrued royalties and in-license fees		1,140		1,299
Accrued professional fees		956		410
Accrued manufacturing costs		471		232
Securities sold, not yet purchased		301		-
Accrued other		1,120		934
Total accrued expenses and other current liabilities	$	5,666	$	4,866

5. Paycheck Protection Program loan

On April 22, 2020, the Company entered into a promissory note for $2.3 million under the Paycheck Protection Program (the “PPP Loan”). On March 22, 2022, the U.S. Small Business Administration notified the Company that 100% of the outstanding principal and accrued interest on the PPP Loan had been forgiven. As a result, the Company recorded a zero and $2.3 million gain on forgiveness of the PPP Loan in other income (expense), net during the three and six months ended June 30, 2022, respectively.

6. Contingent Value Rights

On July 28, 2020, La Jolla completed its acquisition of Tetraphase Pharmaceuticals, Inc. and its subsidiaries (“Tetraphase”), a biopharmaceutical company focused on commercializing XERAVA, for $43 million in upfront cash plus potential future cash payments pursuant to contingent value rights (“CVRs”). As of June 30, 2022 and December 31, 2021, the holders of the CVRs are entitled to receive potential future cash payments of up to $13.5 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (ii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024.

In connection with La Jolla’s purchase price allocation as of the acquisition date, La Jolla recorded a liability equal to the estimated fair value of future cash payments pursuant to the CVRs based on a Monte Carlo simulation. The CVRs are measured at fair value on a recurring basis, and any gain (loss) resulting from the change in fair value of CVRs are recorded in other income (expense), net. The CVRs are classified as Level 3 in the ASC Topic 820-10 three-tier fair value hierarchy.

As of June 30, 2022 and December 31, 2021, the fair value of the CVRs was $0.9 million and $1.1 million, respectively. During the three and six months ended June 30, 2022, the Company recorded a gain (loss) resulting from the change in fair value of CVRs of $(13,000) and $0.1 million, respectively. During the three and six months ended June 30, 2021, the Company recorded a gain (loss) resulting from the change in fair value of CVRs of $0.1 million and $(0.4) million, respectively.

7. Deferred Royalty Obligation

In May 2018, the Company closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, the Company received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the maximum royalty rate was 10%. Starting January 1, 2022, the maximum royalty rate increased by 4%, and starting January 1, 2024, the maximum royalty rate may increase by an additional 4%, if an agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by the Company’s wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA.

On receipt of the $125.0 million payment from HCR, the Company recorded a deferred royalty obligation of $125.0 million, net of issuance costs of $0.7 million. For the three and six months ended June 30, 2022, the Company recognized interest expense, including amortization of the obligation discount, of $2.4 million and $4.8 million, respectively. For the three and six months ended June 30, 2021, the Company recognized interest expense, including amortization of the obligation discount, of $2.7 million and $5.3 million, respectively. The carrying value of the deferred royalty obligation as of June 30, 2022 and December 31, 2021, was $124.5 million, net of unamortized obligation discount of $0.5 million and was classified as a noncurrent liability. The related accrued interest expense as of June 30, 2022 and December 31, 2021 was $32.5 million and $29.8 million, respectively, of which $26.8 million and $24.6 million was classified as noncurrent liabilities, respectively. During the three and six months ended June 30, 2022, the Company made royalty payments to HCR of $1.1 million and $2.0 million, respectively. During the three and six months ended June 30, 2021, the Company made royalty payments to HCR of $0.7 million and $1.6 million, respectively. As of June 30, 2022 and December 31, 2021, the Company recorded royalty obligations payable of $1.0 million and $0.9 million, respectively, in accrued expenses. The deferred royalty obligation is classified as Level 3 in the FASB ASC Topic 820-10, three-tier fair value hierarchy, and its carrying value approximates fair value.

Under the terms of the Royalty Agreement, La Jolla Pharma, LLC has certain obligations, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA. If La Jolla Pharma, LLC is held to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. To date, the Company has paid $10.6 million of aggregate royalties to HCR under the Royalty Agreement. In the event that

La Jolla Pharma, LLC fails to timely pay such amount if and when due, HCR would have the right to foreclose on the GIAPREZA-related assets. The Company concluded that certain of these contract provisions that could result in an acceleration of amounts due under the Royalty Agreement are embedded derivatives that require bifurcation from the deferred royalty obligation and fair value recognition. The Company determined the fair value of each derivative by assessing the probability of each event occurring, as well as the potential repayment amounts and timing of such repayments that would result under various scenarios. As a result of this assessment, the Company determined that the fair value of the embedded derivatives is immaterial as of June 30, 2022 and December 31, 2021. Each reporting period, the Company estimates the fair value of the embedded derivatives until the features lapse and/or the termination of the Royalty Agreement. Any material change in the fair value of the embedded derivatives will be recorded as either a gain or loss on the condensed consolidated statements of operations.

On August 5, 2022, the Company received a notice letter from HCR in which HCR alleges the occurrence, or imminent occurrence, of La Jolla Pharma, LLC not meeting certain obligations under the Royalty Agreement and related agreements, including the obligation to use commercially reasonable and diligent efforts to commercialize GIAPREZA and the obligation to not undertake a Change of Control, that would result in HCR’s right to terminate the Royalty Agreement. As defined in the Royalty Agreement, a Change of Control means any event or series of events that results in either: (i) the Company no longer directly or indirectly owning 100% of La Jolla Pharma, LLC; or (ii) La Jolla Pharma, LLC no longer directly owning 100% of worldwide net sales of GIAPREZA, except for the granting of ex-U.S. product licenses, neither of which are impacted by the transactions contemplated by the Merger Agreement with Innoviva. If La Jolla Pharma, LLC is ultimately determined to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. The Company believes that each of the claims made in the notice letter are wholly without merit and frivolous, disputes them and would vigorously defend against such claims if they were asserted in a legal proceeding. Neither the notice letter nor the meritless and frivolous claims made therein are expected to impede the anticipated closing of the transactions contemplated by the Merger Agreement and the Company expects to complete the transactions as planned.

8. Commitments and Contingencies

Lease Commitments

In December 2020, the Company entered into a sublease agreement for office space in Waltham, Massachusetts (the “Waltham Sublease”). The Waltham Sublease commenced on December 21, 2020 and expires on November 30, 2023. In addition to rent of approximately $15,000 per month, the Waltham Sublease requires the Company to pay certain taxes, insurance and operating costs relating to the leased premises (collectively, “Lease Operating Costs”). The Waltham Sublease contains customary default provisions, representations, warranties and covenants. The Waltham Sublease is classified as an operating lease. The Company recognizes the Waltham Sublease expense in the condensed consolidated statements of operations and records a lease liability and right-of-use asset for this lease. The option to extend the Waltham Sublease was not recognized as part of the Company’s lease liabilities and right-of-use lease assets.

