424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-237584

LOGO

   LOGO

PROXY STATEMENT OF TETRAPHASE PHARMACEUTICALS, INC.

   PROSPECTUS OF ACELRX PHARMACEUTICALS, INC.

PROPOSED MERGER—YOUR VOTE IS VERY IMPORTANT

Dear Tetraphase Stockholder:

We cordially invite you to attend a special meeting of the stockholders of Tetraphase Pharmaceuticals, Inc., a Delaware corporation, which we refer to as “we,” “us,” “our,” “Tetraphase” or the “Company,” to be held via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time. We are holding this special meeting virtually in order to support the health and well-being of our stockholders, employees and directors in light of the recent novel coronavirus (“COVID-19”) outbreak.

On March 15, 2020, the Company entered into an agreement and plan of merger, which we refer to as the merger agreement, with AcelRx Pharmaceuticals, Inc., a Delaware corporation, which we refer to as AcelRx, and Consolidation Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of AcelRx, which we refer to as Merger Sub, providing for the merger of Merger Sub with and into the Company, with the Company surviving the merger as an indirect wholly-owned subsidiary of AcelRx, which we refer to as the merger.

At the special meeting, you will be asked to consider and vote on the following matters:

 

   

a proposal to adopt the merger agreement (the “merger agreement proposal”);

 

   

a proposal to approve, on a nonbinding advisory basis, the “golden parachute” compensation that will or may be payable to our named executive officers in connection with the merger as reported on the Change-in-Control Compensation table on page 84 of the accompanying proxy statement (the “compensation proposal”); and

 

   

a proposal to approve one or more adjournments of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement proposal (the “adjournment proposal”).

Approval of the merger agreement proposal is required for completion of the merger. Neither the compensation proposal nor the adjournment proposal is a condition to the obligations of the Company or AcelRx to complete the merger.

If the merger is consummated, each share of Tetraphase common stock issued and outstanding immediately prior to the effective time of the merger will, other than excluded shares (as defined in the accompanying proxy statement/prospectus), be converted into the right to receive, in accordance with the terms of the merger agreement, (1) a number of shares of AcelRx’s common stock, par value $0.001 per share, equal to 0.6303 (the “Exchange Ratio”); provided that if the Company’s closing net cash (“Closing Net Cash”) is less than $5.0 million, the Exchange Ratio shall be adjusted to the ratio determined as follows: (a) (i) $20.0 million, minus (ii) the dollar amount by which the Closing Net Cash is less than $5.0 million, minus (iii) $10,265,292, divided by (b) (i) 10,800,166 shares of Tetraphase common stock divided by (ii) $1.43, and (2) one contingent value right per share (a “CVR”) representing the right to receive up to $12.5 million (payable in cash or shares of AcelRx’s common stock, at AcelRx’s election), subject to the achievement of net sales milestones pursuant to the CVR Agreement (as defined below), which we refer to as the merger consideration.

The board of directors of the Company, which we refer to as the Tetraphase Board, has unanimously adopted and approved the merger agreement and recommended that the Company’s stockholders vote in favor of the merger agreement proposal. The Tetraphase Board made its determination after consultation with its legal and financial


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advisors and consideration of a number of factors. The Tetraphase Board unanimously recommends that you vote “FOR” the merger agreement proposal, “FOR” the compensation proposal and “FOR” the adjournment proposal, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

Your vote is very important. The merger cannot be completed unless the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting vote in favor of the merger agreement proposal.

The accompanying proxy statement/prospectus provides you with detailed information about the special meeting, the merger agreement and the merger. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement/prospectus. We encourage you to carefully read the entire proxy statement/prospectus and its annexes, including the merger agreement. You also may obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission by following the instructions listed in the section of the accompanying proxy statement/prospectus titled “Where You Can Find More Information.”

In general, the exchange of Tetraphase common stock for the merger consideration in the merger is expected to be a taxable transaction for U.S. federal income tax purposes. We encourage Tetraphase stockholders to carefully review the information under the section titled “Material U.S. Federal Income Tax Consequences of the Merger for Tetraphase Stockholders” beginning on page 182 of the accompanying proxy statement/prospectus for a description of material U.S. federal income tax consequences of the merger.

If you have any questions or need assistance submitting a proxy to have your shares of Tetraphase common stock voted at the special meeting, please call Alliance Advisors LLC, the Company’s proxy solicitor, at (855) 742-8268.

Thank you in advance for your cooperation and continued support.

Sincerely,

L. Patrick Gage, PhD.

Chairman of the Board

Larry Edwards

Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger or the other transactions described in this proxy statement/prospectus or the securities to be issued in connection with the merger or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated April 24, 2020 and is first being mailed to Tetraphase stockholders on or about April 28, 2020.


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LOGO

Tetraphase Pharmaceuticals, Inc.

480 Arsenal Way

Watertown, MA 02472

Notice of Special Meeting of Stockholders to be Held on June 8, 2020

To the Stockholders of Tetraphase Pharmaceuticals, Inc.:

Notice is hereby given that Tetraphase Pharmaceuticals, Inc., which is referred to as Tetraphase, will hold a special meeting of its stockholders, which is referred to as the Tetraphase special meeting, via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time, for the purpose of considering and voting on the following proposals:

 

  1.

to adopt the Agreement and Plan of Merger, dated as of March 15, 2020 (as it may be amended from time to time), which is referred to as the merger agreement, a copy of which is included as Annex A to the accompanying proxy statement/prospectus, by and among AcelRx Pharmaceuticals, Inc., which is referred to as AcelRx, Tetraphase and Consolidation Merger Sub, Inc., an indirect wholly-owned subsidiary of AcelRx, which is referred to as Merger Sub, pursuant to which Merger Sub will merge with and into Tetraphase, with Tetraphase as the surviving corporation and an indirect wholly-owned subsidiary of AcelRx, which proposal is referred to as the merger agreement proposal;

 

  2.

to approve, on a nonbinding advisory basis, the “golden parachute” compensation that may be payable to Tetraphase’s named executive officers in connection with the merger as reported on the Change-in-Control Compensation table on page 84 of the accompanying proxy statement/prospectus, which proposal is referred to as the compensation proposal; and

 

  3.

to approve the adjournment of the Tetraphase special meeting to solicit additional proxies if there are not sufficient votes at the time of the Tetraphase special meeting to approve the merger agreement proposal or to ensure that any supplement or amendment to the accompanying proxy statement/prospectus is timely provided to Tetraphase stockholders, which proposal is referred to as the adjournment proposal.

Tetraphase will transact no other business at the Tetraphase special meeting or any adjournment or postponement thereof. The accompanying proxy statement/prospectus, including the merger agreement attached thereto as Annex A, contains further information with respect to these matters.

Only holders of record of Tetraphase common stock at the close of business on April 22, 2020, the record date for notice of and voting at the Tetraphase special meeting, which is referred to as the record date, are entitled to notice of and to vote at the Tetraphase special meeting.

The board of directors of Tetraphase, which is referred to as the Tetraphase Board, has unanimously approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement on the terms and subject to the conditions set forth in the merger agreement. The Tetraphase Board unanimously recommends that Tetraphase stockholders vote “FOR” the merger agreement proposal, “FOR” the compensation proposal and “FOR” the adjournment proposal.

Your vote is very important, regardless of the number of shares of Tetraphase common stock you own. Tetraphase cannot complete the transactions contemplated by the merger agreement, including the merger, without approval of the merger agreement proposal. Assuming a quorum is present, the approval of the merger agreement proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Tetraphase common stock entitled to vote on the proposal.


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To support the health and well-being of Tetraphase’s stockholders, employees and directors in light of the recent novel coronavirus (“COVID-19”) outbreak, the special meeting will be a “virtual meeting” of stockholders, which will be conducted exclusively via the Internet at a virtual web conference. There will not be a physical meeting location, and stockholders will not be able to attend the special meeting in person. This means that you can attend the special meeting online, vote your shares during the online meeting and submit questions during the online meeting by visiting the above-mentioned Internet site. In light of the public health and safety concerns related to COVID-19, we believe that hosting a “virtual meeting” will enable greater stockholder attendance and participation from any location around the world.

Whether or not you plan to attend the Tetraphase special meeting via virtual web conference, Tetraphase urges you to please promptly mark, sign and date the accompanying proxy card and return it in the enclosed postage-paid envelope, or call the telephone number or use the Internet as described in the instructions included with the proxy card, so that your shares may be represented and voted at the Tetraphase special meeting. If you hold your shares through a broker, bank or other nominee in “street name” (instead of as a registered holder) and you wish to vote during the Tetraphase special meeting, you will receive instructions from the holder of record that you must follow for your shares to be voted. Instructions on how to attend and participate online, including how to demonstrate proof of stock ownership, are posted at www.proxydocs.com/ttph. A list of registered stockholders as of the close of business on the record date will be available for examination by any stockholder for any purpose germane to the special meeting at www.proxydocs.com/ttph for a period of at least 10 days prior to the special meeting. This list will also be available for examination by the stockholders during the whole time of the special meeting at www.proxydocs.com/ttph.

If you have any questions about the merger or about how to vote or direct a vote in respect of your shares of Tetraphase common stock, you may contact Tetraphase’s proxy solicitor, Alliance Advisors LLC, at (855) 742-8268.

By Order of the Board of Directors,

Larry Edwards

Chief Executive Officer

Watertown, Massachusetts

Dated: April 24, 2020

Your vote is important. Tetraphase stockholders are requested to complete, date, sign and return the enclosed proxy card in the envelope provided, which requires no postage if mailed in the United States, or to submit a proxy to vote your shares electronically through the Internet or by telephone.


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ABOUT THIS PROXY STATEMENT/PROSPECTUS

AcelRx Pharmaceuticals, Inc. (“AcelRx”) has supplied all information contained in or incorporated by reference into this proxy statement/prospectus relating to AcelRx. Tetraphase Pharmaceuticals, Inc. (“Tetraphase”) has supplied all information contained in this proxy statement/prospectus relating to Tetraphase. AcelRx and Tetraphase have both contributed to information relating to the proposed merger.

No one has been authorized to provide you with information that is different from that contained in or incorporated by reference into this proxy statement/prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any information others may give you. This proxy statement/prospectus is dated April 24, 2020, and is based on information as of that date or such other date as may be noted. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any other date. You should not assume that the information contained in any document incorporated or deemed to be incorporated by reference herein is accurate as of any date other than the date of such document. Any statement contained in a document incorporated or deemed to be incorporated by reference into this proxy statement/prospectus will be deemed to be modified or superseded to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference into this proxy statement/prospectus modifies or supersedes that statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement/prospectus. Neither the mailing of this proxy statement/prospectus to the stockholders of Tetraphase nor the taking of any actions contemplated hereby by AcelRx or Tetraphase at any time will create any implication to the contrary.

This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

Unless otherwise indicated or as the context otherwise requires, all references in this proxy statement/prospectus to:

 

   

AcelRx” refers to AcelRx Pharmaceuticals, Inc., a Delaware corporation;

 

   

AcelRx Board” refers to the board of directors of AcelRx;

 

   

AcelRx Bylaws” refers to the Amended and Restated Bylaws of AcelRx, as amended from time to time;

 

   

AcelRx Charter” refers to the Amended and Restated Certificate of Incorporation of AcelRx, as amended from time to time;

 

   

AcelRx Common Stock” refers to the common stock, par value $0.001 per share, of AcelRx;

 

   

AcelRx SEC Documents” refers to the registration statements, proxy statements and other statements, reports, schedules, forms and other documents filed by AcelRx with the SEC since December 31, 2018, including any amendments thereto since December 31, 2018, and any certifications and statements relating thereto required by: (A) Rule 13a-14 or Rule 15d-14 under the Exchange Act; (B) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act); or (C) any other rule or regulation promulgated by the SEC or applicable thereto;

 

   

adjournment proposal” refers to the proposal to approve adjournments of the Special Meeting, if necessary or appropriate, to solicit additional proxies if, immediately prior to such adjournment, sufficient votes to adopt the Merger Agreement have not been obtained by Tetraphase;

 

   

Code” refers to the Internal Revenue Code of 1986, as amended;

 

   

compensation proposal” refers to the proposal to approve, on a non-binding, advisory basis, the compensation payments that will or may be paid by Tetraphase to its named executive officers in connection with the Merger;

 

   

Confidentiality Agreement” refers to the Confidentiality Agreement dated July 29, 2019, and amended on January 23, 2020, by and between AcelRx and Tetraphase;


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Contemplated Transactions” refers to the Merger and other transactions contemplated by the Merger Agreement, the CVR Agreement and the Voting Agreements;

 

   

CVR Agreement” refers to a contingent value rights agreement, a copy of which is attached as Annex D to this proxy statement/prospectus and incorporated by reference herein.

 

   

CVRs” refers to the contingent value rights issuable pursuant to the Merger Agreement, representing the right to receive contingent payments of cash and/or AcelRx Common Stock pursuant to the CVR Agreement;

 

   

DGCL” refers to the Delaware General Corporation Law;

 

   

DOJ” refers to the United States Department of Justice;

 

   

Effective Time” refers to the date and time of the filing of the certificate of merger with respect to the Merger with the Secretary of State of the State of Delaware or such later date and time as Tetraphase and AcelRx may agree upon and as is set forth in such certificate of merger;

 

   

Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

 

   

Exchange Agreement” refers to the exchange agreement entered into by AcelRx with a holder of Tetraphase warrants;

 

   

Exchange Ratio” refers to 0.6303 shares of AcelRx Common Stock for each share of Tetraphase Common Stock issued and outstanding immediately prior to the Effective Time, provided that if Tetraphase Net Cash is less than Target Net Cash, Exchange Ratio shall mean: (a) (i) Residual Equity Value, divided by (ii) Reference Company Fully Diluted Shares, divided by (b) the Reference Company Per Share Price;

 

   

FDA” refers to U.S. Food and Drug Administration;

 

   

FTC” refers to the United States Federal Trade Commission;

 

   

GAAP” refers to Generally Accepted Accounting Principles in the United States of America;

 

   

IRS” refers to the United States Internal Revenue Service;

 

   

Janney” refers to Janney Montgomery Scott LLC, financial advisor to Tetraphase;

 

   

Merger” refers to the merger of Merger Sub with and into Tetraphase, with Tetraphase surviving the merger as an indirect wholly-owned subsidiary of AcelRx;

 

   

Merger Agreement” refers to the Agreement and Plan of Merger, dated as of March 15, 2020, by and among Tetraphase, AcelRx and Merger Sub, a copy of which is attached as Annex A to this proxy statement/prospectus and incorporated by reference herein;

 

   

merger agreement proposal” refers to the proposal to adopt the Merger Agreement;

 

   

Merger Consideration” refers to the consideration payable in the Merger by AcelRx to Tetraphase stockholders in respect of each share of Tetraphase Common Stock outstanding immediately prior to the Effective Time, which consideration consists of the Exchange Ratio and the CVRs;

 

   

Merger Sub” refers to Consolidation Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of AcelRx;

 

   

Nasdaq” refers to the Nasdaq Global Select Market, the Nasdaq Global Market and The Nasdaq Stock Market LLC;

 

   

Pro Forma Balance Sheet” refers to AcelRx’s unaudited pro forma balance sheet;

 

   

Pro Forma Financial Statements” refers to AcelRx’s pro forma unaudited condensed combined financial statements;

 

   

Pro Forma Statement of Operations” refers to AcelRx’s unaudited pro forma condensed combined statements of operations;

 

   

Record Date” refers to April 22, 2020, the date on which holders of Tetraphase Common Stock must be holders of record in order to receive notice of, and to vote at, the Special Meeting;


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Reference Company Fully Diluted Shares” refers to 10,800,166 shares of Tetraphase Common Stock;

 

   

Reference Company Per Share Price” refers to $1.43;

 

   

Residual Equity Value” refers to (a) $20.0 million, minus (b) the dollar amount by which the Tetraphase Net Cash is less than the Target Net Cash, minus (c) the Tetraphase Warrantholder Payout;

 

   

Sarbanes-Oxley Act” refers to the Sarbanes-Oxley Act of 2002, as it may be amended from time to time;

 

   

SEC” refers to the United States Securities and Exchange Commission;

 

   

Securities Act” refers to the Securities Act of 1933, as amended;

 

   

Special Meeting” refers to the meeting of Tetraphase stockholders to be held via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time;

 

   

Surviving Corporation” refers to Tetraphase as an indirect wholly-owned subsidiary of AcelRx following the Merger;