Future minimum lease payments, excluding Lease Operating Costs, as of June 30, 2022 are as follows (in thousands):

2022	$	91
2023		166
Thereafter		-
Total future minimum lease payments		257
Less: discount		(25	)
Total lease liabilities	$	232

Lease expense under current leases was approximately $45,000 and $0.1 million for the three and six months ended June 30, 2022, respectively. Lease expense under current and former leases was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2021, respectively. Cash paid for amounts included in the measurement of lease liabilities was $45,000 and $0.1 million for the three and six months ended June 30, 2022, respectively. Cash paid for amounts included in the measurement of lease liabilities was $0.1 million for the three and six months ended June 30, 2021. As of June 30, 2022, the weighted-average remaining lease term and the weighted-average discount rate for the Company’s only operating lease, the Waltham Sublease, was 1.4 years and 3.3%, respectively.

Legal Proceedings

On February 15, 2022, the Company received a paragraph IV notice of certification (the “Notice Letter”) from Gland Pharma Limited (“Gland”) advising that Gland had submitted an Abbreviated New Drug Application (“ANDA”) to the FDA seeking approval to manufacture, use or sell a generic version of GIAPREZA^® in the U.S. prior to the expiration of U.S. Patent Nos.: 9,220,745; 9,572,856; 9,867,863; 10,028,995; 10,335,451; 10,493,124; 10,500,247; 10,548,943; 11,096,983; and 11,219,662 (the “GIAPREZA Patents”), which are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”). The Notice Letter alleges that the GIAPREZA Patents are invalid, unenforceable and/or will not be infringed by the commercial manufacture, use or sale of the generic product described in Gland’s ANDA.

On March 29, 2022, the Company filed a complaint for patent infringement of the GIAPREZA Patents against Gland and certain related entities in the United States District Court for the District of New Jersey in response to Gland’s ANDA filing. In accordance with the Hatch-Waxman Act, because GIAPREZA is a new chemical entity and the Company filed a complaint for patent infringement within 45 days of receipt of the Notice Letter, the FDA cannot approve Gland’s ANDA any earlier than 7.5 years from the approval of the GIAPREZA NDA unless the District Court finds that all of the asserted claims of the patents-in-suit are invalid, unenforceable and/or not infringed. The Company intends to vigorously enforce its intellectual property rights relating to GIAPREZA.

Following the announcement of the Agreement and Plan of Merger (the “Merger Agreement”) with Innoviva, Inc., a Delaware corporation (the “Parent”) and Innoviva Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Purchaser”), and through August 12, 2022, the Company is aware of six complaints that have been filed in United States District Courts and five demand letters that were sent to the Company by purported stockholders of the Company related to the transaction (collectively, the “Complaints”).

On July 27, 2022, Richard Gole, a purported stockholder of the Company, filed a complaint in the United States District Court for the Southern District of New York, Case No. 1:22-cv-06395. On August 1, 2022, Denise Redfield, a purported stockholder of the Company, filed a complaint in the United States District Court for the Southern District of New York, Case No. 1:22-cv-06528. On August 2, 2022, Marc Waterman, a purported stockholder of the Company, filed a complaint in the United States District Court for the Southern District of New York, Case No. 1:22-cv-06534. On August 2, 2022, the Company received a demand letter from Miriam Nathan, a purported stockholder of the Company. On August 2, 2022, the Company received a demand letter from Raymond Tomo, a purported stockholder of the Company. On August 4, 2022, Richard Lawrence, a purported stockholder of the Company, filed a complaint in the United States District Court for the District of Delaware, Case No.1:22-cv-01032-UNA. On August 4, 2022, Katherine Finger, a purported stockholder of the Company, filed a complaint in the United States District Court for the Southern District of New York, Case 1:22-cv-06640. On August 5, 2022, Brian Jones, a purported stockholder of the Company filed a complaint in the United States District Court for the Southern District of New York, Case No. 1:22-cv-06681. On August 7, 2022, the Company received a demand letter from Christopher Taylor, a purported stockholder of the Company. On August 8, 2022, the Company received a demand letter to inspect books and records pursuant to 8 Del. §220 from James Gyldenvand, a purported stockholder of the Company. On August 11, 2022, the Company received a demand letter to inspect books and records pursuant to 8 Del. § 220 from Ramin Hatam, a purported stockholder of the Company.

The Complaints name the Company and each of the Company’s directors as defendants (“Defendants”) and generally allege violations of Sections 14(e), 14(d), and 20(a) of the Securities and Exchange Act of 1934 (“Exchange Act”) as a result of Defendants’ efforts to sell the Company to the Parent through a cash tender offer (“Offer”) by the Purchaser. The Complaints generally contend that the Recommendation Statement on Schedule 14D-9 filed on July 25, 2022 (“Recommendation Statement”) has omitted or misrepresented material information regarding the Merger.

The Complaints seek generally to enjoin the transactions contemplated by the Merger Agreement or, in the event the transactions are consummated, an order rescinding consummation or an award of rescissory damages, to direct Defendants to disseminate a Recommendation Statement that does not contain any untrue statements of material fact, award of costs, including reasonable attorneys’ and experts’ fees and other relief the court may deem just and proper. Company management believes it has strong factual and legal defenses to all actions and intends to defend itself vigorously. Other similar cases or cases based on similar facts may be filed in the future.

9. Stockholders’ Deficit

Preferred Stock

As of June 30, 2022 and December 31, 2021, 3,906.5192257295 shares of Series C-1² Convertible Preferred Stock (“Series C-1²Preferred”) were issued and outstanding, and convertible into 6,734,993 shares of common stock. As of June 30, 2022 and December 31, 2021, the Series C-1² Preferred liquidation preference was approximately $3.9 million. The Series C-1² Preferred does not pay a dividend. The holders of the Series C-1² Preferred do not have voting rights, other than for general protective rights required by the Delaware General Corporation Law.

Stock Repurchase Plan

On November 17, 2021, the Company announced that it would commence a stock repurchase plan for up to $10 million of the Company’s common stock. On March 7, 2022, the Board approved a $5 million increase to the stock repurchase plan from up to $10 million to up to $15 million of the Company’s common stock. For the three and six months ended June 30, 2022, the Company repurchased approximately 0.7 million shares and 1.9 million shares, respectively, of its common stock for $2.9 million and $8.1 million, including commissions, respectively. In connection with the Merger Agreement (see Note 15), the stock repurchase plan was cancelled effective July 11, 2022.