 

   

Target Net Cash” refers to $5.0 million;

 

   

Tetraphase” refers to Tetraphase Pharmaceuticals, Inc., a Delaware corporation;

 

   

Tetraphase Board” refers to the board of directors of Tetraphase;

 

   

Tetraphase Bylaws” refers to the Amended and Restated Bylaws of Tetraphase, as amended from time to time;

 

   

Tetraphase Charter” refers to the Restated Certificate of Incorporation of Tetraphase, as amended from time to time;

 

   

Tetraphase Common Stock” refers to the common stock, par value $0.001 per share, of Tetraphase;

 

   

Tetraphase Net Cash” refers to the definition of Tetraphase Net Cash as set forth in “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 93 of this proxy statement/prospectus;

 

   

Tetraphase Option Plans” refers to: (a) the Tetraphase 2006 Stock Plan; and (b) the Tetraphase 2013 Stock Incentive Plan;

 

   

Tetraphase Options” refers to options to purchase shares of Tetraphase Common Stock from Tetraphase;

 

   

Tetraphase PRSU” refers to each restricted stock unit representing the right to vest in and be issued one share of Tetraphase Common Stock by Tetraphase, and which vests in whole or in part contingent upon the attainment of one or more performance goals, granted by Tetraphase pursuant to a Tetraphase Option Plan;

 

   

Tetraphase RSU” refers to each restricted stock unit representing the right to vest in and be issued one share of Tetraphase Common Stock by Tetraphase, granted by Tetraphase pursuant to a Tetraphase Option Plan, and which is not a Tetraphase PRSU;

 

   

Tetraphase SEC Documents” refers to the registration statements, proxy statements and other statements, reports, schedules, forms and other documents filed by Tetraphase with the SEC since December 31, 2018, including any amendments thereto since December 31, 2018, and any certifications and statements thereto required by: (A) Rule 13a-14 or Rule 15d-14 under the Exchange Act; (B) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act); or (C) any other rule or regulation promulgated by the SEC or applicable thereto;

 

   

Tetraphase Warrantholder Payout” refers to $10,265,292; and

 

   

Voting Agreements” refers to the voting agreements entered into by AcelRx with certain Tetraphase equityholders.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates by reference important business and financial information about AcelRx and Tetraphase from documents AcelRx and Tetraphase have filed or will file with the SEC that are not included in or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request and must be made no later than five business days before the date of the Special Meeting. You can obtain documents incorporated by reference into this proxy statement/prospectus by requesting them in writing or by telephone using the following contact information:

 

For AcelRx stockholders:

 

AcelRx Pharmaceuticals, Inc.

351 Galveston Drive

Redwood City, CA 94063

Attn: Secretary

(650) 216-3500

 

For Tetraphase stockholders:

 

Tetraphase Pharmaceuticals, Inc.

480 Arsenal Way

Watertown, Massachusetts 02472

Attn: Secretary

Telephone: (617) 715-3600

If you would like to request any documents, please do so by June 1, 2020, or the date that is five business days before the date of the Special Meeting, in order to receive them before the Special Meeting.

For additional information on the documents incorporated by reference into this proxy statement/prospectus, see “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS

     1  

SUMMARY

     8  

SELECTED HISTORICAL FINANCIAL DATA OF ACELRX

     19  

SELECTED HISTORICAL FINANCIAL DATA OF TETRAPHASE

     21  

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     22  

UNAUDITED COMPARATIVE PER SHARE INFORMATION

     24  

COMPARATIVE MARKET PRICE INFORMATION

     26  

RISK FACTORS

     27  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     35  

THE COMPANIES

     36  

THE SPECIAL MEETING

     37  

BENEFICIAL STOCK OWNERSHIP OF TETRAPHASE DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN HOLDERS OF TETRAPHASE COMMON STOCK

     42  

PROPOSAL 1: ADOPTION OF THE MERGER AGREEMENT

     45  

PROPOSAL 2: ADVISORY (NON-BINDING) VOTE ON MERGER-RELATED COMPENSATION FOR TETRAPHASE NAMED EXECUTIVE OFFICERS

     46  

PROPOSAL 3: ADJOURNMENT OF THE TETRAPHASE SPECIAL MEETING

     47  

THE MERGER

     48  

Background of the Merger

     48  

Effects of the Merger

     63  

AcelRx Board’s Reasons for the Merger

     63  

Recommendation of the Tetraphase Board; the Tetraphase Board’s Reasons for the Merger

     63  

Opinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor

     67  

Certain Information Provided by the Parties

     76  

Interests of Tetraphase Directors and Executive Officers in the Merger

     79  

Equity Awards Held by Tetraphase Directors and Executive Officers

     80  

Possible Change-in-Control Compensation

     84  

Indemnification; Directors’ and Officers’ Insurance

     85  

Regulatory Approvals

     86  

Nasdaq Listing of AcelRx Common Stock; De-Listing and Deregistration of Tetraphase Common Stock After the Merger

     86  

Appraisal Rights

     87  

Accounting Treatment of the Merger

     90  

THE MERGER AGREEMENT

     92  

The Merger

     92  

Effective Time; Closing

     92  

Merger Consideration and the Exchange Ratio

     92  

Dividends and Distributions

     94  

Conditions to the Merger

     95  

No Solicitation of Acquisition Proposals

     98  

The Special Meeting

     99  

Tetraphase Board Recommendation

     100  

Efforts to Consummate the Merger; Regulatory Matters

     102  

Termination

     103  

Termination Fee and Expenses

     104  

Conduct of Business Pending the Merger

     105  

Disclosure

     109  

Access to Information; Confidentiality

     109  

 

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Securityholder Litigation

     110  

Additional Agreements

     110  

Governance of the Surviving Corporation

     112  

Employee Benefit Matters

     112  

Representations and Warranties

     112  

Amendment of the Merger Agreement; Waiver

     114  

Applicable Law; Jurisdiction; Specific Performance

     114  
THE CONFIDENTIALITY AGREEMENT      115  

THE VOTING AGREEMENTS AND EXCHANGE AGREEMENT

     115  

THE CVR AGREEMENT

     116  

THE CO-PROMOTION AGREEMENT

     117  

THE EXCLUSIVITY AGREEMENT

     118  

INFORMATION ABOUT TETRAPHASE

     119  

Tetraphase’s Business

     119  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     156  

Quantitative and Qualitative Disclosures About Market Risks

     171  

DESCRIPTION OF ACELRX CAPITAL STOCK

     172  

COMPARISON OF RIGHTS OF HOLDERS OF ACELRX COMMON STOCK AND TETRAPHASE COMMON STOCK

     175  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER FOR U.S. TETRAPHASE STOCKHOLDERS

     182  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     187  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     196  

LEGAL MATTERS

     197  

EXPERTS

     197  

WHERE YOU CAN FIND MORE INFORMATION

     198  

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

     199  

ANNEX A – Agreement and Plan of Merger

     A-1  

ANNEX B – Form of Voting Agreement

     B-1  

ANNEX C – Form of Exchange Agreement

     C-1  

ANNEX D – Form of Contingent Value Rights Agreement

     D-1  

ANNEX E – Opinion of Janney Montgomery Scott LLC

     E-1  

ANNEX F – General Corporation Law of the State of Delaware Regarding Appraisal Rights

     F-1  

 

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QUESTIONS AND ANSWERS

Q: Why did I receive these proxy materials?

A: You are receiving this proxy statement/prospectus because you were a stockholder of record of Tetraphase on the Record Date for the Special Meeting to be held via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time. You are invited to attend the Special Meeting online and are requested to vote on the items of business described in this proxy statement/prospectus.

Q: What is the purpose of the Special Meeting?

A: At the Special Meeting, Tetraphase stockholders will consider and vote on the following matters:

 

   

Proposal 1: a proposal to adopt the Merger Agreement, a copy of which is included as Annex A to the accompanying proxy statement/prospectus, by and among AcelRx, Tetraphase and Merger Sub, pursuant to which Merger Sub will merge with and into Tetraphase, with Tetraphase as the surviving corporation and an indirect wholly-owned subsidiary of AcelRx, which proposal is referred to as the merger agreement proposal;

 

   

Proposal 2: a proposal to approve, on a nonbinding advisory basis, the “golden parachute” compensation that may be payable to Tetraphase’s named executive officers in connection with the Merger as reported on the Change-in-Control Compensation table on page 84 of this proxy statement/prospectus, which proposal is referred to as the compensation proposal; and

 

   

Proposal 3: a proposal to approve the adjournment of the Tetraphase Special Meeting to solicit additional proxies if there are not sufficient votes at the time of the Tetraphase Special Meeting to approve the merger agreement proposal or to ensure that any supplement or amendment to this proxy statement/prospectus is timely provided to Tetraphase stockholders, which proposal is referred to as the adjournment proposal.

Q: What is the Merger?

A: AcelRx, Tetraphase, and Merger Sub entered into an Agreement and Plan of Merger, dated as of March 15, 2020, pursuant to which, among other things, Merger Sub will be merged with and into Tetraphase, with Tetraphase continuing as the surviving corporation and an indirect wholly-owned subsidiary of AcelRx. The Merger Agreement, as it may be amended from time to time, contains the terms and conditions of the proposed merger transaction between AcelRx, Tetraphase, and Merger Sub. This proposed merger transaction is referred to as the Merger.

At the Effective Time, each share of Tetraphase Common Stock outstanding immediately prior to the Effective Time (other than shares owned by AcelRx, Merger Sub or Tetraphase or any direct or indirect wholly-owned subsidiary of AcelRx or Tetraphase or by stockholders of Tetraphase who have exercised and perfected their statutory rights of appraisal as more fully described in the section titled “The Merger—Appraisal Rights” in this proxy statement/prospectus) will be converted into the right to receive the Merger Consideration.

Each outstanding share of Tetraphase Common Stock will be automatically converted into the right to receive (i) 0.6303 of a share of AcelRx Common Stock (subject to adjustment as described below), plus (ii) one CVR, plus (iii) any cash payable in lieu of fractional shares of AcelRx Common Stock.

The Exchange Ratio is subject to a potential downward adjustment if the Tetraphase Net Cash is less than $5.0 million at the closing of the Merger.

The Merger Agreement also provides that:

 

   

each Tetraphase Option, whether vested or unvested, will terminate at the Effective Time and will be of no further force and effect;

 

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each unvested Tetraphase RSU and Tetraphase PRSU shall vest in full as of five business days prior to the Merger; and

 

   

each Tetraphase Warrant shall be treated in accordance with its terms or as modified in any Voting Agreement or Exchange Agreement entered into with an applicable warrantholder, as further described in this proxy statement/prospectus.

At the Effective Time, AcelRx’s stockholders will continue to own and hold their existing shares of AcelRx Common Stock.

Q: What will I receive for my shares of Tetraphase Common Stock in the Merger?

A: In the Merger, each issued and outstanding share of Tetraphase Common Stock immediately prior to the Effective Time will be automatically cancelled and converted into the right to receive (i) 0.6303 of a share of AcelRx Common Stock (subject to adjustment as described herein), plus (ii) one CVR, plus (iii) any cash payable in lieu of fractional shares of AcelRx Common Stock.

After the consummation of the Merger, Tetraphase stockholders will own shares of AcelRx Common Stock and will no longer own shares of Tetraphase Common Stock. See “The Merger Agreement” beginning on page 92 of this proxy statement/prospectus.

Q: Where will the shares of AcelRx Common Stock that I receive in the Merger be traded?

A: Shares of AcelRx Common Stock are listed on Nasdaq under the symbol “ACRX.” AcelRx will apply to have the new shares of AcelRx Common Stock issued in the Merger listed on Nasdaq upon consummation of the Merger.

Q: What percentage of AcelRx Common Stock will Tetraphase stockholders own following the Merger?

A: Based on the number of shares of Tetraphase Common Stock and AcelRx Common Stock estimated to be outstanding on the Record Date for the Special Meeting, Tetraphase and AcelRx estimate that, upon completion of the Merger, former Tetraphase stockholders and certain other Tetraphase equityholders will own approximately 14.6% of the combined company on a fully diluted basis.

Q: Are AcelRx stockholders voting on the Merger?

A: No. No vote of AcelRx’s stockholders is required to complete the Merger.

Q: When is the Merger expected to be completed?

A: AcelRx and Tetraphase are working toward completing the Merger as expeditiously as possible and currently expect the Merger to be completed in the second quarter of 2020. However, AcelRx and Tetraphase cannot be certain when, or if, the conditions to the Merger will be satisfied or waived, or that the Merger will be completed.

Q: Who can vote at the Special Meeting?

A: To be entitled to vote, you must have been a stockholder of record at the close of business on the Record Date. There were 7,263,236 shares of Tetraphase Common Stock outstanding and entitled to vote at the Special Meeting as of the Record Date.

 

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Q: Why is the Special Meeting of stockholders a virtual, online meeting?

A: To support the health and well-being of Tetraphase stockholders, employees and directors in light of the recent novel coronavirus (“COVID-19”) outbreak, the Tetraphase Special Meeting will be a virtual meeting of stockholders where stockholders will participate by accessing a website using the Internet. There will not be a physical meeting location. In light of the public health and safety concerns related to COVID-19, Tetraphase believes that hosting a virtual meeting will facilitate stockholder attendance and participation at the Tetraphase Special Meeting by enabling stockholders to participate remotely from any location around the world. Tetraphase has designed the virtual Special Meeting to provide the same rights and opportunities to participate as stockholders would have at an in-person meeting, including the right to vote and ask questions through the virtual meeting platform. If the Contemplated Transactions are not consummated, Tetraphase intends to return to holding in person meetings as soon as it is safe to do so.

Q: How do I virtually attend the Special Meeting?

A: Tetraphase will host the Special Meeting live online via webcast. You may attend the Special Meeting live online by visiting www.proxydocs.com/ttph. The webcast will start at 10.00 a.m., Eastern Time, on June 8, 2020. You will need the control number included on your proxy card or voting instruction form in order to be able to enter the Special Meeting online, and you will need to register for the Special Meeting in advance in order to virtually attend the Special Meeting. Instructions on how to attend and participate online, including how to demonstrate proof of stock ownership, are posted at www.proxydocs.com/ttph. The deadline for registering to virtually attend the Special Meeting is 5:00 p.m., Eastern Time on June 4, 2020. Tetraphase will have technicians standing by and ready to assist you with any technical difficulties you may have accessing the Special Meeting via the email address provided to you upon registering for the Special Meeting. If you encounter any difficulties accessing the virtual meeting during the meeting time, please call the toll-free phone number provided to you upon registering for the Special Meeting.

Q: May I see a list of stockholders entitled to vote as of the Record Date?

A: A list of registered stockholders as of the close of business on the Record Date will be available for examination by any stockholder for any purpose germane to the Special Meeting at www.proxydocs.com/ttph for a period of at least 10 days prior to the Special Meeting. Such list will also be available for examination by the stockholders during the whole time of the Special Meeting at www.proxydocs.com/ttph.

Q: How do I submit a question at the Special Meeting?

A: If you wish to submit a question upon registering for the Special Meeting or during the Special Meeting, you may log into the virtual meeting platform at www.proxydocs.com/ttph, type your question into the “Ask a Question” field, and click “Submit.” Tetraphase’s virtual meeting will be governed by Tetraphase’s Rules of Conduct and Procedures which will be posted at www.proxydocs.com/ttph in advance of the meeting. The Rules of Conduct and Procedures will address the ability of stockholders to ask questions during the meeting, including rules on permissible topics, and rules for how questions and comments will be recognized and disclosed to meeting participants. All questions received from stockholders during the virtual Special Meeting will be posted on Tetraphase’s investor relations website at https://ir.tphase.com/investor-relations as soon as practicable following the Special Meeting.

Q: How many votes do I have?

A: Each share of Tetraphase Common Stock that you own as of the Record Date will entitle you to one vote on each matter considered at the Special Meeting.

 

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Q: How do I vote?

A: If you are the “record holder” of your shares, meaning that your shares are registered in your name in the records of Tetraphase’s transfer agent, American Stock Transfer & Trust Company, LLC, you may vote your shares during the meeting or by proxy as follows:

 

  (1)

Over the Internet: To vote over the Internet, please go to the following website: www.proxypush.com/ttph, and follow the instructions at that site for submitting your proxy electronically. If you vote over the Internet, you do not need to complete and mail your proxy card or vote your proxy by telephone.

 

  (2)

By Telephone: To vote by telephone, please call (866) 416-3857, and follow the instructions provided on the proxy card. If you vote by telephone, you do not need to complete and mail your proxy card or vote your proxy over the Internet.

 

  (3)

By Mail: To vote by mail, you must mark, sign and date the proxy card and then mail the proxy card in accordance with the instructions on the proxy card. If you vote by mail, you do not need to vote over the Internet or by telephone. If you return your proxy card but do not specify how you want your shares voted on the proposal, they will be voted in accordance with the recommendations of the Tetraphase Board.

If your shares are held in “street name,” meaning they are held for your account by an intermediary, such as a broker, then you are deemed to be the beneficial owner of your shares and the broker that actually holds the shares for you is the record holder and is required to vote the shares it holds on your behalf according to your instructions. The proxy materials, as well as voting and revocation instructions, should have been forwarded to you by the broker that holds your shares. In order to vote your shares, you will need to follow the instructions that your broker provides you. Many brokers solicit voting instructions over the Internet or by telephone.

A “broker non-vote” occurs when shares held by a broker are not voted with respect to a particular proposal because the broker does not have or did not exercise discretionary authority to vote on the matter and has not received voting instructions from its clients. Because none of the proposals currently scheduled to be voted on at the Special Meeting are routine matters for which brokers may have discretionary authority to vote, Tetraphase does not expect there to be any broker non-votes at the Special Meeting.

Regardless of whether your shares are held in street name, you are welcome to virtually attend the Special Meeting. You may not vote shares held in street name during the meeting, however, unless you obtain a proxy, executed in your favor, from the holder of record (i.e., your broker).

Q: Are there risks associated with the Merger that I should consider in deciding how to vote?

A: Yes. There are a number of risks related to the Merger and the other Contemplated Transactions that are discussed in this proxy statement/prospectus and in the documents incorporated by reference into this proxy statement/prospectus. Please read carefully the detailed description of the risks described in “Risk Factors” beginning on page 27 of this proxy statement/prospectus.

Q: Can I change my vote?

A: If your shares are registered directly in your name, you may revoke your proxy and change your vote at any time before the vote is taken at the Special Meeting. Execution of the proxy will not in any way affect your right to virtually attend the Special Meeting. To revoke a prior proxy, you must do one of the following:

 

  (1)

Vote over the Internet or by telephone as instructed above. Only your latest Internet or telephone vote is counted.

 

  (2)

Sign and return a new proxy card. Only your latest dated proxy card will be counted.

 

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  (3)

Revocation of your proxy may also be made during the Special Meeting prior to the voting of the proxy by voting your shares online while virtually attending the Special Meeting. Virtual attendance at the Special Meeting does not in itself constitute the revocation of a proxy.

 

  (4)

Give Tetraphase’s corporate secretary written notice before or during the meeting that you want to revoke your proxy.

If your shares are held in “street name,” you may submit new voting instructions with a later date by contacting your broker.

Q: How many shares must be represented to have a quorum and hold the Special Meeting?

A: A majority of the shares of Tetraphase Common Stock outstanding at the Record Date must be virtually present or represented by proxy to hold the Special Meeting. This is called a quorum. For purposes of determining whether a quorum exists, Tetraphase counts as present any shares that are voted over the Internet, by telephone or by submitting a proxy card. Further, for purposes of establishing a quorum, Tetraphase will count as present shares that a stockholder holds even if the stockholder votes against the proposals or abstains. In addition, Tetraphase will count as present shares held in “street name” by brokers who indicate on their proxies that they do not have authority to vote those shares. If a quorum is not present, Tetraphase expects to adjourn the Special Meeting until Tetraphase obtains a quorum.

Q: What vote is required to approve the proposals and how are votes counted?

A: Proposal 1: Merger Agreement Proposal: Assuming a quorum is present at the Special Meeting, the merger agreement proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Tetraphase Common Stock entitled to vote on such proposal. Accordingly, a Tetraphase stockholder’s abstention from voting, a broker non-vote or the failure of a Tetraphase stockholder to vote (including the failure of a Tetraphase stockholder who holds shares in “street name” through a bank, broker or other nominee to give voting instructions to that bank, broker or other nominee) will have the same effect as votes cast “AGAINST” the merger agreement proposal.

Proposal 2: Compensation Proposal: Assuming a quorum is present at the Special Meeting, approval of the compensation proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on this proposal.

Proposal 3: Adjournment Proposal: Whether or not a quorum is present at the Special Meeting, approval of the adjournment proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on this proposal.

Q: Who will count the vote?

A: The votes will be counted, tabulated and certified by Mediant Communications.

Q: How does the board of directors recommend that I vote on the proposals?

A: The Tetraphase Board unanimously recommends that you vote FOR each of the proposals.

 

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Q: Are there other matters to be voted on at the Special Meeting?

A: Tetraphase does not know of any matters that may come before the Special Meeting other than the three proposals previously mentioned. If any other matters are properly presented at the Special Meeting, the persons named in the accompanying proxy card intend to vote, or otherwise act, in accordance with their judgment on the matter.

Q: Where can I find the voting results?

A: Tetraphase plans to announce preliminary voting results at the Special Meeting and will report final voting results in a Current Report on Form 8-K filed with the SEC within four business days following the conclusion of the Tetraphase Special Meeting.

Q: What are the costs of soliciting these proxies?

A: Tetraphase will bear the cost of soliciting proxies. In addition to solicitation by mail, Tetraphase’s directors, officers and employees may solicit proxies by telephone, e-mail, facsimile and in person without additional compensation. Tetraphase has engaged Alliance Advisors, LLC, a proxy solicitation firm, to solicit proxies from shareholders for a fee of $10,000 plus certain additional costs associated with solicitation campaigns. Tetraphase may reimburse brokers or persons holding stock in their names, or in the names of their nominees, for their expenses in sending proxies and proxy material to beneficial owners. Tetraphase has also hired a proxy solicitor who may also solicit proxies from shareholders by telephone, e-mail, facsimile and in person and whose fees Tetraphase will reimburse.

Q: What are the material U.S. federal income tax consequences of the Merger to U.S. Holders of Tetraphase Stockholders?

A: In general, the exchange of Tetraphase Common Stock for the Merger Consideration in the Merger is expected to be a taxable transaction for U.S. federal income tax purposes. Please carefully review the information set forth in “Material U.S. Federal Income Tax Consequences of the Merger for Tetraphase Stockholders” beginning on page 182 of this proxy statement/prospectus for a description of material U.S. federal income tax consequences of the Merger to Tetraphase Stockholders. The tax consequences to you of the Merger will depend on your particular facts and circumstances. You are urged to consult your tax advisors as to the specific tax consequences to you of the Merger and your receipt of the Merger Consideration, including the applicability and effect of U.S. federal, state, local and non-U.S. income and other tax laws in light of your particular circumstances.

Q. What happens if the Merger is not completed?

A. If the Merger is not completed, Tetraphase stockholders will not receive any consideration for their shares of Tetraphase Common Stock. Instead, Tetraphase and AcelRx will remain independent public companies, and shares of Tetraphase Common Stock and AcelRx Common Stock will continue to be independently listed and traded on Nasdaq. In the event the Merger Agreement is terminated pursuant to its terms, Tetraphase may, in certain circumstances, be required to pay AcelRx a termination fee equal to $810,000 and/or, in certain additional circumstances, to reimburse AcelRx for certain expenses up to $200,000 incurred in connection with the Merger Agreement and the Contemplated Transactions. These termination fees and reimbursement expenses are described in more detail in “The Merger Agreement—Termination Fee and Expenses” beginning on page 104 of this proxy statement/prospectus.

 

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Stockholders Sharing the Same Address

Some brokers and other nominee record holders may be “householding” Tetraphase proxy materials. This means a single notice and, if applicable, the proxy materials, will be delivered to multiple stockholders sharing an address unless contrary instructions have been received. Tetraphase will promptly deliver a separate copy of the notice and, if applicable, the proxy materials, to you if you call or write to Tetraphase at its principal executive offices, 480 Arsenal Way, Watertown, Massachusetts 02472, Attn: Investor Relations, telephone: (617) 715-3600. In the future, if you want to receive separate copies of the proxy materials, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your broker, or you may contact Tetraphase at the above address and telephone number.

 

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SUMMARY

This summary highlights selected information described in more detail elsewhere in this proxy statement/prospectus and the documents incorporated herein by reference and may not contain all of the information that is important to you. To understand the Merger and the other matters to be voted on by Tetraphase stockholders at the Special Meeting more fully, and to obtain a more complete description of the terms of the Merger Agreement, you should carefully read this entire proxy statement/prospectus, including the Annexes, and the documents to which AcelRx and Tetraphase refer you. You should also read and consider the information in the documents incorporated by reference into this proxy statement/prospectus described under “Incorporation of Certain Information by Reference” beginning on page 199 and the additional information described under “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus. AcelRx and Tetraphase have included page references parenthetically to direct you to a more complete description of the topics presented in this summary.

The Companies (see page 36)

Tetraphase Pharmaceuticals, Inc.

Tetraphase Pharmaceuticals, Inc. (“Tetraphase”) is a biopharmaceutical company using its proprietary chemistry technology to develop and commercialize novel tetracyclines for serious and life-threatening conditions, including bacterial infections caused by many multidrug-resistant (“MDR”), bacteria. There is a medical need for new antibiotics as resistance to existing antibiotics increases. The company’s commercial product, XERAVA (eravacycline), a fully synthetic fluorocycline, is an intravenous (“IV”) antibiotic that is approved for use as a first-line empiric monotherapy for the treatment of MDR infections, including those found in complicated intra-abdominal infections. The Tetraphase pipeline also includes TP-271 IV and Oral, and TP-6076 IV only, which are Phase 2 ready, and TP-2846, which is in preclinical testing for acute myeloid leukemia.

Shares of Tetraphase Common Stock are traded on the Nasdaq Global Select Market under the symbol “TTPH.”

Tetraphase’s current contact information is as follows:

Tetraphase Pharmaceuticals, Inc.

480 Arsenal Way

Watertown, MA 02472

(617) 715-3600

Additional information about Tetraphase is included in the documents incorporated by reference into this proxy statement/prospectus. See “Information About Tetraphase” beginning on page 119 of this proxy statement/prospectus and “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus.

AcelRx Pharmaceuticals, Inc.

AcelRx Pharmaceuticals, Inc. (“AcelRx”) is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in healthcare institutions. AcelRx’s proprietary, non-invasive sublingual formulation technology delivers sufentanil with consistent pharmacokinetic profiles. The company has one approved product in the U.S., DSUVIA® (sufentanil sublingual tablet, 30 mcg), known as DZUVEO in Europe, indicated for the management of acute pain severe enough to require an opioid analgesic for adult patients in certified medically supervised healthcare settings, and one product candidate, Zalviso® (sufentanil sublingual tablet system, SST system, 15 mcg), an investigational product in the U.S., is being developed as an innovatively designed patient-controlled analgesia (PCA) system for reduction of moderate-to-severe acute pain in medically supervised settings. DZUVEO and Zalviso are both approved products in Europe.

 

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Shares of AcelRx Common Stock are traded on The Nasdaq Stock Market LLC under the symbol “ACRX.”

AcelRx’s current contact information is as follows:

AcelRx Pharmaceuticals, Inc.

351 Galveston Drive

Redwood City, CA 94063

(650) 216-3500

Additional information about AcelRx and its subsidiaries is included in the documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.

Consolidation Merger Sub, Inc.

Consolidation Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of AcelRx (“Merger Sub”), was organized solely for the purpose of entering into the Merger Agreement and completing the Merger and other Contemplated Transactions. Merger Sub has not conducted any business operations other than in connection with the Contemplated Transactions. Upon consummation of the Merger, Merger Sub will cease to exist, with Tetraphase surviving the Merger as an indirect wholly-owned subsidiary of AcelRx under the name “Tetraphase Pharmaceuticals, Inc.”.

Merger Sub’s current contact information is as follows:

c/o AcelRx Pharmaceuticals, Inc.

351 Galveston Drive

Redwood City, CA 94063

(650) 216-3500

The Merger (see page 48)

The AcelRx Board and the Tetraphase Board have each unanimously approved the Merger Agreement, pursuant to which Merger Sub, an indirect wholly-owned subsidiary of AcelRx, will merge with and into Tetraphase, with Tetraphase surviving the Merger. As a result of the Merger, Tetraphase will become an indirect wholly-owned subsidiary of AcelRx. Upon completion of the Merger, Tetraphase stockholders and certain other Tetraphase equityholders will own approximately 14.6% of the outstanding shares of AcelRx Common Stock on a fully diluted basis.

At the Special Meeting to be held via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time, you will be asked to consider and vote upon a proposal to adopt the Merger Agreement.

Tetraphase stockholders are receiving this proxy statement/prospectus in connection with Tetraphase’s solicitation of proxies for the Special Meeting.

The Merger Agreement (see page 92)

A copy of the Merger Agreement is attached as Annex A to this proxy statement/prospectus. AcelRx and Tetraphase encourage you to read the entire Merger Agreement carefully because it is the principal document governing the Merger.

Merger Consideration and the Exchange Ratio (see page 92)

At the Effective Time, each share of Tetraphase Common Stock issued and outstanding immediately prior to the Effective Time (other than shares owned by AcelRx, Merger Sub or Tetraphase or any direct or indirect wholly-

 

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owned subsidiary of AcelRx or Tetraphase or by stockholders of Tetraphase who have exercised and perfected their statutory rights of appraisal under the DGCL) will be converted into the right to receive (i) 0.6303 of a share of AcelRx Common Stock (subject to a potential downward adjustment if the Tetraphase Net Cash is less than $5.0 million at the closing of the Merger), plus (ii) one CVR, plus (iii) any cash payable in lieu of fractional shares of AcelRx Common Stock. No fractional shares of AcelRx Common Stock will be issued in the Merger.

The Special Meeting (see page 99)

The Special Meeting will be held via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time. The purposes of the Special Meeting are as follows:

 

   

Proposal 1: Merger Agreement Proposal: To adopt the Merger Agreement.

 

   

Proposal 2: Compensation Proposal: To approve, on a nonbinding, advisory basis, the “golden parachute” compensation that will or may be payable to Tetraphase’s named executive officers in connection with the Merger.

 

   

Proposal 3: Adjournment Proposal: To approve adjournments of the Special Meeting, if necessary or appropriate, to solicit additional proxies if sufficient votes to approve the merger agreement proposal have not been obtained by Tetraphase.

Completion of the Merger is conditioned on the approval of the merger agreement proposal by Tetraphase stockholders. Approval of the compensation proposal concerning the merger-related compensation arrangements for Tetraphase’s named executive officers is not a condition to the obligation of either Tetraphase or AcelRx to complete the Merger.

Only holders of record of issued and outstanding shares of Tetraphase Common Stock as of the close of business on the Record Date are entitled to notice of, and to vote at, the Special Meeting. Tetraphase stockholders may cast one vote for each share of Tetraphase Common Stock that Tetraphase stockholders held as of the Record Date.

Assuming a quorum is present at the Special Meeting, the merger agreement proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Tetraphase Common Stock entitled to vote on such proposal. Accordingly, a Tetraphase stockholder’s abstention from voting, a broker non-vote or the failure of a Tetraphase stockholder to vote (including the failure of a Tetraphase stockholder who holds shares in “street name” through a bank, broker or other nominee to give voting instructions to that bank, broker or other nominee) will have the same effect as votes cast “AGAINST” the merger agreement proposal.

Assuming a quorum is present at the Special Meeting, approval of the compensation proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on this proposal.

Whether or not a quorum is present at the Special Meeting, approval of the adjournment proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on this proposal.

AcelRx Board’s Reasons for the Merger (see page 63)

The AcelRx Board authorized and approved the Merger Agreement and approved the Contemplated Transactions, including the issuance of AcelRx Common Stock as Merger Consideration, and such other

 

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agreements, instruments and documents as are contemplated by the Merger Agreement, including the Voting Agreements, Exchange Agreement and the form of CVR Agreement, as well as the Co-Promotion Agreement. The AcelRx Board also determined that the terms of the Merger are fair to and in the best interests of AcelRx, Merger Sub and their respective stockholders.

The AcelRx Board believes the combination of the two organizations creates efficiencies resulting from commercializing multiple products with a single salesforce. The combination also creates a growth platform to further consolidate hospital-focused pharmaceutical companies and products expected to generate near-and long-term growth, additional synergies and stockholder value.