10. Equity Incentive Plans

2013 Equity Incentive Plan

A total of 9,600,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2013 Equity Incentive Plan (the “2013 Equity Plan”). As of June 30, 2022 and December 31, 2021, 3,147,040 shares of common stock and 5,503,796 shares of common stock, respectively, remained available for future grants under the 2013 Equity Plan. The Company has not granted stock options under the 2013 Equity Plan since June 30, 2022.

2018 Employee Stock Purchase Plan

A total of 750,000 shares of common stock have been reserved for issuance under the La Jolla Pharmaceutical Company 2018 Employee Stock Purchase Plan (the “ESPP”). As of June 30, 2022 and December 31, 2021, 262,234 shares of common stock and 335,473 shares of common stock, respectively, remained available for future grants under the ESPP. In connection with the Merger Agreement (see Note 15), the ESPP was suspended on July 10, 2022, and will be terminated subject to the consummation of the transactions contemplated by the Merger Agreement.

Equity Awards

The activity related to equity awards, which are comprised of stock options, during the six months ended June 30, 2022 is summarized as follows:

	Equity Awards			Weighted- average Exercise Price per Share		Weighted- average Remaining Contractual Term⁽¹⁾ (years)		Aggregate Intrinsic Value⁽²⁾ (millions)
Outstanding at December 31, 2021		4,096,204		$	7.22
Granted		2,582,543		$	4.73
Exercised		(500	)	$	3.62
Cancelled/forfeited		(225,287	)	$	6.12
Outstanding at June 30, 2022		6,452,960		$	6.27		8.4	$	0.0
Exercisable at June 30, 2022		2,118,281		$	9.61		5.7	$	0.0

⁽¹⁾Represents the weighted-average remaining contractual term of stock options.

⁽²⁾ Aggregate intrinsic value represents the product of the number of equity awards outstanding or equity awards exercisable multiplied by the difference between the Company’s closing stock price per share on the last trading day of the period, which was $3.19 as of June 30, 2022, and the exercise price.

Share-based Compensation Expense

The classification of share-based compensation expense is summarized as follows (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Selling, general and administrative	$	1,334	$	977	$	2,579	$	1,817
Research and development		18		47		35		323
Total share-based compensation expense	$	1,352	$	1,024	$	2,614	$	2,140

As of June 30, 2022, total unrecognized share-based compensation expense related to unvested equity awards was $13.0 million, which is expected to be recognized over a weighted-average period of 3.1 years. As of June 30, 2022, there was no unrecognized share-based compensation expense related to shares of common stock issued under the ESPP.

11. Other Income—Related Party

The Company owns a non-core asset, consisting of a non-voting minority interest in a private company (the “Minority Interest”). The investment in the Minority Interest provides the Company with the potential to receive a portion of the future distributions of free cash flow, if any, at the discretion of the Minority Interest. Investment funds affiliated with the Chairman of the Company’s board of directors have a controlling interest in the Minority Interest. During the three and six months ended June 30, 2022, the Company received distributions from the Minority Interest of $6.4 million and $8.0 million, respectively. During the three and six months ended June 30, 2021, the Company received distributions from the Minority Interest of $2.5 million. In connection with the transactions contemplated by the Merger Agreement (see Note 15), the private company exercised its right under applicable governing documents to elect to redeem the Minority Interest for fair value, resulting in a payment to the Company of $6.2 million on July 6, 2022.

12. License Agreements

In-license Agreements

George Washington University

In December 2014, the Company entered into a patent license agreement with George Washington University (“GW”), which was subsequently amended and restated (the “GW License”) and assigned to La Jolla Pharma, LLC. Pursuant to the GW License, GW exclusively licensed to the Company certain intellectual property rights relating to GIAPREZA, including the exclusive rights to certain issued patents and patent applications covering GIAPREZA. Under the GW License, La Jolla Pharma, LLC is obligated to use commercially reasonable efforts to develop, commercialize, market and sell GIAPREZA. The Company has paid a one-time license initiation fee, annual maintenance fees, an amendment fee, additional payments following the achievement of certain development and regulatory milestones and royalties. The Company is obligated to pay a 6% royalty on net sales of GIAPREZA and 15% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering GIAPREZA. During the three and six months ended June 30, 2022, the Company made payments to GW of $0.5 million and $1.1 million, respectively. During the three and six months ended June 30, 2021, the Company made payments to GW of $0.4 million and $3.2 million, respectively.

Harvard University

In August 2006, the Company entered into a license agreement with Harvard University (“Harvard”), which was subsequently amended and restated (the “Harvard License”). Pursuant to the Harvard License, Harvard exclusively licensed to the Company certain intellectual property rights relating to tetracycline-based products, including XERAVA, including the exclusive rights to certain issued patents and patent applications covering such products. Under the Harvard License, the Company is obligated to use commercially reasonable efforts to develop, commercialize, market and sell tetracycline-based products, including XERAVA. For each product covered by the Harvard License, the Company is obligated to make certain payments for the following: (i) up to approximately $15.1 million upon the achievement of certain clinical development and regulatory milestones; (ii) a 5% royalty on direct U.S. net sales of XERAVA; (iii) a single-digit tiered royalty on direct ex-U.S. net sales of XERAVA, starting at a minimum royalty rate of 4.5%, with step-ups to a maximum royalty of 7.5% based on the achievement of annual net product sales thresholds; and (iv) 20% on payments received from sublicensees. The obligation to pay royalties under this agreement extends through the last-to-expire patent covering tetracycline-based products, including XERAVA. During the three and six months ended June 30, 2022, the Company made payments to Harvard of $0.2

million and $0.4 million, respectively, none of which related to clinical development and regulatory milestones. During the three and six months ended June 30, 2021, the Company made payments to Harvard of $1.5 million and $1.6 million, respectively, none of which related to clinical development and regulatory milestones.

Paratek Pharmaceuticals, Inc.

In March 2019, the Company entered into a license agreement with Paratek Pharmaceuticals, Inc. (“Paratek”), which was subsequently amended and restated (the “Paratek License”). Pursuant to the Paratek License, Paratek non-exclusively licensed to the Company certain intellectual property rights relating to XERAVA, including non-exclusive rights to certain issued patents and patent applications covering XERAVA. The Company is obligated to pay Paratek a 2.25% royalty based on direct U.S. net sales of XERAVA. The Company’s obligation to pay royalties with respect to the licensed product is retroactive to the date of the first commercial sale of XERAVA and shall continue until there are no longer any valid claims of the Paratek patents, which will expire in October 2023. During the three and six months ended June 30, 2022, the Company paid $0.1 million of royalties to Paratek. During the three and six months ended June 30, 2021, the Company paid $40,000 and $0.1 million, respectively, of royalties to Paratek.