Recommendation of the Tetraphase Board; the Tetraphase Board’s Reasons for the Merger (see page 63)

The Tetraphase Board unanimously recommends that Tetraphase stockholders vote “FOR” the merger agreement proposal, “FOR” the compensation proposal, and “FOR” the adjournment proposal. In reaching its determinations and recommendations, the Tetraphase Board consulted with Tetraphase’s senior management and its outside legal and financial advisors, and considered a number of factors, including the following reasons that weighed in favor of the Merger:

 

   

the shares of AcelRx Common Stock payable at closing will provide Tetraphase equityholders with ownership of approximately 14.6% of the combined company and therefore allow Tetraphase’s stockholders to participate in the anticipated growth of the combined company, as well as any synergies resulting from the Merger;

 

   

the fact that the shares of AcelRx Common Stock that Tetraphase stockholders would receive pursuant to the Merger Agreement would be registered and freely tradable following the completion of the Merger;

 

   

in addition to the upfront merger consideration, each share of Tetraphase Common Stock will entitle the holder thereof to one CVR, which may provide Tetraphase stockholders with an opportunity to receive additional payments in cash or shares of AcelRx Common Stock upon the achievement of certain milestones, and AcelRx has agreed in the agreement governing the CVRs to use commercially reasonable efforts to achieve such milestones;

 

   

the expectation that the combined company would generate potentially significant cost synergies, including cost savings relating to the sales infrastructure of the companies;

 

   

the risks associated with continuing to operate Tetraphase on a stand-alone basis, including the time and resources required to continue to commercialize and market XERAVA;

 

   

the risks, costs and uncertainty associated with Tetraphase’s existing cash position, including the need to obtain additional financing and the amount of cash resources that would be necessary to effect an orderly bankruptcy or liquidation process;

 

   

the risks, costs and timing associated with a potential liquidation or bankruptcy event of Tetraphase;

 

   

the expectation that the combined company could also realize revenue growth, including potentially immediately following execution of the Merger Agreement from activities under the Co-Promotion Agreement; and

 

   

certain other factors, including the information and discussions with Tetraphase’s senior management and outside advisors regarding AcelRx’s business, assets, financial condition, results of operations, current business strategy and prospects, including the projected results of AcelRx as a stand-alone company, and the expected pro forma effect of the Merger on the combined company.

For a more complete description of the factors considered by the Tetraphase Board in reaching this decision, including potentially negative factors against which these advantages and opportunities were weighed, and additional information on the recommendation of the Tetraphase Board, see the section titled “The Merger—Recommendation of the Tetraphase Board; the Tetraphase Board’s Reasons for the Merger” beginning on page 63 of this proxy statement/prospectus.

 

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Opinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor (see page 67)

Tetraphase retained Janney as its financial advisor in connection with the potential sale of Tetraphase. Janney delivered an opinion to the Tetraphase Board to the effect that, as of March 15, 2020, based upon and subject to the assumptions made, matters considered and limitations and qualifications upon the review undertaken by Janney, the Merger Consideration to be received in the Merger was fair, from a financial point of view, to the common stockholders of Tetraphase. The full text of Janney’s written opinion, dated as of March 15, 2020, which is attached as Annex E to this proxy statement/prospectus and which you should read carefully and in its entirety, is subject to the assumptions, limitations, qualifications and other conditions contained in such opinion and is necessarily based on economic, capital markets and other conditions, and the information made available to Janney, as of the date of such opinion. The description set forth below is qualified in its entirety by reference to the full text of the opinion.

Janney’s opinion was directed to the Tetraphase Board and addressed only the fairness, from a financial point of view, as of the date of the Opinion, of the consideration to be paid to the common stockholders of Tetraphase. Janney’s opinion did not address any other aspects of the proposed Merger or the Contemplated Transactions and did not address the prices at which shares of AcelRx Common Stock would trade following completion of the proposed Merger or at any time. Janney’s opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Janney in rendering its opinion. Janney’s opinion did not and does not constitute a recommendation as to how any holder of Tetraphase Common Stock should vote in connection with the proposed Merger.

For a description of the opinion that the Tetraphase Board received from Janney, see “The Merger—Opinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor” beginning on page 67 of this proxy statement/prospectus.

Interests of Tetraphase Directors and Executive Officers in the Merger (see page 79)

In considering the information described in this proxy statement/prospectus, you should be aware that Tetraphase’s executive officers and directors may have interests in the Merger that are or were different from, or in conflict with or are in addition to, those of Tetraphase’s stockholders generally. In addition to the rights described below in this section, the executive officers of Tetraphase may be eligible to receive some of the generally applicable benefits described under “The Merger Agreement—Employee Benefit Matters” beginning on page 112 of this proxy statement/prospectus, and certain directors are affiliated with certain of Tetraphase’s equityholders that will be entitled to receive consideration as described under “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Treatment of Outstanding Tetraphase Warrants.” The Tetraphase Board was aware of and considered these interests, among other matters, in evaluating and reaching its decision to approve the Merger Agreement, the Merger and the other Contemplated Transactions and in recommending that Tetraphase stockholders vote for the merger agreement proposal.

Overview of the Merger Agreement and Agreements Related to the Merger Agreement

Treatment of Tetraphase Common Stock (see page 92)

At the Effective Time, each share of Tetraphase Common Stock outstanding immediately prior to the Effective Time (other than any Dissenting Tetraphase Shares or shares held by AcelRx, Merger Sub, Tetraphase (or in Tetraphase’s treasury) or any wholly-owned subsidiary of AcelRx or Tetraphase) will be converted into the right to receive the Merger Consideration, i.e., (i) a number of shares of AcelRx Common Stock equal to the Exchange Ratio and (ii) one CVR representing the right to receive the consideration set forth in the CVR Agreement. No fractional shares of AcelRx Common Stock will be issued in the Merger and Tetraphase’s stockholders will receive cash in lieu of any fractional share.

 

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Treatment of Tetraphase Options (see page 92)

All Tetraphase Options, whether vested or unvested, will terminate at the Effective Time and will be of no further force and effect.

Treatment of Tetraphase RSUs and Tetraphase PRSUs (see page 92)

Effective as of five business days prior to the closing date of the Merger, each outstanding Tetraphase RSU and Tetraphase PRSU will vest in full, and Tetraphase will issue to the holder one share of Tetraphase Common Stock in respect of each Tetraphase RSU and each Tetraphase PRSU that vests. The holders of the Tetraphase RSUs and Tetraphase PRSUs are required, pursuant to the applicable award agreements, to sell, on the vesting date, a number of shares that are issued in respect of such awards having a value equal to Tetraphase’s tax withholding obligations. All shares of Tetraphase Common Stock issued on vesting of the Tetraphase RSUs and Tetraphase PRSUs (including the shares that are sold to satisfy tax withholding obligations and any shares that continue to be held by the holder of the award) will be treated as outstanding shares of Tetraphase Common Stock at the Effective Time and will be converted into the right to receive the Merger Consideration.

Treatment of Tetraphase Warrants (see page 93)

Each outstanding and unexercised Tetraphase Warrant will be treated in accordance with its terms, except that, pursuant to the Voting Agreements and Exchange Agreement described below, (i) each outstanding common stock warrant issued by Tetraphase in November 2019 will be converted into the right to receive, at the closing of the Merger, 0.8813 of a share of AcelRx Common Stock for each share of Tetraphase Common Stock underlying such Tetraphase Warrant, (ii) each outstanding common stock warrant issued by Tetraphase in January 2020 will be converted into the right to receive, at the closing of the Merger, 0.9087 of a share of AcelRx Common Stock for each share of Tetraphase Common Stock underlying such Tetraphase Warrant, and (iii) each outstanding pre-funded warrant will be converted into the right to receive the product of (a) in the case of pre-funded warrants issued by Tetraphase in November 2019, 98.89052%, and in the case of pre-funded warrants issued by Tetraphase in January 2020, 99.88906%, and (b) each element of the Merger Consideration, for each share of Tetraphase Common Stock underlying such Tetraphase Warrant.

The Voting Agreements and Exchange Agreement (see page 115)

Concurrently with the execution of the Merger Agreement, AcelRx entered into Voting Agreements with the Tetraphase equityholders party thereto (including certain entities holding shares of Tetraphase Common Stock on their behalf), and collectively beneficially owning approximately 31% of the outstanding voting power of Tetraphase, pursuant to which such equityholders agreed, among other things, to vote their shares of Tetraphase Common Stock in favor of the adoption of the Merger Agreement, and agreed to certain restrictions on their ability to take actions with respect to Tetraphase and their shares of Tetraphase Common Stock. In addition, such equityholders agreed to the treatment of the Tetraphase Warrants specified above. The Voting Agreements terminate by their terms in certain circumstances, including upon termination of the Merger Agreement in accordance with its terms and upon a Tetraphase Adverse Change in Recommendation. Tetraphase also entered into an exchange agreement with a holder of Tetraphase Warrants under which the holder agreed to the treatment of Tetraphase Warrants specified above.

The CVR Agreement (see page 116)

Prior to the Effective Time of the Merger, AcelRx will enter into the CVR Agreement with a rights agent selected by AcelRx and reasonably acceptable to Tetraphase governing the terms of certain consideration payable thereunder. The CVRs represent the right to receive contingent payments, payable to the rights agent for the benefit of the holders of CVRs, of up to $12.5 million in the aggregate, payable in cash or shares of AcelRx

 

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Common Stock at AcelRx’s election, without interest, and allocated among the outstanding CVRs, if the following milestones are achieved:

 

   

$2.5 million upon the achievement of annual net sales of XERAVA in the United States of at least $20.0 million during the calendar year ending on December 31, 2021;

 

   

$4.5 million upon the achievement of annual net sales of XERAVA in the United States of at least $35.0 million during any calendar year ending on or before December 31, 2024; and/or

 

   

$5.5 million upon the achievement of annual net sales of XERAVA in the United States of at least $55.0 million during any calendar year ending on or before December 31, 2024.

The CVR Agreement provides that all milestones or a combination of any two milestones can be earned in the same year, in which case all such applicable milestone amounts will be payable. If AcelRx elects to pay milestone amounts in shares of AcelRx Common Stock, the number of shares of AcelRx Common Stock will be determined by reference to the number of shares of AcelRx Common Stock equal to the applicable milestone amount divided by the average closing price of a share of AcelRx Common Stock on the Nasdaq Global Market for the 10 most recent trading days that AcelRx Common Stock has traded ending on the trading day one day prior to the date of the applicable payment date. Notwithstanding anything to the contrary in the CVR Agreement, AcelRx will not be required to pay any milestone amounts in shares of AcelRx Common Stock in excess of a number of shares of AcelRx Common Stock equal to 19.9% of the total number of shares of AcelRx Common Stock issued and outstanding immediately prior to the execution and delivery of the Merger Agreement, when combined with all other shares of AcelRx Common Stock issued in connection with the closing of the Merger; provided that this limitation shall not limit any CVR holder’s right to receive any milestone amount in full, and any portion of a milestone amount that would otherwise exceed such limitation will be paid in cash.

Additionally, commencing upon the closing of the Merger and continuing until the earlier of December 31, 2024 or the achievement of all milestones, AcelRx has agreed to, and has agreed to cause its affiliates and licensees to, use commercially reasonable efforts (as defined in the CVR Agreement) to achieve the milestones. Without limiting the foregoing, AcelRx has further agreed that neither it nor any of its affiliates will act in bad faith for the purpose of avoiding achievement of any milestone or the payment of any milestone amount.

The terms of the CVRs described above reflect the parties’ agreement over the sharing of potential economic upside benefits from future net sales of XERAVA and do not reflect anticipated net sales of XERAVA. There can be no assurance that such levels of net sales will occur or that any or all of the payments in respect of the CVRs will be made.

The right to payments under the CVRs as evidenced by the CVR Agreement is a contractual right only and will not be transferable, except in the limited circumstances specified in the CVR Agreement, including: (i) upon death of a holder by will or intestacy; (ii) by instrument to an inter vivos or testamentary trust in which the CVRs are to be passed to beneficiaries upon the death of the trustee; (iii) pursuant to a court order; (iv) by operation of law (including by consolidation or merger) or without consideration in connection with the dissolution, liquidation or termination of any corporation, limited liability company, partnership or other entity; (v) in the case of CVRs held in book-entry or other similar nominee form, from a nominee to a beneficial owner and, if applicable, through an intermediary, as allowable by the Depository Trust Company; or (vi) to AcelRx in connection with an abandonment of the CVR or in connection with a negotiated transaction.

The foregoing description of the CVR Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the CVR Agreement, a form of which is attached as Annex D to this proxy statement/prospectus.

The Co-Promotion Agreement (see page 117)

Concurrently with the Merger Agreement, AcelRx and Tetraphase entered into the Co-Promotion Agreement, pursuant to which AcelRx agreed to detail and promote Tetraphase products, and Tetraphase agreed to detail and

 

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promote AcelRx’s products, in accordance with marketing plans to be agreed to by the parties and subject to specified minimum call requirements. The co-promotion activities are overseen by a joint marketing and sales committee, which is responsible for developing marketing plans for the products, provided, that each party is responsible for developing the marketing strategy for, creating the promotional materials for, and handling sales and distribution of, its own products. There are no payments being made between the parties under the agreement, and each party will continue to receive all the revenues from the sales of its own products.

The Co-Promotion Agreement has a five-year term, unless terminated earlier pursuant to its terms. Either party may terminate the Co-Promotion Agreement upon a 15-month notice period. Additionally, either party may terminate the Co-Promotion Agreement in the event of an uncured material breach or insolvency event of the other party and in the event of other specified circumstances relating to the other party’s products, such as safety.

In the event of a change of control of either party, the other party may terminate the agreement upon one month’s notice and, upon a material breach by the change of control party, may be entitled to receive a 10% royalty on net sales of the change of control party’s products for a specified period of time (but not to exceed eighteen months).

Conditions to the Merger (see page 95)

The obligations to consummate the Merger and otherwise consummate the Contemplated Transactions are subject to receipt of the Tetraphase stockholder vote required to adopt the Merger Agreement and the satisfaction or waiver, on or prior to the Effective Time, of the other conditions set forth in the section titled “The Merger Agreement—Conditions to the Merger” beginning on page 95 of this proxy statement/prospectus.

No Solicitation of Acquisition Proposals (see page 98)

The Merger Agreement prohibits Tetraphase from soliciting an alternative transaction to the Merger. Under these “no solicitation” provisions, Tetraphase has agreed not to, directly or indirectly:

 

   

solicit, initiate or knowingly facilitate or knowingly encourage any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal;

 

   

engage in, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any other person any non-public information in connection with, an Acquisition Proposal or any proposal or offer that would reasonably be expected to lead to an Acquisition Proposal; or

 

   

adopt any resolution for the purpose of exempting any person (other than AcelRx and its subsidiaries) from the restriction on “business combinations” or any similar provision contained in applicable takeover law or Tetraphase’s organizational or other governing documents.

The Merger Agreement provides, however, that Tetraphase may furnish information to and/or engage in discussions or negotiations with a third party in response to a bona fide, written Acquisition Proposal if:

 

   

the Acquisition Proposal is made or renewed after the date of the Merger Agreement (and is not withdrawn);

 

   

the Acquisition Proposal did not result from any material breach of certain Tetraphase non-solicitation and board recommendation obligations; and

 

   

the Tetraphase Board determines in good faith, after consultation with its independent financial advisors and outside legal counsel, the Acquisition Proposal constitutes or could reasonably be expected to lead to a Superior Offer and that failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements.

Tetraphase must keep AcelRx reasonably informed of any material developments regarding any such Acquisition Proposal, including by providing reasonably prompt (and in any event within one business day) notice of all material amendments or modifications thereto and a copy of any final definitive agreement Tetraphase would be prepared to execute, subject to the terms and conditions of the Merger Agreement.

 

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For more information, see “The Merger Agreement—No Solicitation of Acquisition Proposals” beginning on page 98 of this proxy statement/prospectus.

Tetraphase Board Recommendation (see page 100)

The Tetraphase Board may, prior to the adoption of the merger agreement proposal by the Tetraphase stockholders, effect a Tetraphase Adverse Change in Recommendation or terminate the Merger Agreement to substantially concurrently enter into a Specified Agreement and pay the termination fee pursuant to the Merger Agreement if (and only if):

 

   

a bona fide written Acquisition Proposal is made to Tetraphase that has not been withdrawn;

 

   

such Acquisition Proposal did not result from a material breach of certain Tetraphase non-solicitation obligations in the Merger Agreement;

 

   

the Tetraphase Board determines in good faith, after consultation with outside legal counsel and independent financial advisors, that such Acquisition Proposal is a Superior Offer and that the failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements;

 

   

Tetraphase provides a Determination Notice to AcelRx;

 

   

Tetraphase has made available to AcelRx the identity of the offeror, a summary of the material terms and conditions of the Acquisition Proposal and copies of all written materials and certain other documents required under the non-solicitation provisions of the Merger Agreement;

 

   

Tetraphase has given AcelRx the four business days after the Determination Notice to propose revisions to the terms of the Merger Agreement or make other proposals and shall have made available its representatives to negotiate with AcelRx with respect to such proposed revisions or other proposal, if any (provided, that AcelRx may revise such offer or proposal in response to any revisions to a Superior Offer);

 

   

after considering any such revised proposal from AcelRx, including whether such proposal was a written, binding and irrevocable offer, and the results of any such negotiations and giving effect to the proposals made by AcelRx, if any, after consultation with outside legal counsel and its independent financial advisors, the Tetraphase Board shall have determined in good faith that such Acquisition Proposal is a Superior Offer and that the failure to make the Tetraphase Adverse Change in Recommendation and/or terminate the Merger Agreement pursuant to the Superior Offer Termination Right could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements; and

 

   

if Tetraphase intends to terminate the Merger Agreement to enter into a Specified Agreement, Tetraphase has complied with the termination provisions of the Merger Agreement pursuant to the Superior Offer Termination Right, including the payment of the termination fee.

If there are any material amendments to such Acquisition Proposal, a new Determination Notice must be delivered to AcelRx except the references to four business days will be reduced to two business days.

Further, the Tetraphase Board may, prior to the adoption of the merger agreement proposal by the Tetraphase stockholders, make a Tetraphase Change of Recommendation in response to a Change in Circumstance if (and only if):

 

   

the Tetraphase Board determines in good faith, after consultation with Tetraphase’s outside legal counsel, that the failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements;

 

   

Tetraphase has given AcelRx a Determination Notice at least four business days prior to making any such Tetraphase Adverse Change in Recommendation;

 

   

Tetraphase has specified the Change in Circumstance in reasonable detail including a summary of the material facts and circumstances involved in such Change in Circumstance;

 

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Tetraphase has given AcelRx the four business days after the Determination Notice to propose revisions to the terms of the Merger Agreement or make other proposals and shall have made available its representatives to negotiate with AcelRx with respect to such proposed revisions or other proposal, if any, such that the applicable Change in Circumstance would no longer necessitate a Tetraphase Adverse Change in Recommendation under the Merger Agreement; and

 

   

after considering any such proposal, including whether such proposal was a written, binding and irrevocable offer, and the results of such negotiations and giving effect to the proposals made by AcelRx, if any, after consultation with outside legal counsel and its independent financial advisors, the Tetraphase Board shall have determined in good faith that the failure to make the Tetraphase Adverse Change in Recommendation could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements.

If there is a material change to the status of such Change in Circumstance, a new Determination Notice must be delivered to AcelRx except the references to four business days will be reduced to two business days.

For more information, see “The Merger Agreement—Tetraphase Board Recommendation” beginning on page 100 of this proxy statement/prospectus.

Termination of the Merger Agreement and Termination Fee and Expenses (see pages 103 and 104)

The Merger Agreement may be terminated by the parties under certain circumstances, and upon termination of the Merger Agreement, Tetraphase may be required, in certain circumstances, to pay to AcelRx a termination fee of $810,000, and/or in other specified circumstances Tetraphase may be required to reimburse AcelRx’s expenses incurred, up to a maximum of $200,000, as set forth in the section titled “The Merger Agreement—Termination Fees and Expenses” beginning on page 104 of this proxy statement/prospectus.

Accounting Treatment of the Merger (see page 90)

AcelRx expects the Merger will be accounted for by AcelRx as a business combination under the acquisition method of accounting, in conformity with GAAP. Under the acquisition method of accounting, the assets and liabilities of Tetraphase as of the Effective Time will be recorded by AcelRx at their respective fair values and consolidated with those of AcelRx. Any excess of purchase price over the fair value of the net assets will be recorded as goodwill. Tetraphase’s assets and liabilities and results of operations will be consolidated with those of AcelRx from and after the date of the Merger.

Litigation Relating to the Merger (see page 90)

As of April 21, 2020, four lawsuits have been filed by alleged Tetraphase stockholders challenging the Merger. The first lawsuit, a putative class action complaint, is captioned Plumley v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-00496, and was filed by Patrick Plumley in the United States District Court for the District of Delaware. The Plumley complaint names as defendants Tetraphase and each member of the Tetraphase Board, as well as AcelRx and Merger Sub. The second lawsuit is captioned Sahan v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03069, and was filed by Herman Sahan, in the United States District Court for the Southern District of New York. The Sahan complaint names as defendants Tetraphase and certain members of the Tetraphase Board. The third lawsuit is captioned Giacobbe v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-10762, and was filed by Charles Giacobbe, in the United States District Court for the District of Massachusetts. The fourth lawsuit is captioned Ravi v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03142, and was filed by Surya Ravi in the United States District Court for the Southern District of New York. The Giacobbe and Ravi complaints name as defendants Tetraphase and each member of the Tetraphase Board.

The Plumley, Sahan, Giacobbe and Ravi complaints allege violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The plaintiffs in these actions generally allege that the registration statement on Form S-4, filed with the SEC on April 6, 2020, omits material information with respect to the proposed

 

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transaction, which renders such registration statement false and misleading. The Sahan complaint also alleges that the defendants breached their fiduciary duty of candor/disclosure, by allegedly disseminating a materially incomplete and misleading registration statement in connection with the Merger.

The complaints seek preliminary and permanent injunction of the proposed transaction and, if the Merger is consummated, rescission or rescissory damages. The complaints also seek the dissemination of a registration statement that discloses certain information requested by the plaintiffs. In addition, the complaints seek attorneys’ and experts’ fees.

The defendants believe that the Plumley, Sahan, Giacobbe and Ravi complaints are without merit.

Material U.S. Federal Income Tax Consequences (see page 182)

In general, the exchange of Tetraphase Common Stock for the Merger Consideration in the Merger is expected to be a taxable transaction for U.S. federal income tax purposes Please carefully review the information under “Material U.S. Federal Income Tax Consequences of the Merger for Tetraphase Stockholders” beginning on page 182 of this proxy statement/prospectus for a description of material U.S. federal income tax consequences of the Merger to Tetraphase stockholders. The tax consequences to you will depend on your particular facts and circumstances.

You are urged to consult your tax advisors as to the specific tax consequences to you of the Merger and your receipt of the Merger Consideration, including the applicability and effect of U.S. federal, state, local and non-U.S. income and other tax laws in light of your particular circumstances.

Risk Factors (see page 27)

Both AcelRx and Tetraphase are subject to various risks associated with their businesses and their industries. In addition, the Merger, including the possibility that the Merger may not be completed, poses a number of risks to each company and its respective stockholders, including the following risks:

 

   

if the Merger is not consummated, AcelRx’s and Tetraphase’s business could suffer materially and the respective stock prices of AcelRx and/or Tetraphase could decline;

 

   

the Merger may be completed even though material adverse changes may result from the announcement of the Merger, industry-wide changes and other causes;

 

   

the market price of the combined company’s common stock may decline as a result of the Merger;

 

   

AcelRx and Tetraphase’s stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger;

 

   

during the pendency of the Merger, Tetraphase will be subject to contractual limitations set forth in the Merger Agreement that restrict its ability to enter into business combination transactions with another party;

 

   

the opinion received by the Tetraphase Board from Janney has not been, and is not expected to be, updated to reflect changes in circumstances that may have occurred since the date of the opinion; and

 

   

AcelRx and Tetraphase may become involved in securities litigation or stockholder derivative litigation in connection with the Merger, and this could divert the attention of AcelRx and Tetraphase management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

These risks and other risks are discussed in greater detail under the section titled “Risk Factors” in this proxy statement/prospectus. You are encouraged to read and consider all of these risks carefully.

Appraisal Rights in Connection with the Merger (see page 87)

Holders of Tetraphase Common Stock are entitled to appraisal rights in connection with the Merger under Section 262 of the DGCL. For more information about such rights, please see the provisions of Section 262 of the DGCL attached as Annex F to this proxy statement/prospectus, and the section titled “The Merger—Appraisal Rights” beginning on page 87 of this proxy statement/prospectus.

 

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SELECTED HISTORICAL FINANCIAL DATA OF ACELRX

The following table sets forth selected historical consolidated financial data for AcelRx. The historical consolidated financial information for each of the years in the five-year period ended December 31, 2019 is derived from the audited consolidated financial statements of AcelRx as of and for each of the years in the five-year period ended December 31, 2019. You should not assume the results of operations for any past periods indicate results for any future period, including with respect to the future performance of AcelRx following the date of this proxy statement/prospectus or following the completion of the Merger.

The information set forth below should be read in conjunction with AcelRx’s consolidated financial statements and the related notes thereto and the information under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in AcelRx’s Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated by reference into this proxy statement/prospectus. For additional information, see “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.

 

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Statements of Operations Data

 

     Year Ended December 31,  
     2019     2018     2017     2016     2015  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

          

Total revenue

   $ 2,289     $ 2,151     $ 7,995     $ 17,357     $ 19,263  

Costs and Operating Expenses:

          

Cost of goods sold

   $ 6,806     $ 3,976     $ 10,659     $ 12,315     $ 1,770  

Research and development

     4,661       13,137       19,409       21,402       22,488  

General and administrative

     45,027       20,765       16,609       15,597       14,203  

Restructuring costs

     —         —         —         —         756  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     56,494       37,878       46,677       49,314       39,217  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (54,205     (35,727     (38,682     (31,957     (19,954

Interest expense

     (2,535     (2,217     (3,316     (2,770     (2,977

Interest income and other income, net

     2,166       1,138       510       918       1,720  

Non-cash interest income (expense) on liability related to sale of future royalties

     1,337       (10,341     (10,721     (9,382     (2,428
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

   $ (53,237   $ (47,147   $ (52,209   $ (43,191   $ (23,639

Provision (benefit) for income taxes

     3       2       (701     (34     760  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (53,240   $ (47,149   $ (51,508   $ (43,157   $ (24,399
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic

   $ (0.67   $ (0.81   $ (1.10   $ (0.95   $ (0.55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic

     79,184,266       58,408,548       46,883,535       45,313,118       44,300,099  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, diluted

   $ (0.67   $ (0.81   $ (1.10   $ (0.95   $ (0.60
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, diluted

     79,184,266       58,408,548       46,883,535       45,313,118       44,468,440  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data

 

     As of December 31,  
     2019     2018     2017     2016     2015  
     (in thousands)  

Balance Sheet Data:

          

Cash, cash equivalents and short-term investments

   $ 66,137     $ 105,715     $ 60,469     $ 80,310     $ 113,464  

Working capital

     58,077       92,066       49,753       78,862       106,167  

Total assets

     91,356       120,533       75,552       99,993       127,785  

Long-term debt

     25,147       11,991       19,096       21,549       20,922  

Liability related to sale of future royalties

     92,035       93,679       83,588       72,987       63,612  

Accumulated deficit

     (398,106     (345,019     (297,870     (246,362     (203,205

Total stockholders’ (deficit) equity

     (41,418     4,253       (36,509     (5,337     33,113  

 

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SELECTED HISTORICAL FINANCIAL DATA OF TETRAPHASE

Tetraphase is a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and is not required to provide the information required under this item.

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following table presents selected unaudited pro forma combined financial information about AcelRx’s consolidated balance sheet and statements of operations, after giving effect to the Merger with Tetraphase. The information under “Selected Unaudited Pro Forma Condensed Combined Statements of Operations” in the table below assumes the Merger had been consummated on January 1, 2019, the beginning of the earliest period presented. The information under “Selected Unaudited Pro Forma Condensed Combined Balance Sheet Data” in the table below assumes the Merger had been consummated on December 31, 2019.

The unaudited pro forma condensed combined financial information includes adjustments which are preliminary and may be revised. These revisions may be material. In addition, the unaudited pro forma condensed combined financial information does not reflect any cost savings or associated costs to achieve such savings from operating efficiencies, synergies, debt refinancing or other restructuring that may result from the Merger. The unaudited pro forma condensed combined financial information is not necessarily indicative of results that actually would have occurred or that may occur in the future had the Merger been completed on the dates indicated.

The accompanying unaudited pro forma condensed combined financial information should be read in conjunction with (a) the audited consolidated financial statements of AcelRx contained in its Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated herein by reference, and (b) the audited consolidated financial statements of Tetraphase for the year ended December 31, 2019, which are incorporated herein by reference. See “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.

 

     Year Ended
December 31,
2019
 
(in thousands, except share and per share data)    (Unaudited)  

Selected Unaudited Pro Forma Condensed Combined Statements of Operations

  

Total revenue

   $ 9,665  

Operating costs and expenses:

  

Cost of goods sold

     12,207  

Research and development

     27,553  

Selling, general and administrative

     94,070  
  

 

 

 

Total operating costs and expenses

     133,830  
  

 

 

 

Loss from operations

     (124,165

Interest expense

     (5,115

Interest income and other income (expense), net

     3,761  

Non-cash interest income (expense) on liability related to sale of future royalties

     1,337  

Loss on extinguishment of debt

     (1,568

Net loss before income taxes

   $ (125,750
  

 

 

 

Provision (benefit) for income taxes

     3  
  

 

 

 

Net loss

   $ (125,753
  

 

 

 

Net loss per share of common stock, basic

   $ (1.35
  

 

 

 

Shares used in computing net loss per share of common stock, basic

     93,170,280  
  

 

 

 

Net loss per share of common stock, diluted

   $ (1.35
  

 

 

 

Shares used in computing net loss per share of common stock, diluted

     93,170,280  
  

 

 

 

 

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     As of
December 31,
2019
 
(in thousands)    (Unaudited)  

Selected Unaudited Pro Forma Condensed Combined Balance Sheet Data

  

Cash, cash equivalents and short-term investments

   $ 70,861  

Working capital

     69,890  

Total assets

     124,887  

Long-term debt

     25,147  

Liability related to sale of future royalties

     92,035  

Accumulated deficit

     (402,493

Total stockholders’ (deficit) equity

     (28,005

 

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UNAUDITED COMPARATIVE PER SHARE INFORMATION

The following table sets forth, for the periods indicated, selected per share information for AcelRx Common Stock on a historical and pro forma combined basis and selected per share information for Tetraphase Common Stock on a historical and pro forma equivalent basis. Except for the historical information as of and for the year ended December 31, 2019, which is derived from the audited financial statements, the information in the table is unaudited. The information in the table is based on, and should be read together with, the historical consolidated financial statements and related notes of (i) AcelRx contained in its Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated by reference into this proxy statement/prospectus, and (ii) Tetraphase as disclosed under “Consolidated Financial Statements of Tetraphase” included in Tetraphase’s Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.

The pro forma combined per share information for the year ended December 31, 2019 reflects the Merger as if it had occurred on January 1, 2019. The pro forma combined book value per share amounts in the table below reflect the Merger as if it had occurred on December 31, 2019. The pro forma information below is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger and the other Contemplated Transactions had been completed as of the beginning of the periods presented, nor is it necessarily indicative of the future operating results or financial position of AcelRx or Tetraphase following the date of this proxy statement/prospectus or following the completion of the Merger.

The pro forma combined net loss per share of common stock set forth below was calculated using the methodology as described in “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 187 of this proxy statement/prospectus. The pro forma combined book value per share was calculated by dividing total combined AcelRx and Tetraphase pro forma common stockholders’ equity by pro forma equivalent shares of common stock. The Tetraphase equivalent pro forma per common share amounts were calculated by multiplying the AcelRx pro forma combined per share amounts by the Exchange Ratio of 0.6303, rounded to the nearest whole cent.

Neither AcelRx nor Tetraphase declared a cash dividend on account of their respective common stock during the periods presented in the following table. Neither AcelRx nor Tetraphase have any intention to pay cash dividends in the foreseeable future.