Out-license Agreements

PAION AG

In January 2021, La Jolla Pharmaceutical Company and certain of its wholly owned subsidiaries, including La Jolla Pharma, LLC and Tetraphase Pharmaceuticals, Inc., entered into an exclusive license agreement (the “PAION License”) with PAION AG and its wholly owned subsidiary (collectively, “PAION”). Pursuant to the PAION License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”). La Jolla has received an upfront cash payment of $22.5 million, less a 15% refundable withholding tax, and is entitled to receive potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments. La Jolla recognized the upfront cash payment of $22.5 million as license and other revenue for the six months ended June 30, 2021. As of June 30, 2022 and December 31, 2021, the 15% refundable withholding tax of $2.3 million and $3.4 million, respectively, was recorded as an other current asset. On July 7, 2022, the Company received the remaining refundable withholding tax. In addition, royalties payable under the PAION License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction. Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA and XERAVA in the PAION Territory. PAION is required to use commercially reasonable efforts to commercialize GIAPREZA and XERAVA in the PAION Territory. The Company has not received any payments from PAION related to either royalties or commercial milestones.

In July 2021, the Company entered into a commercial supply agreement with PAION whereby the Company will supply PAION a minimum quantity of GIAPREZA and XERAVA through July 13, 2024. The supply agreement will automatically renew until the earlier of July 13, 2027, or until a new supply agreement is executed. During the initial 3-year term of the supply agreement, the Company will be reimbursed for direct and certain indirect manufacturing costs at cost.

Everest Medicines Limited

In February 2018, the Company entered into a license agreement with Everest, which was subsequently amended and restated (the “Everest License”). Pursuant to the Everest License, the Company granted Everest an exclusive license to develop and commercialize XERAVA for the treatment of cIAI and other indications in mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines (collectively, the “Everest Territory”). The Company is eligible to receive an additional $8.0 million regulatory milestone payment and up to an aggregate of $20.0 million in sales milestone payments. The Company is also entitled to receive tiered royalties from Everest at percentages in the low double digits on sales, if any, in the Everest Territory of products containing eravacycline. Royalties are payable with respect to each jurisdiction in the Everest Territory until the latest to occur of: (i) the last-to-expire of specified patent rights in such jurisdiction in the Everest Territory; (ii) expiration of marketing or regulatory exclusivity in such jurisdiction in the Everest Territory; or (iii) 10 years after the first commercial sale of a product in such jurisdiction in the Everest Territory.

In March 2021, the Company received a $3.0 million milestone payment associated with the submission of an NDA with the China National Medical Products Administration (“NMPA”) for XERAVA for the treatment of cIAI in patients in China. Amounts due under the Harvard License for this milestone payment were included as research and development expense on the condensed consolidated statements of operations. XERAVA was approved in Singapore by the Health Science Authority in April 2020.

In May 2021, the Company entered into a commercial supply agreement with Everest whereby the Company will supply Everest a minimum quantity of XERAVA through December 31, 2023 and will transfer to Everest certain XERAVA-related manufacturing know-how. Pursuant to the supply agreement: (i) the Company received $6.8 million of upfront payments during the year ended December 31, 2021 comprised of: (1) a $4.0 million upfront technology transfer payment; and (2) a $2.8 million partial prepayment for XERAVA that is expected to be delivered to Everest; (ii) the Company received an additional $1.0 million technology transfer payment in January 2022; and (iii) the Company will be reimbursed for direct and certain indirect manufacturing costs at 110% of cost through December 31, 2023. The Company recognized the $5.0 million of technology transfer-related payments as license and other revenue during the three and six months ended June 30, 2021 as Everest obtained control of the XERAVA-related manufacturing know-how prior to June 30, 2021. The Company recognized the $2.8 million partial prepayment for XERAVA that is expected to be delivered to Everest as deferred revenue as of June 30, 2022 and December 31, 2021 as the performance obligation to deliver XERAVA had not yet been satisfied.

13. Short-term Investments

In January 2022, AcelRx Pharmaceuticals, Inc. (“AcelRx”) closed its acquisition of Lowell Therapeutics, Inc. (“Lowell”), a privately held company in which La Jolla held an approximately 15% non-controlling equity interest. Through the closing of the acquisition, La Jolla’s investment in Lowell was measured at its contributed cost of zero in the consolidated balance sheets in accordance with the measurement alternative pursuant to FASB ASC 321, Investments—Equity Securities. In connection with AcelRx’s acquisition of Lowell, La Jolla received: (i) approximately 1.4 million shares of AcelRx common stock; and (ii) contingent value rights (“AcelRx CVRs”) that entitle La Jolla to receive up to approximately $3.9 million on the achievement of certain regulatory and sales-based milestones. The AcelRx CVRs will be paid in AcelRx common stock or cash at the discretion of AcelRx. La Jolla is also entitled to receive up to approximately 0.2 million shares of AcelRx common stock, if such shares are not used to satisfy certain obligations of Lowell and its security holders made in connection with the acquisition.

The shares of AcelRx common stock received by La Jolla are considered marketable equity securities, which are measured at fair value on a recurring basis and classified as Level 1 in the ASC Topic 820-10 three-tier fair value hierarchy. Any unrealized gain (loss) is recorded in other income (expense), net. Any potential consideration received in connection with the AcelRx CVRs is contingent upon the achievement of certain regulatory and sales-based milestones. Accordingly, the AcelRx CVRs are deemed a “gain contingency” pursuant to FASB ASC 450, Contingencies, and the Company will record a gain in other income (expense), net upon the achievement of such milestones.

In connection with the closing of the acquisition, La Jolla recorded $0.7 million of short-term investments and a $0.7 million gain on sale of its non-controlling equity interest in Lowell in other income (expense), net, which is equal to the approximately 1.4 million shares of AcelRx common stock received, multiplied by the closing price of the common stock on the acquisition date. As of June 30, 2022, the fair value of short-term investments was $0.3 million. For the three months and six months ended June 30, 2022, the Company recorded a $0.1 million and $0.4 million loss, respectively, on short-term investments in other income (expense), net.

In June 2022, La Jolla sold AcelRx securities, not yet purchased, to limit exposure to fluctuations in the value of the Company’s short-term investments. Securities sold, not yet purchased, represent an obligation of La Jolla to deliver the underlying securities, not yet purchased. These securities sold, not yet purchased are measured at fair value on a recurring basis and classified as Level 1 in the ASC Topic 820-10, three-tier fair value hierarchy. Any unrealized gain (loss) is recorded in other income (expense), net. As of June 30, 2022, the fair value of securities sold, not yet purchased was $0.3 million. For the three months and six months ended June 30, 2022, the Company recorded a $30,000 loss on securities sold, not yet purchased, in other income (expense), net.

14. Income Taxes

For the three and six months ended June 30, 2022, the Company recorded a provision for income taxes of $17,000 and $18,000, respectively. For the three and six months ended June 30, 2021, the Company recorded a provision for income taxes of zero and $18,000, respectively. As of June 30, 2022 and December 31, 2021, the Company established a full valuation allowance against its federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets. There were no unrecognized tax benefits as of June 30, 2022 and December 31, 2021. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months.

15. Subsequent Event

On July 10, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Innoviva, Inc., a Delaware corporation (the “Parent”) and Innoviva Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Purchaser”). The Merger Agreement provides for the acquisition of the Company by the Parent through a cash tender offer (the “Offer”) by the Purchaser for all of the Company’s outstanding shares of common stock, for $6.23 per share of common stock (the “Offer Price”). Purchaser commenced the Offer on July 25, 2022 and the Offer will expire one minute after 11:59 p.m. New York City Time, on August 19, 2022, unless the Offer is extended or terminated. Following the completion of the Offer, the satisfaction or waiver of certain conditions set forth in the Merger Agreement and in accordance with the General Corporation Law of the State of Delaware, the Purchaser will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of the Parent.

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 condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 9, 2022 (the “Form 10-K”).

Forward-looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, and such statements may involve substantial risks and uncertainties. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, future expenses, financing needs, plans or intentions relating to acquisitions, business trends and other information referred to under this section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan,” “anticipate,” “target,” “forecast” or the negative of these terms and similar expressions intended to identify forward-looking statements. Forward-looking statements are not historical facts and reflect our current views with respect to future events. Forward-looking statements are also based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other factors are described under “Risk Factors” in Part I, Item 1A of our Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q. We caution you that these risks, uncertainties and other factors may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will affect us or our business in the way expected. All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

Business Overview

La Jolla Pharmaceutical Company is dedicated to the commercialization of innovative therapies that improve outcomes in patients suffering from life-threatening diseases. GIAPREZA^® (angiotensin II) injection is approved by the U.S. Food and Drug Administration (“FDA”) as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. XERAVA^® (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older.

Product Portfolio

⁽¹⁾ For U.S. and European approval

⁽²⁾ U.S.: GIAPREZA is a vasoconstrictor to increase blood pressure in adults with septic or other distributive shock

European Union: GIAPREZA is indicated for the treatment of refractory hypotension in adults with septic or other distributive shock who remain hypotensive despite adequate volume restitution and application of catecholamines and other available vasopressor therapies

⁽³⁾ U.S.: XERAVA is a tetracycline class antibacterial indicated for the treatment of cIAIs in patients 18 years of age and older

European Union: XERAVA is indicated for the treatment of cIAI in adults

GIAPREZA^® (angiotensin II)

GIAPREZA^® (angiotensin II) injection is approved by the FDA as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock. GIAPREZA is approved by the European Commission (“EC”) for the treatment of refractory hypotension in adults with septic or other distributive shock who remain hypotensive despite adequate volume restitution and application of catecholamines and other available vasopressor therapies. GIAPREZA mimics the body’s endogenous angiotensin II peptide, which is central to the renin-angiotensin-aldosterone system (“RAAS”), which in turn regulates blood pressure. GIAPREZA is marketed in the U.S. by La Jolla Pharmaceutical Company on behalf of La Jolla Pharma, LLC, its wholly owned subsidiary, and is marketed in Europe by PAION Deutschland GmbH on behalf of La Jolla Pharma, LLC.

XERAVA^® (eravacycline)

XERAVA^® (eravacycline) for injection is approved by the FDA as a tetracycline class antibacterial indicated for the treatment of complicated intra-abdominal infections (“cIAI”) in patients 18 years of age and older. XERAVA is approved by the EC for the treatment of cIAI in adults. XERAVA is marketed in the U.S. by Tetraphase Pharmaceuticals, Inc., a wholly owned subsidiary of La Jolla, and is marketed in Europe by PAION Deutschland GmbH on behalf of Tetraphase. Everest, the Company’s licensee for mainland China, Taiwan, Hong Kong, Macau, South Korea, Singapore, the Malaysian Federation, the Kingdom of Thailand, the Republic of Indonesia, the Socialist Republic of Vietnam and the Republic of the Philippines, submitted an NDA in China, which was accepted by the China National Medical Products Administration (“NMPA”) in March 2021. XERAVA was approved in Singapore by the Health Science Authority in April 2020.

Product Candidates

In connection with the acquisition of Tetraphase, we acquired the following product candidates that are in early stage clinical or preclinical development: (i) TP-6076, an IV formulation of a fully synthetic fluorocycline derivative for the treatment of certain multidrug-resistant gram-negative bacteria; (ii) TP-271, an IV and oral formulation of a fully synthetic fluorocycline for the treatment of respiratory disease caused by bacterial biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia; and (iii) TP-2846, an IV formulation of a tetracycline for the treatment of acute myeloid leukemia. At this time, there are no active studies nor anticipated future studies for any of these product candidates. We intend to seek out-license opportunities for these product candidates; however, we are unable to predict the likelihood of successfully out-licensing any of these product candidates.

Results of Operations

The following table summarizes our results of operations for each of the periods below (in thousands):

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2022		2021			Change			2022		2021			Change
Net product sales	$	10,511	$	11,059		$	(548	)	$	20,920	$	19,696		$	1,224
License and other revenue		32		5,000			(4,968	)		48		30,500			(30,452	)
Cost of product sales		1,691		2,156			(465	)		3,856		4,887			(1,031	)
Cost of license and other revenue		6		-			6			11		3,600			(3,589	)
Selling, general and administrative expense		9,762		8,996			766			20,035		17,751			2,284
Research and development expense		154		1,114			(960	)		181		2,672			(2,491	)
Other income (expense), net		3,545		(60	)		3,605			5,593		(3,117	)		8,710
Provision for income taxes		17		-			17			18		18			-
Net income	$	2,458	$	3,733		$	(1,275	)	$	2,460	$	18,151		$	(15,691	)

Net Product Sales

Net product sales consist of revenue recognized from sales of GIAPREZA and XERAVA to hospitals and other healthcare organizations in the U.S., generally through a network of specialty distributors. These specialty distributors are considered our customers for accounting purposes.