 

     Year ended
December 31,
2019
 

AcelRx historical information

  

Net loss per share, basic and diluted

   $ 0.67  

Book value per share(1)

   $ (0.52

Tetraphase historical information

  

Net loss per share, basic and diluted

   $ 22.85  

Book value per share(1)

   $ 6.68  

AcelRx unaudited pro forma combined information

  

Net loss per share, basic and diluted

   $ 1.35  

Book value per share

   $ (0.30

Tetraphase equivalent unaudited pro forma combined information(2)

  

Net loss per share, basic and diluted

   $ 0.85  

Book value per share

   $ 0.19  

 

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(1)

Book value per share represents the total stockholders’ equity as of December 31, 2019 divided by the number of shares outstanding, as of December 31, 2019.

(2)

The Tetraphase equivalent unaudited pro forma combined share amounts were calculated by multiplying the AcelRx unaudited pro forma combined share amounts by the Exchange Ratio of 0.6303.

 

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COMPARATIVE MARKET PRICE INFORMATION

AcelRx Common Stock is listed on Nasdaq under the symbol “ACRX.” Tetraphase Common Stock is listed on Nasdaq under the symbol “TTPH.” The following table presents the closing prices of AcelRx Common Stock and Tetraphase Common Stock on March 13, 2020, the last trading day before the public announcement of the Merger Agreement, and April 23, 2020, the last practicable trading day prior to the mailing of this proxy statement/prospectus. The table also shows the equivalent per share value of the Merger Consideration for a share of Tetraphase Common Stock on the relevant date. Equivalent per share amounts for Tetraphase Common Stock are calculated by multiplying per share information for AcelRx Common Stock by the Exchange Ratio of 0.6303, rounded to the nearest whole cent.

 

Date    AcelRx Closing Price      Tetraphase Closing Price      Equivalent Value Per
Share of Tetraphase Common
Stock
 

March 13, 2020

   $ 1.03      $ 1.45      $ 0.65  

April 23, 2020

   $ 1.42      $ 1.29      $ 0.90  

The above table shows only historical comparisons. These comparisons may not provide meaningful information to Tetraphase stockholders in determining whether to approve the adoption of the Merger Agreement. Because the Exchange Ratio will not be adjusted for changes in the market price of AcelRx Common Stock, the market value of the shares of AcelRx Common Stock that holders of Tetraphase Common Stock will be entitled to receive at the Effective Time of the Merger may vary significantly from the market value of the shares of AcelRx Common Stock that holders of Tetraphase Common Stock would have received if the Merger were completed on the dates shown in the table above.

The above table does not take into account any adjustment of the Exchange Ratio to the extent the Tetraphase Net Cash is less than $5.0 million at the closing of the Merger. If the Tetraphase Net Cash is less than $5.0 million, the Exchange Ratio will be adjusted to the ratio determined as follows: (a) (i) $20.0 million, minus (ii) the dollar amount by which the Tetraphase Net Cash is less than $5.0 million, minus (iii) $10,265,292, divided by (b) (i) 10,800,166 shares of Tetraphase Common Stock, divided by (ii) $1.43.

 

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RISK FACTORS

Risks Relating to the Merger

The failure to complete the Merger in a timely manner, or at all, may adversely affect the business and financial results of AcelRx and Tetraphase and their respective stock prices.

Each of AcelRx’s and Tetraphase’s obligations to consummate the Merger are subject to the satisfaction or waiver of certain customary conditions, including, among others, (i) the Merger Agreement must be adopted by the requisite vote of Tetraphase stockholders; (ii) the absence of (A) any governmental restraining order or injunction having been issued with respect to the Contemplated Transactions and continuing in effect or (B) any legal proceeding of a governmental body challenging or seeking to prohibit the consummation of the Merger or related matters; (iii) subject to certain qualifications, the accuracy of the respective representations and warranties of Tetraphase and AcelRx and compliance by the parties with their respective obligations under the Merger Agreement; (iv) the registration statement of which this proxy statement/prospectus forms a part being declared effective by the SEC, and remaining in effect; (v) the approval of the shares of AcelRx Common Stock issuable as Merger Consideration for listing on Nasdaq; and (vi) the absence of any Tetraphase Material Adverse Effect or AcelRx Material Adverse Effect since the date of the Merger Agreement. AcelRx and Tetraphase cannot provide assurance that these or the other conditions to the completion of the Merger will be satisfied in a timely manner or at all. In addition, other factors may affect when and whether the Merger will occur. If the Merger is not completed, AcelRx’s and Tetraphase’s stock prices could fall to the extent that such current stock prices reflect an assumption that the Merger will be completed. Furthermore, if the Merger is not completed and the Merger Agreement is terminated, AcelRx and Tetraphase may suffer other consequences that could adversely affect such entity’s business, results of operations and stock price, including the following:

 

   

each of AcelRx and Tetraphase have incurred and will continue to incur costs relating to the Merger (including significant legal and financial advisory fees) and many of these costs are payable by AcelRx and Tetraphase whether or not the Merger is completed;

 

   

Tetraphase could be required, in certain circumstances, to pay an $810,000 termination fee and/or reimburse AcelRx up to $200,000 for certain of its costs incurred in connection with the Merger and the Merger Agreement;

 

   

Tetraphase may be unable to pursue business opportunities that would otherwise be in its best interest as a standalone company due to covenants restricting Tetraphase’s solicitation of alternative transaction proposals and the conduct of Tetraphase’s business between the date of signing the Merger Agreement and the closing of the Merger;

 

   

matters relating to the Merger (including sales integration planning and implementation) may require substantial commitments of time and resources by AcelRx’s and Tetraphase’s management teams, which could otherwise have been devoted to other opportunities that may have been beneficial to AcelRx and Tetraphase;

 

   

current and prospective employees could experience uncertainty about their future roles within the combined company, which may adversely affect AcelRx’s and Tetraphase’s ability to retain their respective key employees, who may seek other employment opportunities;

 

   

AcelRx and Tetraphase may be subject to legal proceedings related to the Merger or the failure to complete the Merger;

 

   

AcelRx’s and Tetraphase’s respective customers, prospective customers and other business partners and investors in general may view the failure to consummate the Merger as a poor reflection on its business or prospects; and

 

   

because of social distancing guidelines and other legal orders and restrictions caused by COVID-19, including that many hospitals will not allow Tetraphase sales representatives inside them during the pandemic, the economies realized by the Merger may be lower than they would have been otherwise.

 

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The Exchange Ratio is not adjustable based on the market price of AcelRx Common Stock so the merger consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was signed.

At the Effective Time, outstanding shares of Tetraphase Common Stock will be converted into the Merger Consideration, which includes shares of AcelRx Common Stock. Applying the Merger Consideration, each share of Tetraphase Common Stock issued and outstanding immediately prior to the Effective Time (other than shares owned by AcelRx, Merger Sub or Tetraphase or any direct or indirect wholly-owned subsidiary of AcelRx or Tetraphase or by stockholders of Tetraphase who have exercised and perfected their statutory rights of appraisal under the DGCL) will be automatically converted into the right to receive (i) 0.6303 of a share of AcelRx Common Stock (subject to a potential downward adjustment if the Tetraphase Net Cash is less than $5.0 million at the closing of the Merger), plus (ii) one CVR, plus (iii) any cash payable in lieu of fractional shares of AcelRx Common Stock.

Any changes in the market price of AcelRx Common Stock before the completion of the Merger will not affect the number of shares Tetraphase stockholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger the market price of AcelRx Common Stock declines from the market price on the date of the Merger Agreement, then holders of Tetraphase Common Stock could receive merger consideration with substantially lower value. Similarly, if before the completion of the Merger the market price of AcelRx Common Stock increases from the market price on the date of the Merger Agreement, then holders of Tetraphase Common Stock could receive consideration with substantially more value for their shares of Tetraphase Common Stock than the parties had negotiated for in the establishment of the Exchange Ratio. The Merger Agreement does not include a price-based termination right.

Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in AcelRx’s or Tetraphase’s respective businesses, operations and prospects, reductions or changes in U.S. government spending or budgetary policies, market assessments of the likelihood that the merger will be completed, interest rates, general market, industry and economic conditions, pandemics and viruses, and other factors generally affecting the respective prices of AcelRx’s or Tetraphase’s common stock, federal, state and local legislation, governmental regulation and legal developments in the industry segments in which AcelRx or Tetraphase operate, and the timing of the merger.

Many of these factors are beyond AcelRx’s and Tetraphase’s control, and neither AcelRx nor Tetraphase is permitted to terminate the Merger Agreement solely due to a decline in the market price of the common stock of the other party.

Uncertainty about the Merger may adversely affect the respective business and stock price of AcelRx and Tetraphase, whether or not the Merger is completed.

Each of AcelRx and Tetraphase are subject to risks in connection with the announcement and pendency of the Merger, including the risks from possibly foregoing opportunities AcelRx and Tetraphase might otherwise pursue absent the proposed Merger. Furthermore, uncertainties about the Merger may cause current and prospective employees of AcelRx and Tetraphase to experience uncertainty about their future with their respective companies. These uncertainties may impair AcelRx’s and Tetraphase’s ability to retain, recruit or motivate key management and other personnel.

In addition, in response to the announcement of the proposed Merger, AcelRx’s and Tetraphase’s existing or prospective customers, suppliers or collaboration partners may:

 

   

delay, defer or cease purchasing products from, or providing goods or services to, AcelRx and Tetraphase;

 

   

delay or defer other decisions concerning AcelRx and Tetraphase, or refuse to extend credit terms to AcelRx and Tetraphase; or

 

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otherwise seek to change the terms on which they do business with AcelRx and Tetraphase.

While AcelRx and Tetraphase are attempting to address these risks, their respective existing and prospective customers, suppliers or collaboration partners may be reluctant to purchase AcelRx’s and Tetraphase’s products, supply AcelRx and Tetraphase with goods and services or continue collaborations due to the potential uncertainty about the direction of AcelRx’s and Tetraphase’s product offerings and the support and service of AcelRx’s and Tetraphase’s products after the completion of the Merger.

While the Merger is pending, Tetraphase is subject to contractual restrictions that could harm its business, operating results and stock price.

The Merger Agreement includes restrictions on the conduct of Tetraphase’s business prior to the completion of the Merger, generally (i) requiring Tetraphase to use commercially reasonable efforts to cause each of Tetraphase and its subsidiaries to conduct its business and operations in the ordinary course and in accordance in all material respects with past practice, to pay its debt, payables and taxes when due, and to attempt to ensure that each of Tetraphase and its subsidiaries preserves intact the material components of its current business organization and maintains its relations and goodwill with all material suppliers, material customers, material licensors and governmental bodies, and (ii) restricting Tetraphase from taking certain specified actions absent AcelRx’s prior written consent. See “The Merger Agreement—Conduct of Business Pending the Merger” beginning on page 105 of this proxy statement/prospectus. Tetraphase may find that these and other obligations in the Merger Agreement may delay or prevent Tetraphase from or limit its ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if Tetraphase’s management and the Tetraphase Board think they may be advisable. These restrictions could adversely impact Tetraphase’s business, operating results and stock price and its perceived acquisition value, regardless of whether the Merger is completed.

The Merger Agreement limits Tetraphase’s ability to pursue alternative transactions which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains provisions that, subject to certain exceptions, limit Tetraphase’s ability to solicit, initiate or knowingly facilitate or knowingly encourage any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, or engage in, continue or otherwise participate in any discussions or negotiations regarding, or furnish any non-public information in connection with, an alternative transaction. See “The Merger Agreement—No Solicitation of Acquisition Proposals” beginning on page 98 of this proxy statement/prospectus. It is possible that these or other provisions in the Merger Agreement might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the outstanding shares of Tetraphase Common Stock from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Tetraphase Common Stock than it might otherwise have proposed to pay.

The Merger will involve substantial and potentially unexpected costs.

AcelRx and Tetraphase have incurred and expect to continue to incur substantial costs and expenses relating directly to the Merger and the issuance of AcelRx Common Stock in connection with the Merger, including, as applicable, fees and expenses payable to financial advisors, other professional fees and expenses, insurance premium costs, fees and costs relating to regulatory filings and notices, SEC filing fees, printing and mailing costs and other transaction-related costs, fees and expenses. Actual transaction costs may substantially exceed estimates and may have an adverse effect on the combined company’s financial condition and operating results.

If the Merger is not completed, AcelRx and Tetraphase will have incurred substantial expenses for which no ultimate benefit will have been received by either company.

 

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The fairness opinion obtained by the Tetraphase Board from its financial advisor will not be updated to reflect changes in circumstances between signing the Merger Agreement and the completion of the Merger.

The Tetraphase Board has not obtained an updated fairness opinion as of the date of this proxy statement/prospectus from Janney, its financial advisor. Changes in the operations and prospects of AcelRx or Tetraphase, general market and economic conditions, and other factors that may be beyond the control of AcelRx and Tetraphase and on which the fairness opinion was based, may alter the value of AcelRx or Tetraphase or the price of AcelRx Common Stock or Tetraphase Common Stock by the time the Merger is completed.

The fairness opinion does not speak as of the time the Merger will be completed or as of any date other than the date of such opinion. Tetraphase does not anticipate asking Janney to update its fairness opinion. The fairness opinion of Janney is included as Annex E to this proxy statement/prospectus. For a description of the fairness opinion that the Tetraphase Board received from Janney and a summary of the material financial analyses it provided to the Tetraphase Board in connection with rendering such opinion, see “The Merger—Opinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor” beginning on page 67 of this proxy statement/prospectus.

For a description of the factors considered by the Tetraphase Board in determining to approve the Merger, see “The Merger—Recommendation of the Tetraphase Board; the Tetraphase Board’s Reasons for the Merger” beginning on page 63 of this proxy statement/prospectus.

Certain directors and executive officers of Tetraphase may have interests in the Merger that are or were different from, or in conflict with or in addition to, those of Tetraphase’s stockholders generally.

In considering whether to approve the proposals at the Special Meeting, Tetraphase stockholders should recognize that directors and officers of Tetraphase have interests in the Merger that may differ from, or that are in addition, to their interests as stockholders of Tetraphase. The Tetraphase Board was aware of these interests at the time it approved the Merger Agreement. These interests may cause Tetraphase’s directors and officers to view the Merger differently from how you may view it as a stockholder. For a description of the factors considered by the Tetraphase Board in determining to approve the Merger, see “The Merger—Interests of Tetraphase Directors and Executive Officers in the Merger” beginning on page 79 of this proxy statement/prospectus.

The Merger is expected to be a taxable transaction for U.S. federal income tax purposes.

The exchange of Tetraphase Common Stock for the Merger Consideration in the Merger is expected to be a taxable transaction for U.S. federal income tax purposes. However, no opinion of counsel or ruling from the IRS with respect to the tax treatment of the Merger has or will be sought, and there can be no assurance that the IRS will not assert a contrary position. Assuming the Merger will be a taxable transaction for U.S. federal income tax purposes, the amount of gain or loss a holder of Tetraphase Common Stock recognizes, and the timing and potentially the character of a portion of such gain or loss, depends in part on the U.S. federal income tax treatment of the CVRs, with respect to which there is uncertainty. For further discussion, see “Material U.S. Federal Income Tax Consequences of the Merger for Tetraphase Stockholders” elsewhere in this proxy statement/prospectus. Tetraphase stockholders should be aware that the Merger Consideration they will be entitled to receive upon the completion of the Merger does not include a cash component payable at closing to pay any taxes that may be due as a result of the Merger.

Four lawsuits have been filed against Tetraphase, certain members of the Tetraphase Board, as well as AcelRx and Merger Sub in the Plumley complaint, and other lawsuits may be filed challenging the Merger. An adverse ruling in any such lawsuit may prevent the Merger from being completed.

As of April 21, 2020, four lawsuits have been filed by alleged Tetraphase stockholders challenging the Merger. The first lawsuit, a putative class action complaint, is captioned Plumley v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-00496, and was filed by Patrick Plumley, in the United States District Court for the District

 

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of Delaware. The Plumley complaint names as defendants Tetraphase and each member of the Tetraphase Board, as well as AcelRx and Merger Sub. The second lawsuit is captioned Sahan v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03069, and was filed by Herman Sahan in the United States District Court for the Southern District of New York. The Sahan complaint names as defendants Tetraphase and certain members of the Tetraphase Board. The third lawsuit is captioned Giacobbe v. Tetraphase Pharmaceuticals, Inc. et al., Case No. 1:20-cv-10762, and was filed by Charles Giacobbe in the United States District Court for the District of Massachusetts. The fourth lawsuit is captioned Ravi v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03142, and was filed by Surya Ravi in the United States District Court for the Southern District of New York. The Giacobbe and Ravi complaints name as defendants Tetraphase and each member of the Tetraphase Board.

The Plumley, Sahan, Giacobbe and Ravi complaints allege violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The plaintiffs in these actions generally allege that the registration statement on Form S-4, filed with the SEC on April 6, 2020, omits material information with respect to the proposed transaction, which renders such registration statement false and misleading. The Sahan complaint also alleges that the defendants breached their fiduciary duty of candor/disclosure, by allegedly disseminating a materially incomplete and misleading registration statement in connection with the Merger. The complaints seek preliminary and permanent injunction of the proposed transaction and, if the Merger is consummated, rescission or rescissory damages. The complaints also seek the dissemination of a registration statement that discloses certain information requested by the plaintiff. In addition, the complaints seek attorneys’ and experts’ fees.

The defendants believe that the Plumley, Sahan, Giacobbe and Ravi complaints are without merit.

See “The Merger—Litigation Relating to the Merger” beginning on page 90 of this proxy statement/prospectus for more information about litigation relating to the Merger that has been commenced prior to the date of this proxy statement/prospectus. There can be no assurance that additional complaints will not be filed with respect to the Merger.

One of the conditions to completion of the Merger is the absence of any applicable law (including any order) being in effect that prohibits completion of the Merger. Accordingly, if a plaintiff is successful in obtaining an order prohibiting completion of the Merger, then such order may prevent the Merger from being completed, or from being completed within the expected timeframe.

Tetraphase and AcelRx may be targets of additional securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Merger from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims could result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Tetraphase’s and AcelRx’s respective liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, then that injunction may delay or prevent the Merger from being completed, or from being completed within the expected timeframe, which may adversely affect Tetraphase’s and AcelRx’s respective business, financial position and results of operations.

The shares of AcelRx Common Stock to be received by Tetraphase stockholders as a result of the Merger will have rights different from the current shares of Tetraphase Common Stock.

Upon consummation of the Merger, the rights of Tetraphase stockholders, who will become stockholders of AcelRx, will be governed by the amended and restated certificate of incorporation and bylaws of the AcelRx. The rights associated with Tetraphase Common Stock are different from the rights which will be associated with AcelRx Common Stock. See the section entitled “Comparison of Rights of Holders of AcelRx Common Stock and Tetraphase Common Stock” beginning on page 175 of this proxy statement/prospectus for a discussion of these rights.

 

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Risks Related to the CVRs

You may not receive any future issuance of AcelRx Common Stock or cash payment on the CVRs.

Your right to receive any future issuance of AcelRx Common Stock or cash payment on the CVRs will be contingent upon the achievement by AcelRx and its subsidiaries of certain milestones within agreed time periods, as specified in the CVR Agreement. If some or all of the milestones specified in the CVR Agreement are not achieved for any reason within the time periods specified in such agreement, only some or none of the issuances of AcelRx Common Stock or cash payments will be made under the CVRs and the CVRs will expire valueless. Accordingly, the value, if any, of the CVRs is speculative, and the CVRs may ultimately result in no additional value to holders of CVRs. See “The CVR Agreement” on page 116 of this proxy statement/prospectus.

You will not be able to determine the amount of stock or cash to be received under the CVRs until the achievement of certain agreed upon milestones, which makes it difficult to value the CVRs.

Upon the achievement of certain agreed upon milestones, the CVRs are payable in cash or shares of AcelRx Common Stock at AcelRx’s election. If any issuance of AcelRx Common Stock or cash payment is made on the CVRs, it will not be made until the achievement of such milestones. As such, you will not know the value, if any, of your CVRs until certain sales milestones occur, or until the CVRs expire.

The CVRs are nontransferable.

The CVRs are not transferable, except in the limited circumstances specified in the CVR Agreement. The CVRs will not be registered as securities and they will not be listed or traded on any stock exchange in the United States or elsewhere. Therefore, the CVRs are not liquid and you will not be permitted to sell or transfer them, except for in certain limited circumstances. See “The CVR Agreement” on page 116 of this proxy statement/prospectus.

While AcelRx and its subsidiaries and licensees are required to use commercially reasonable efforts to achieve the CVR milestones, some or all of the milestones may ultimately not be achieved.

AcelRx has agreed to, and has agreed to cause its affiliates and licensees to, use commercially reasonable efforts to achieve the CVR milestones. AcelRx has further agreed that neither it nor any of its affiliates shall act in bad faith for the purpose of avoiding achievement of any milestone or the payment of any milestone amount. The CVR Agreement does not, however, require AcelRx to take all possible actions to achieve each milestone, and the milestones may not be achieved due to factors outside of AcelRx’s control. As a result, some or all of the milestones may ultimately not be achieved.

The U.S. federal income tax treatment of the CVRs is unclear.

There is no legal authority directly addressing the U.S. federal income tax treatment of the CVRs or the treatment of payments that may be received pursuant to the CVR Agreement. Accordingly, the amount, timing and character of any gain, income or loss with respect to the CVRs are uncertain. For further discussion, see “Material U.S. Federal Income Tax Consequences of the Merger for Tetraphase Stockholders” elsewhere in this proxy statement/prospectus.

Risks Related to AcelRx Following the Merger

AcelRx may fail to realize the benefits expected from the Merger, which could adversely affect its stock price.

The anticipated benefits AcelRx expects from the Merger are, necessarily, based on projections and assumptions about the combined businesses of AcelRx and Tetraphase, which may not materialize as expected or which may prove to be inaccurate. The value of AcelRx Common Stock following the completion of the Merger could be adversely affected if AcelRx is unable to realize the anticipated benefits from the Merger on a timely basis or at all. Achieving the benefits of the Merger will depend, in part, on AcelRx’s ability to integrate the sales team,

 

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business, operations and products of Tetraphase successfully and efficiently with its sales team and business. The challenges involved in this integration, which will be complex and time-consuming, include the following:

 

   

difficulties entering new markets and integrating new technologies and products in which AcelRx has no or limited direct prior experience;

 

   

successfully managing relationships with the combined supplier and customer base of AcelRx and Tetraphase;

 

   

coordinating and integrating the joint promotion and marketing of each company’s products under the Co-Promotion Agreement while reducing costs;

 

   

consolidating and integrating manufacturing processes, research, development and engineering activities, customer and technical support and management and administrative functions;

 

   

the increased scale and complexity of AcelRx’s operations resulting from the Merger;

 

   

retaining key employees of AcelRx and Tetraphase; and

 

   

minimizing the diversion of AcelRx’s management attention from other important business objectives.

If AcelRx does not successfully manage these issues and the other challenges inherent in integrating an acquired business of the size and complexity of Tetraphase, then AcelRx may not fully achieve, or may take longer to achieve, the anticipated benefits of the Merger and its revenue, expenses, operating results and financial condition could be materially adversely affected.

The acquisition of Tetraphase may result in significant charges or other liabilities that could adversely affect the financial results of the combined company.

The financial results of the combined company may be adversely affected by cash expenses and non-cash accounting charges incurred in connection with AcelRx’s integration of the business and operations of Tetraphase. The amount and timing of these possible charges are not yet known. Further, AcelRx’s failure to identify or accurately assess the magnitude of certain liabilities it is assuming in the Merger could result in unexpected litigation or regulatory exposure, unfavorable accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on AcelRx’s business, operating results or financial condition. The price of AcelRx Common Stock following the Merger could decline to the extent the combined company’s financial results are materially affected by any of these events.

AcelRx’s future results will suffer if it does not effectively manage its expanded operations following the Merger.

Following the Merger, the size and scope of operations of the business of the combined companies will increase beyond the current size and scope of operations of either AcelRx’s or Tetraphase’s current businesses. In addition, AcelRx may continue to expand its size and operations through additional acquisitions or other strategic transactions. AcelRx’s future success depends, in part, upon its ability to manage its expanded business, which may pose substantial challenges for its management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that AcelRx will be successful in managing such expanded business or that it will realize the expected economies of scale, synergies and other benefits currently anticipated from the Merger or anticipated from any additional acquisitions or strategic transactions.

Future results of AcelRx following the Merger may differ materially from the unaudited pro forma financial information included in this proxy statement/prospectus.

The future results of AcelRx following the Merger may be materially different from those shown in the unaudited pro forma financial information presented in this proxy statement/prospectus that show only a combination of AcelRx’s and Tetraphase’s historical results. AcelRx expects to incur significant costs associated with completing

 

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the Merger and integrating the operations of Tetraphase, and the exact magnitude of these costs is not yet known. Furthermore, these costs may decrease the amount of capital that could be used by AcelRx for other purposes.

The market price of AcelRx Common Stock after completion of the Merger will continue to fluctuate, and may be affected by factors different from those affecting shares of Tetraphase Common Stock currently.

Upon completion of the Merger, holders of Tetraphase Common Stock will become holders of AcelRx Common Stock. The business of AcelRx differs from that of Tetraphase in important respects, and, accordingly, the results of operations of AcelRx after the Merger, as well as the market price of AcelRx Common Stock, may be affected by factors different from those currently affecting the results of operations of Tetraphase. As a result of the Merger, Tetraphase will be part of a larger company with other lines of business, such that decisions affecting Tetraphase may be made in respect of the larger combined business as a whole rather than the Tetraphase business individually. Moreover, general fluctuations in stock markets could have a material adverse effect on the market for, or liquidity of, AcelRx Common Stock, regardless of AcelRx’s actual operating performance. For further information on the businesses of AcelRx and Tetraphase and certain factors to consider in connection with those businesses, see the documents incorporated by reference or included in this proxy statement/prospectus and referred to under “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus, “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus and “Information about Tetraphase” beginning on page 119 of this proxy statement/prospectus.

Additional Risks Related to AcelRx and Tetraphase

AcelRx’s and Tetraphase’s businesses are and will be subject to the risks described above. In addition, AcelRx is also currently subject to the additional risks described in AcelRx’s Annual Report on Form 10-K for the year ended December 31, 2019, as updated by any subsequent Current Reports on Form 8-K and Quarterly Reports on Form 10-Q, all of which are filed with the SEC and are incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus. In addition, Tetraphase is currently subject to the additional risks described in Tetraphase’s Annual Report on Form 10-K for the year ended December 31, 2019, as updated by any subsequent Current Reports on Form 8-K and Quarterly Reports on Form 10-Q, all of which are filed with the SEC and are incorporated by reference into proxy statement/prospectus.

The Tetraphase Bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between Tetraphase and its stockholders, which could limit its stockholders’ ability to obtain a judicial forum that they find favorable for disputes with Tetraphase or its directors, officers or other employees.

The Tetraphase Bylaws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on Tetraphase’s behalf, any action asserting a breach of fiduciary duty owed by any of its current or former directors, officers or other employees to Tetraphase, agents, or its stockholders, including, without limitation, a claim alleging the aiding and abetting of such a breach of fiduciary duty, any action asserting a claim against it arising pursuant to any provisions of the DGCL, the Tetraphase Charter or Tetraphase Bylaws, or any action asserting a claim against it that is governed by the internal affairs doctrine or other “internal corporate claim” as that term is defined in Section 115 of the DGCL; provided, that these provisions will not apply to actions or proceedings brought to enforce a duty or liability created by the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Tetraphase or its directors, officers or other employees, which may discourage such lawsuits against Tetraphase or the combined company and its directors, officers and other employees. If a court were to find the choice of forum provision

contained in the Tetraphase Bylaws to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements may contain words such as “believes”, “anticipates”, “estimates”, “expects”, “intends”, “aims”, “potential”, “will”, “would”, “could”, “considered”, “likely” and words and terms of similar substance used in connection with any discussion of future plans, actions or events identify forward-looking statements. All statements, other than historical facts, including statements regarding the expected timing of the closing of the Merger and AcelRx’s or Tetraphase’s expected financial condition, results of operations and business performance, including any forecasts, financial projections and descriptions of anticipated cost savings or other synergies or expected benefits of the Merger, are forward-looking statements. These statements are based on management’s current expectations, assumptions, estimates and beliefs. While AcelRx and Tetraphase believe these expectations, assumptions, estimates and beliefs are reasonable, such forward-looking statements are only predictions, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements:

 

   

failure to satisfy the conditions to the closing of the Merger, including the failure of Tetraphase to obtain stockholder approval as required for the Merger, which may give rise to the termination of the Merger Agreement;

 

   

substantial and/or unexpected costs in connection with or with respect to the Merger;

 

   

the effect of the announcement of the Merger on the ability of Tetraphase or AcelRx to retain and hire key personnel and maintain business relationships with customers, suppliers and others with whom Tetraphase or AcelRx does business, or on Tetraphase’s or AcelRx’s operating results, market price of common stock, and business generally;

 

   

potential legal proceedings relating to the Merger and the outcome of any such legal proceeding;

 

   

the inherent risks, costs and uncertainties associated with integrating the businesses successfully and risks of not achieving all or any of the anticipated benefits of the Merger, or the risk that the anticipated benefits of the Merger may not be fully realized or take longer to realize than expected;

 

   

fluctuations in the market prices of AcelRx’s and Tetraphase’s stock, as well as the risk that some or all of the milestones under the CVR Agreement are not achieved;

 

   

the contractual restrictions under the Merger Agreement may limit Tetraphase’s ability to respond effectively to competitive pressures in the markets in which Tetraphase and AcelRx operate; and

 

   

other risks to the consummation of the Merger, including the risk that the Merger will not be consummated within the expected time period or at all.

These and additional factors that may affect the future results of Tetraphase and AcelRx are set forth under “Risk Factors” beginning on page 27 of this proxy statement/prospectus, as well as in AcelRx’s Annual Report on Form 10-K for the year ended December 31, 2019, as updated by any subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. See “Incorporation of Certain Information by Reference beginning on page 199 of this proxy statement/prospectus. The risks and uncertainties described and referred to above are not exclusive and further information concerning AcelRx and Tetraphase and their respective businesses, including factors that potentially could materially affect their respective businesses, financial condition or operating results, may emerge from time to time. You are urged to consider these factors carefully in evaluating these forward-looking statements, and not to place undue reliance on any forward-looking statements. The forward-looking statements in this proxy statement/prospectus speak only as of the date of this proxy statement/prospectus. Except as required by law, AcelRx and Tetraphase assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

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THE COMPANIES

Information about Tetraphase

Tetraphase Pharmaceuticals, Inc. (“Tetraphase”) is a biopharmaceutical company using its proprietary chemistry technology to develop and commercialize novel tetracyclines for serious and life-threatening conditions, including bacterial infections caused by many multidrug-resistant (“MDR”), bacteria. There is a medical need for new antibiotics as resistance to existing antibiotics increases. The company’s commercial product, XERAVA (eravacycline), a fully synthetic fluorocycline, is an intravenous (“IV”) antibiotic that is approved for use as a first-line empiric monotherapy for the treatment of MDR infections, including those found in complicated intra-abdominal infections. The Tetraphase pipeline also includes TP-271 IV and Oral, and TP-6076 IV only, which are Phase 2 ready, and TP-2846, which is in preclinical testing for acute myeloid leukemia.

Shares of Tetraphase Common Stock are traded on The Nasdaq Global Select Market under the symbol “TTPH.”

Additional information about Tetraphase is included in the documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus for information on how you can view reports and other documents filed with the SEC by Tetraphase.

Information about AcelRx

AcelRx Pharmaceuticals, Inc. (“AcelRx”) is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in healthcare institutions. AcelRx’s proprietary, non-invasive sublingual formulation technology delivers sufentanil with consistent pharmacokinetic profiles. The company has one approved product in the U.S., DSUVIA® (sufentanil sublingual tablet, 30 mcg), known as DZUVEO in Europe, indicated for the management of acute pain severe enough to require an opioid analgesic for adult patients in certified medically supervised healthcare settings, and one product candidate, Zalviso® (sufentanil sublingual tablet system, SST system, 15 mcg), an investigational product in the U.S., is being developed as an innovatively designed patient-controlled analgesia (PCA) system for reduction of moderate-to-severe acute pain in medically supervised settings. DZUVEO and Zalviso are both approved products in Europe.

Shares of AcelRx Common Stock are traded on The Nasdaq Stock Market LLC under the symbol “ACRX.”

Additional information about AcelRx is included in the documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.

 

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THE SPECIAL MEETING

This proxy statement/prospectus is being provided to Tetraphase stockholders as part of a solicitation of proxies by the Tetraphase Board for use at the Special Meeting. This proxy statement/prospectus contains important information regarding the Special Meeting, the proposals on which you are being asked to vote, information you may find useful in determining how to vote and voting procedures.