For the three and six months ended June 30, 2022, La Jolla’s net product sales were $10.5 million and $20.9 million, respectively, compared to $11.1 million and $19.7 million, respectively, for the same periods in 2021. For the three and six months ended June 30, 2022, GIAPREZA U.S. net product sales were $7.3 million and $15.0 million, respectively, compared to $8.6 million and $15.4 million, respectively, for the same periods in 2021. For the three and six months ended June 30, 2022, XERAVA U.S. net product sales were $3.2 million and $5.9 million, respectively, compared to $2.5 million and $4.3 million, respectively, for the same periods in 2021. The decrease in GIAPREZA U.S. net product sales is primarily due to a decrease in the number of vials sold to our customers. The increase in XERAVA U.S. net product sales is primarily due to an increase in the number of vials sold to our customers.

License and Other Revenue

License and other revenue consists of revenue from out-license agreements with counterparties to develop and/or commercialize our products in territories outside of the U.S. in exchange for: (i) nonrefundable, upfront license fees; (ii) development, regulatory or commercial milestone payments; and/or (iii) sales-based royalties. License and other revenue also consists of revenue from commercial supply agreements with our out-licensees to supply a minimum quantity of our products in territories outside the U.S. in exchange for: (i) nonrefundable, upfront fees; and/or (ii) the reimbursement of manufacturing costs, plus a margin in certain cases.

For the three and six months ended June 30, 2022, La Jolla’s license and other revenue was $32,000 and $48,000, respectively, compared to $5.0 million and $30.5 million, respectively, for the same periods in 2021. For the three and six months ended June 30, 2022, La Jolla’s license and other revenue consists of royalties from out-license agreements. The three months ended June 30, 2021, consists of $5.0 million for the transfer of certain XERAVA-related manufacturing know-how to Everest in connection with the Everest commercial supply agreement (the “Technology Transfer”). The six months ended June 30, 2021, consists of: (i) a $22.5 million upfront payment in connection with the PAION license; (ii) a $3.0 million milestone payment received in connection with the Company’s agreements with PAION AG and Everest Medicines Limited covering ex-U.S. rights to GIAPREZA and XERAVA; and (iii) $5.0 million for the Technology Transfer.

Cost of Product Sales

Cost of product sales consists primarily of expense associated with: (i) manufacturing; (ii) royalties payable to George Washington University, Harvard University and Paratek Pharmaceuticals, Inc.; (iii) shipping and distribution; and (iv) the inventory fair value step-up adjustment recorded in connection with the acquisition of Tetraphase.

La Jolla’s cost of product sales were $1.7 million and $3.9 million for the three and six months ended June 30, 2022, respectively, compared to $2.2 million and $4.9 million, respectively, for the same periods in 2021. For the three and six months ended June 30, 2021, cost of product sales includes zero and $0.9 million, respectively, of the

inventory fair value step-up adjustment recorded in connection with the acquisition of Tetraphase. No such adjustment was included in costs of product sales for the three and six months ended June 30, 2022.

Cost of License and Other Revenue

Cost of license and other revenue consists of amounts due under in-license agreements and commercial supply agreements in connection with license and other revenue from commercially approved product. Cost of license and other revenue recognized in connection with product that is not commercially approved is recorded as research and development expense.

For the three and six months ended June 30, 2022, La Jolla’s cost of license and other revenue was $6,000 and $11,000, respectively, compared to zero and $3.6 million, respectively, for the same periods in 2021. This decrease is due to a decrease in amounts due under the George Washington University and Harvard University license agreements of $2.7 million and $0.9 million, respectively, in connection with the upfront cash payment received pursuant to the PAION AG out-license agreement.

Selling, General and Administrative Expense

Selling, general and administrative expense consists of non-personnel and personnel expenses. Non-personnel-related expense includes expense related to: (i) professional fees for legal, patent, consulting, accounting and audit services; (ii) sales and marketing costs such as speaker programs, advertising and promotion, travel and marketing data; and (iii) facilities and information technology. Personnel-related expense includes expense related to salaries, benefits and share-based compensation for personnel engaged in sales, finance and administrative functions. We expect our selling, general and administrative expense to increase in the third quarter of 2022 due to transaction costs related to the Merger Agreement.

The following table summarizes these expenses for each of the periods below (in thousands):

	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2022		2021		Change			2022		2021		Change
Non-personnel expense:
Professional fees	$	1,618	$	1,266	$	352		$	3,203	$	2,794	$	409
Sales and marketing		1,313		1,315		(2	)		2,670		2,510		159
Amortization of Intangibles		388		388		-			776		776		-
Facility		62		105		(43	)		129		119		10
Other		438		423		15			1,098		826		272
Total non-personnel expense		3,819		3,496		322			7,875		7,025		850
Personnel expense:
Salaries, bonuses and benefits		4,609		4,523		86			9,581		8,909		673
Share-based compensation expense		1,334		977		357			2,579		1,817		762
Total personnel expense		5,943		5,500		443			12,160		10,726		1,434
Total selling, general and administrative expense	$	9,762	$	8,996	$	765		$	20,035	$	17,751	$	2,284

During the three and six months ended June 30, 2022, total selling, general and administrative non-personnel expense increased compared to the same periods in 2021 primarily as a result of: (i) an increase in transaction costs in connection with the Merger Agreement; (ii) an increase in speaker programs, advertising and other promotional activities to support growing net product sales for both GIAPREZA and XERAVA; and (iii) an increase in non-personnel allocations to general and administrative activities.

During the three months ended June 30, 2022, total selling, general and administrative personnel expense increased compared to the same period in 2021 primarily due to an increase in share-based compensation expense resulting from an increase in the volume and grant date fair value of stock options granted to employees in connection with their annual performance.

During the six months ended June 30, 2022, total selling, general and administrative personnel expense increased compared to the same period in 2021 primarily as a result of: (i) an increase in the average per cost of employee; (ii) an increase in personnel allocations to general and administrative activities; and (iii) an increase in

share-based compensation expense resulting from an increase in the volume and grant date fair value of stock options granted to employees in connection with their annual performance.

Research and Development Expense

Research and development expense consists of non-personnel and personnel expenses. Non-personnel-related expense includes expense related to: (i) manufacturing development; (ii) amounts due under in-license agreements for drug product that is not commercially approved; and (iii) conducting post-marketing pediatric studies. Personnel-related expense includes expense related to salaries, benefits and share-based compensation for personnel engaged in research and development functions. We do not expect our research and development expense to be significant going forward.

During the three and six months ended June 30, 2022, total research and development expense was $0.2 million and $0.2 million, respectively, compared to $1.1 million and $2.7 million, respectively, for the same period in 2021. These decreases are primarily due to: (i) a decrease in amounts due under in-license agreements for drug product that was not commercially approved; (ii) decreases in manufacturing development and post-marketing pediatric study expenses; and (iii) a decrease in total research and development personnel expense, including share-based compensation expense, due to a decrease in personnel allocations to research and development activities.

Other Income (Expense), Net

Other income (expense), net consists primarily of the following: (i) income from distributions received in connection with the Company’s non-core asset, consisting of a non-voting minority interest in a private company (the “Minority Interest”); (ii) interest expense accrued for our deferred royalty obligation; (iii) a gain on the forgiveness of Paycheck Protection Program loan (“PPP Loan”); (iv) unrealized losses on changes in fair value of short term investments; and (vi) gains and/or losses resulting from changes in the fair value of contingent value rights (“CVRs”).

During the three months ended June 30, 2022, other income (expense), net was $3.5 million, compared to $(0.1) million for the same period in 2021. This increase is primarily due to a $3.9 million increase in the receipt of distributions in connection with the Company’s Minority Interest.

During the six months ended June 30, 2022, other income (expense), net was $5.6 million, compared to $(3.1) million for the same period in 2021. This increase is primarily due to: (i) a $5.5 million increase in the receipt of distributions in connection with the Company’s Minority Interest; (ii) a $2.3 million increase due to a gain on the forgiveness of the PPP Loan by the U.S. Small Business Administration; and (iii) a $0.3 million decrease in interest expense accrued for our deferred royalty obligation.

Liquidity and Capital Resources

As of June 30, 2022 and December 31, 2021, we had cash, cash equivalents and short-term investments of $48.7 million and $46.7 million, respectively. The increase in cash, cash equivalents and short-term investments is primarily due to net cash provided by operating activities, offset by purchases of the Company’s common stock under its stock repurchase plan. For the six months ended June 30, 2022, La Jolla’s net cash provided by operating activities was $9.2 million compared to $24.3 million for the same period in 2021. The 2021 period included a $16.8 million net upfront payment and a $3.0 million milestone payment received in connection with the Company’s agreements with PAION AG and Everest Medicines Limited covering ex-U.S. rights to GIAPREZA and XERAVA.

We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least one year from the date this Quarterly Report on Form 10-Q is filed with the SEC. The Company expects to fund future operations with existing cash or cash generated from operations.

The amount and timing of additional future funding needs, if any, will depend on many factors, including the success of our commercialization efforts for GIAPREZA and XERAVA and our ability to control expenses. If the pending transaction with Innoviva, Inc. does not close, and if necessary, we intend to raise additional capital through equity or debt financings. We can provide no assurance that additional financing will be available to us on favorable terms, or at all.

Contractual Obligations

HealthCare Royalty Partners Royalty Agreement

In May 2018, we closed a $125.0 million royalty financing agreement (the “Royalty Agreement”) with HealthCare Royalty Partners (“HCR”). Under the terms of the Royalty Agreement, we received $125.0 million in exchange for tiered royalty payments on worldwide net sales of GIAPREZA. HCR is entitled to receive quarterly royalties on worldwide net sales of GIAPREZA beginning April 1, 2018. Quarterly payments to HCR under the Royalty Agreement start at a maximum royalty rate, with step-downs based on the achievement of annual net product sales thresholds. Through December 31, 2021, the maximum royalty rate was 10%. Starting January 1, 2022, the maximum royalty rate increased by 4%, and, starting January 1, 2024, the maximum royalty rate may increase by an additional 4% if an agreed-upon, cumulative net product sales threshold has not been met. The Royalty Agreement is subject to maximum aggregate royalty payments to HCR of $225.0 million. The Royalty Agreement expires upon the first to occur of January 1, 2031 or when the maximum aggregate royalty payments have been made. The Royalty Agreement was entered into by our wholly owned subsidiary, La Jolla Pharma, LLC, and HCR has no recourse under the Royalty Agreement against La Jolla Pharmaceutical Company or any assets other than GIAPREZA. See — Recent Developments.

In-license Agreements

George Washington University

Harvard University

Paratek Pharmaceuticals, Inc.

Out-license Agreements

PAION AG

License”) with PAION AG and its wholly owned subsidiary (collectively, “PAION”). Pursuant to the PAION License, La Jolla granted PAION an exclusive license to commercialize GIAPREZA and XERAVA in the European Economic Area, the United Kingdom and Switzerland (collectively, the “PAION Territory”). La Jolla has received an upfront cash payment of $22.5 million, less a 15% refundable withholding tax, and is entitled to receive potential commercial milestone payments of up to $109.5 million and double-digit tiered royalty payments. In addition, royalties payable under the PAION License will be subject to reduction on account of generic competition and after patent expiration in a jurisdiction. La Jolla recognized the upfront cash payment of $22.5 million as license and other revenue for the six months ended June 30, 2021. As of June 30, 2022 and December 31, 2021, the 15% refundable withholding tax of $2.3 million and $3.4 million, respectively, was recorded as an other current asset. On July 7, 2022, the Company received the remaining refundable withholding tax. Pursuant to the PAION License, PAION will be solely responsible for the future development and commercialization of GIAPREZA and XERAVA in the PAION Territory. PAION is required to use commercially reasonable efforts to commercialize GIAPREZA and XERAVA in the PAION Territory. The Company has not received any payments from PAION related to either royalties or commercial milestones.

Everest Medicines Limited

In May 2021, the Company entered into a commercial supply agreement with Everest whereby the Company will supply Everest a minimum quantity of XERAVA through December 31, 2023 and will transfer to Everest certain XERAVA-related manufacturing know-how. Pursuant to the supply agreement: (i) the Company has received $6.8 million of upfront payments comprised of: (1) a $4.0 million upfront technology transfer payment; and (2) a $2.8 million partial prepayment for XERAVA that is expected to be delivered to Everest; (ii) the Company has received an additional $1.0 million technology transfer payment in January, 2022; and (iii) the Company will be reimbursed for direct and certain indirect manufacturing costs at 110% of costs through December 31, 2023. The Company recognized the $5.0 million of technology transfer-related payments as license and other revenue during the three and six months ended June 30, 2021 as Everest obtained control of the XERAVA-related manufacturing know-how prior to June 30, 2021. The Company recognized the $2.8 million partial prepayment for XERAVA that is expected to be delivered to Everest as deferred revenue as of June 30, 2022, and December 31, 2021, as the performance obligation to deliver XERAVA had not yet been satisfied.

Recent Developments

Agreement with Innoviva. If La Jolla Pharma, LLC is ultimately determined to not have met these obligations, HCR would have the right to terminate the Royalty Agreement and demand payment from La Jolla Pharma, LLC of either $125.0 million or $225.0 million (depending on which obligation La Jolla Pharma, LLC is held to not have met), minus aggregate royalties already paid to HCR. The Company believes that each of the claims made in the notice letter are wholly without merit and frivolous, disputes them and would vigorously defend against such claims if they were asserted in a legal proceeding. Neither the notice letter nor the meritless and frivolous claims made therein are expected to impede the anticipated closing of the transactions contemplated by the Merger Agreement and the Company expects to complete the transactions as planned.

Critical Accounting Estimates

We believe the estimates, assumptions and judgments involved in the accounting policies described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Form 10-K for the year ended December 31, 2021 are most critical to understanding and evaluating our reported financial results. During the six months ended June 30, 2022, there have been no material changes to the critical accounting policies and estimates as described in Item 7 of our Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company, as defined by Rule 12b-2 under the Securities and Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, and are not required to provide the information under this item.

Item 4. Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial and accounting officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation of our disclosure controls and procedures as of June 30, 2022, our principal executive officer and principal financial and accounting officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company may periodically become subject to legal proceedings and claims arising in connection with its business. As of June 30, 2022, no claims or actions are pending against the Company that, in the opinion of management, are likely to have a material adverse effect on the Company.

just and proper. Company management believes it has strong factual and legal defenses to all actions and intends to defend itself vigorously. Other similar cases or cases based on similar facts may be filed in the future.

Item 1A. Risk Factors

Our business is subject to various risks, including those described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. Other than the new risk factor described below, there have been no material changes from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K.

Failure to complete, or delays in completing, the pending transaction with Innoviva, Inc. announced on July 11, 2022 could materially and adversely affect our results of operations and our stock price.

On July 10, 2022, La Jolla Pharmaceutical Company, a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Innoviva, Inc., a Delaware corporation (the “Parent”), and Innoviva Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Purchaser”). The Merger Agreement provides for the acquisition of the Company by the Parent through a cash tender offer (the “Offer”) by the Purchaser for all of the Company’s outstanding shares of common stock (“Common Stock”), for $6.23 per share of Common Stock (the “Offer Price”). The Offer commenced on July 25, 2022. There are a number of risks related to the pending transaction, including but not limited to the following:

•

there is a possibility that an insufficient percentage of stockholders agree to tender their shares in the Offer such that the “Minimum Condition” set forth in the Offer documents is not satisfied;

•

we, the Parent and/or the Purchaser may fail to satisfy all of the closing conditions of the Offer and/or the Merger, including that there is no injunction or legal restraint, such as under applicable antitrust law, that would prohibit the consummation of the Offer or Merger;

•

the occurrence of any certain event, changes or other circumstance could give rise to the termination of the Merger Agreement, the Offer and/or the other proposed transactions;

•

the announcement or pendency of the Offer, Merger or other proposed transactions may have a negative effect on the Company’s business, operating results, and relationships with customers, suppliers, competitors and others;

•

the Offer, Merger or other proposed transactions may disrupt the Company’s current plans and business operations;

•

management’s attention may be diverted by the Offer or Merger from the Company’s ongoing business operations; and

•

there may be an adverse outcome to any legal proceedings that may be instituted against the Company related to the Merger Agreement, the Offer, the Merger or the other proposed transactions.

The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price.

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

On November 17, 2021, La Jolla announced that it would commence a stock repurchase plan for up to $10 million of the Company’s common stock. On March 7, 2022, the Board approved a $5 million increase to the stock repurchase plan from up to $10 million to up to $15 million of the Company’s common stock. In connection with the announced merger, the stock repurchase plan was cancelled effective July 11, 2022. The following table contains information with respect to repurchases made by the Company during the three months ended June 30, 2022:

Period	(a) Total number of shares purchased		(b) Average price paid per share⁽¹⁾		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Maximum approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
April 1, 2022 – April 30, 2022		178,368	$	4.17		178,368	$	5,697
May 1, 2022 – May 31, 2022		305,107	$	3.98		305,107	$	4,484
June 1, 2022 – June 30, 2022		261,383	$	3.55		261,383	$	3,555
Total		744,858				744,858

⁽¹⁾	Includes commissions

The Company had entered into a Rule 10b5-1 stock repurchase plan for the purpose of establishing a trading plan to purchase the Company’s common stock in a manner that complies with the requirements of Rule 10b5-1(c)(1) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Exhibit Description

2.1†		Agreement and Plan of Merger by and among the Parent, the Purchaser and the Company dated July 10, 2022 (incorporated by reference to Exhibit 2.1 to the registrant’s Report on Form 8-K filed with the SEC on July 11, 2022)

3.1		Amended and Restated Certificate of Incorporation of La Jolla Pharmaceutical Company, a Delaware Corporation (incorporated by reference to Exhibit 3.1 to the registrant’s Report on Form 8-K12B filed with the SEC on November 2, 2021)

3.2		Bylaws of La Jolla Pharmaceutical Company, a Delaware Corporation (incorporated by reference to Exhibit 3.2 to the registrant’s Report on Form 8-K12B filed with the SEC on November 2, 2021)

10.1		Support Agreement, dated as of July 10, 2022, by and among the Parent, the Purchaser and the stockholders named therein (incorporated by reference to Exhibit 10.1 the registrant’s Current Report on Form 8-K filed with the SEC on July 11, 2022).

31.1*		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		Inline XBRL Instance Document

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
		† Certain schedules and exhibits omitted pursuant to item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon its request.
		*Filed herewith
		**Furnished herewith

SIGNATURES

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

			La Jolla Pharmaceutical Company

Date:	August 15, 2022	By:	/s/ Larry Edwards
			Larry Edwards
			Director, President and Chief Executive Officer
			(principal executive officer)

			/s/ Michael Hearne
			Michael Hearne
			Chief Financial Officer
			(principal financial and accounting officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

LA JOLLA PHARMACEUTICAL CO 10-Q