This proxy statement/prospectus is being first mailed on or about April 28, 2020 to all stockholders of record of Tetraphase as of the Record Date. Stockholders of record who owned Tetraphase Common Stock at the close of business on the Record Date are entitled to receive notice of, attend and vote at the Special Meeting. On the Record Date, there were 7,263,236 shares of Tetraphase Common Stock outstanding.

 

Date, Time and Place of the Special Meeting

The Special Meeting will be held via the Internet at a virtual web conference at www.proxydocs.com/ttph on June 8, 2020, at 10:00 a.m., Eastern Time.

 

Proposals at the Special Meeting

At the Special Meeting, Tetraphase stockholders will be asked to vote on the following proposals:

 

  Proposal 1: Merger Agreement Proposal: To adopt the Merger Agreement.

 

  Proposal 2: Compensation Proposal: To approve, on a nonbinding, advisory basis, the “golden parachute” compensation that will or may be payable to Tetraphase named executive officers in connection with the Merger.

 

  Proposal 3: Adjournment Proposal: To approve adjournments of the Special Meeting, if necessary or appropriate, to solicit additional proxies if sufficient votes to approve the merger agreement proposal have not been obtained by Tetraphase.

 

Recommendation of the Tetraphase Board

At a meeting of the Tetraphase Board held on March 15, 2020 the Tetraphase Board unanimously (i) determined that the Contemplated Transactions are advisable and fair to and in the best interests of Tetraphase and the Tetraphase stockholders; (ii) adopted, approved and declared advisable the Merger Agreement and the Contemplated Transactions; and (iii) resolved to recommend the adoption of the Merger Agreement by the Tetraphase stockholders.

 

  The Tetraphase Board unanimously recommends that you vote “FOR” each of the merger agreement proposal, the compensation proposal and the adjournment proposal.

 

Shares Entitled to Vote

Stockholders who owned Tetraphase Common Stock at the close of business on the Record Date are entitled to receive notice of, attend and vote at the Special Meeting. On the Record Date, there were 7,263,236 shares of Tetraphase Common Stock outstanding and entitled to vote at the Special Meeting.

 

 

As a Tetraphase stockholder on the Record Date, you have a right to vote on certain matters affecting Tetraphase. The proposals that will be presented at the Special Meeting and upon which you are being

 

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asked to vote are summarized above and fully set forth in this proxy statement/prospectus. Each share of Tetraphase Common Stock that you owned at the close of business on the Record Date, including (i) shares held directly in your name as the stockholder of record and (ii) shares held for you as the beneficial owner in street name through a broker, bank or other nominee, entitles you to one vote on each proposal to be presented at the Special Meeting.

 

Quorum Requirement

A quorum of outstanding shares of Tetraphase Common Stock is necessary to take action at the Special Meeting. Holders of a majority of the outstanding shares of Tetraphase Common Stock entitled to vote as of the Record Date must be virtually present by remote communication or by proxy at the Special Meeting to constitute a quorum and to conduct business at the Special Meeting. Your shares are counted as present if you virtually attend the Special Meeting by remote communication or properly submit a proxy by telephone, over the Internet or mail. The inspector of election will treat abstentions as present for purposes of determining the presence of a quorum. If you hold your shares of Tetraphase Common Stock in street name and you fail to give voting instructions to your broker, bank or other nominee, your shares will not be considered present for purposes of determining the presence of a quorum to transact business at the Special Meeting.

 

Votes Required for the Proposals

Proposal 1: Merger Agreement Proposal: Assuming a quorum is present at the Special Meeting, the merger agreement proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Tetraphase Common Stock entitled to vote on such proposal. Accordingly, a Tetraphase stockholder’s abstention from voting, a broker non-vote or the failure of a Tetraphase stockholder to vote (including the failure of a Tetraphase stockholder who holds shares in “street name” through a bank, broker or other nominee to give voting instructions to that bank, broker or other nominee) will have the same effect as votes cast “AGAINST” the merger agreement proposal.

 

  Proposal 2: Compensation Proposal: Assuming a quorum is present at the Special Meeting, approval of the compensation proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on the compensation proposal.

 

 

Proposal 3: Adjournment Proposal: Whether or not a quorum is present at the Special Meeting, approval of the adjournment proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such

 

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matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on the adjournment proposal.

 

Methods of Voting—Stockholders of Record

If you are a Tetraphase stockholder of record on the Record Date, you may submit a proxy by mail, by telephone or over the Internet to instruct the voting of your shares of Tetraphase Common Stock at the Special Meeting or you may vote your shares of Tetraphase Common Stock at the Special Meeting. Proxies submitted by mail, by telephone or over the Internet must be received by 11:59 p.m., Eastern Time, on June 7, 2020.

 

  Voting by Telephone or over the Internet. To submit a proxy by telephone or over the Internet, please follow the instructions included on your proxy card. If you submit a proxy by telephone or over the Internet, you are authorizing the individuals named on the proxy card to vote your shares of Tetraphase Common Stock at the Special Meeting in the manner you indicate, and you do not need to complete and mail a proxy card.

 

  Voting by Mail. By completing and signing the proxy card and returning it in the enclosed prepaid and addressed envelope, you are authorizing the individuals named on the proxy card to vote your shares of Tetraphase Common Stock at the Special Meeting in the manner you indicate. If you receive more than one proxy card, it is an indication that your shares are held in multiple accounts. Please sign and return all proxy cards to ensure that all of your shares are voted.

 

  If you are a Tetraphase stockholder of record and you sign and return your proxy card(s) without indicating how to vote on any particular proposal, the shares of Tetraphase Common Stock represented by your proxy card(s) will be counted as present for purposes of determining the presence of a quorum at the Special Meeting and will be voted “FOR” that proposal.

 

  Tetraphase encourages you to submit a proxy by telephone, over the Internet or by signing and returning the proxy card even if you plan to attend the Special Meeting so that your shares will be voted if you are unable to attend the Special Meeting.

 

Methods of Voting—Beneficial Owners

If your shares of Tetraphase Common Stock are held in an account at a broker, bank or other nominee, then you are the beneficial owner of shares held in “street name” and this proxy statement/prospectus is being sent to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Special Meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares in your account by following the instructions that the broker, bank or other nominee provides you along with this proxy statement/prospectus. If you are not a stockholder of record, you must obtain a proxy executed in your favor from the record holder of your shares to be able to vote at the Special Meeting.

 

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Attending the Special Meeting

To support the health and well-being of Tetraphase’s stockholders, employees and directors in light of the recent novel coronavirus (“COVID-19”) outbreak, the Special Meeting will be a “virtual meeting” of stockholders, which will be conducted exclusively via the Internet at a virtual web conference. There will not be a physical meeting location, and stockholders will not be able to attend the Special Meeting in person. This means that you can attend the Special Meeting online, vote your shares during the online meeting and submit questions during the online meeting by visiting the above-mentioned Internet site. In light of the public health and safety concerns related to COVID-19, Tetraphase believes that hosting a “virtual meeting” will enable greater stockholder attendance and participation from any location around the world. If the Contemplated Transactions are not consummated, Tetraphase intends to resume its historical practice of holding an in-person meeting next year.

 

Voting Instructions

If you are a stockholder of record of Tetraphase Common Stock and return a signed proxy card but do not provide specific voting instructions, your shares will be voted on the proposals as follows:
 

 

  FOR” the merger agreement proposal;

 

  FOR” the compensation proposal; and

 

  FOR” the adjournment proposal.

 

Shares Held in Street Name

In general, if your shares of Tetraphase Common Stock are held in street name and you do not instruct your broker how to vote your shares, your brokerage firm, in its discretion, may either leave your shares unvoted or vote your shares on routine matters, but not on any non-routine matters. None of the proposals at the Special Meeting are routine matters.

 

  If you fail to give voting instructions to your broker, bank or other nominee, your broker, bank or other nominee may not submit or vote your shares of Tetraphase Common Stock for any purpose at the Special Meeting, which will have the same effect as a vote “AGAINST” of the merger agreement proposal but will have no effect on the compensation proposal and the adjournment proposal.

 

Revoking Your Proxy

If you are a Tetraphase stockholder of record, you may revoke your proxy at any time before it is voted at the Special Meeting. To revoke your proxy, you must:

 

   

submit a new proxy by telephone or over the Internet by 11:59 p.m., Eastern Time, on June 7, 2020;

 

   

sign and return another proxy card, which must be received by 11:59 p.m., Eastern Time, on June 7, 2020; or

 

   

provide written notice of the revocation to Tetraphase’s Secretary at: Tetraphase Pharmaceuticals, Inc., Attention: Secretary, 480 Arsenal Way, Watertown, MA 02472, which

 

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must be received by 11:59 p.m., Eastern Time, on June 7, 2020.

 

  If you are the beneficial owner of shares held in “street name” by a broker, bank or other nominee, you should follow the instructions of your broker, bank or other nominee regarding the revocation of proxies.

 

Solicitation of Proxies

Tetraphase will bear the cost of soliciting proxies. In addition to solicitation by mail, the Tetraphase Board, officers and employees may solicit proxies by telephone, e-mail, and facsimile without additional compensation. Tetraphase may reimburse brokers or persons holding stock in their names, or in the names of their nominees, for their expenses in sending proxies and proxy material to beneficial owners. Tetraphase has also hired a proxy solicitor who may also solicit proxies from shareholders by telephone, e-mail, and facsimile and in person and whose fees Tetraphase will reimburse.

DO NOT SEND IN ANY TETRAPHASE STOCK CERTIFICATES WITH YOUR PROXY CARD.

As described in the Merger Agreement, Tetraphase stockholders will be sent materials for exchanging Tetraphase Common Stock shortly after consummation of the Merger.

 

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BENEFICIAL STOCK OWNERSHIP OF TETRAPHASE DIRECTORS, EXECUTIVE OFFICERS

AND CERTAIN HOLDERS OF TETRAPHASE COMMON STOCK

Unless otherwise provided below, the following table sets forth information regarding beneficial ownership of Tetraphase Common Stock as of March 31, 2020 by:

 

   

each person, or group of affiliated persons, known to Tetraphase to be the beneficial owner of 5% or more of the outstanding shares of Tetraphase Common Stock;

 

   

each of Tetraphase’s current directors;

 

   

each of Tetraphase’s named executive officers; and

 

   

all of Tetraphase’s directors and executive officers as a group.

Beneficial ownership is determined in accordance with SEC rules. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of Tetraphase Common Stock issuable upon the exercise of stock options, warrants or other rights that are immediately exercisable or exercisable or that will vest, as applicable, within 60 days after March 1, 2020. Except as otherwise indicated, all of the shares reflected in the table are shares of Tetraphase Common Stock and all persons listed below have sole voting and investment power with respect to the shares of Tetraphase Common Stock beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.

The column titled “Percentage of Shares Beneficially Owned” is based on a total of 7,259,236 shares of Tetraphase Common Stock outstanding as of March 1, 2020. Except as otherwise indicated in the footnotes below, the address of the beneficial owner is c/o Tetraphase Pharmaceuticals, Inc., 480 Arsenal Way, Watertown, MA 02472.

 

Name of Beneficial Owner

   Number of
Shares
Beneficially
Owned
     Percentage of
Shares
Beneficially
Owned
 

5% Stockholders

     

Armistice Capital, LLC(1)

     1,419,507        19.6

CVI Investments, Inc.(2)

     666,666        9.2

Intracoastal Capital LLC(3)

     725,197        9.9

Sabby Volatility Warrant Master Fund Limited(4)

     666,667        9.2

Named Executive Officers and Directors

     

Larry Edwards(5)

     21,490        *  

Leonard Patrick Gage, Ph.D.(6)

     7,481        *  

Garen Bohlin(7)

     5,997        *  

Steven Boyd(1)(8)

     1,419,507        19.6

Jeffrey Chodakewitz (9)

     3,869        *  

John Freund, M.D. (10)

     4,369        *  

Gerri Henwood(11)

     3,369        *  

Guy Macdonald

     21,000        *  

Keith Maher, M.D. (1)(12)

     1 419,507        19.6

Nancy Wysenski(9)

     3,869        *  

Maria Stahl(13)

     22,526        *  

Christopher Watt(14)

     11,110        *  
  

 

 

    

 

 

 

All current executive officers and directors as a group (12 persons)(15)

     1,524,587        21.0
  

 

 

    

 

 

 

 

*

Represents beneficial ownership of less than 1% of outstanding Tetraphase Common Stock.

 

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(1)

Consists of 1,419,507 shares of Tetraphase Common Stock held by Armistice Capital Master Fund Ltd. (“Armistice”). As a result of the application of a beneficial ownership cap in the warrants issued to Armistice in the Tetraphase January 2020 private placement (the “January 2020 Warrants)”, the table above under the heading “Shares of Common Stock Beneficially Owned” does not include 5,396,668 shares of Tetraphase Common Stock issuable upon exercise of warrants to purchase Tetraphase Common Stock held by Armistice. While such shares are being registered under the registration statement of which this prospectus forms a part, Armistice is not permitted to exercise the January 2020 Warrants to the extent that such exercise would result in Armistice and its affiliates beneficially owning more than 19.99% of the number of shares of Tetraphase Common Stock outstanding immediately after giving effect to the issuance of shares of Tetraphase Common Stock issuable upon exercise of the January 2020 Warrants. As a result of the application of a beneficial ownership cap in the warrants issued to Armistice in Tetraphase’s November 2019 registered direct offering (the “November 2019 Warrants”), the table above under the heading “Shares of Common Stock Beneficially Owned” does not include 3,560,986 shares of Tetraphase Common Stock issuable upon exercise of warrants to purchase Tetraphase Common Stock held by Armistice. Armistice is not permitted to exercise the November 2019 Warrants to the extent that such exercise would result in Armistice and its affiliates beneficially owning more than 4.99% of the number of shares of Tetraphase Common Stock outstanding immediately after giving effect to the issuance of shares of Tetraphase Common Stock issuable upon exercise of the November 2019 Warrants. Armistice has the right to increase this beneficial ownership limitation in its discretion on 61 days’ prior written notice to us, provided that in no event is Armistice permitted to exercise the November 2019 Warrants to the extent that such exercise would result in Armistice and its affiliates beneficially owning in the aggregate more than 9.99% of the number of shares of Tetraphase Common Stock outstanding or the combined voting power of Tetraphase securities outstanding immediately after giving effect to the issuance of shares of Tetraphase Common Stock issuable upon exercise of the November 2019 Warrants. Armistice Capital LLC (“Armistice Capital”) has shared voting power of 1,419,507 shares of Tetraphase Common Stock with Armistice, a Cayman Islands corporation, and Steven Boyd. Mr. Boyd is the managing member of Armistice Capital, a director of Armistice and a member of the Tetraphase Board. Keith Maher, a member of the Tetraphase Board, is a managing director of Armistice Capital. Armistice’s address is 510 Madison Avenue, 7th Floor, New York, NY 10022.This information is based, in part, on a Schedule 13D filed by Armistice with the SEC on January 23, 2020.

 

(2)

Consists of 666,666 shares of Tetraphase Common Stock held by CVI Investments, Inc. (“CVI”). As a result of the application of a beneficial ownership cap in the warrants issued to CVI, the table above under the heading “Shares of Common Stock Beneficially Owned” does not include 666,666 shares of Tetraphase Common Stock issuable upon exercise of warrants to purchase Tetraphase Common Stock held by CVI. CVI is not permitted to exercise such warrants to purchase Tetraphase Common Stock to the extent that such exercise would result in CVI and its affiliates beneficially owning more than 4.99% of the number of shares of Tetraphase Common Stock outstanding immediately after giving effect to the issuance of shares of Tetraphase Common Stock issuable upon exercise of such warrants to purchase Tetraphase Common Stock. CVI has shared voting and dispositive power with Heights Capital Management, Inc., the investment manager of CVI. CVI’s address is Ugland House, South Church Street, George Town, Grand Cayman Islands. This information is based, in part, on a Schedule 13G filed by CVI with the SEC on January 31, 2020.

 

(3)

Consists of 725,197 shares of Tetraphase Common Stock held by Intracoastal Capital LLC (“Intracoastal”). As a result of the application of a beneficial ownership cap in the warrants issued to Intercoastal, the table above under the heading “Shares of Common Stock Beneficially Owned” does not include 460 shares of Tetraphase Common Stock issuable upon exercise of warrants to purchase Tetraphase Common Stock held by Intracoastal. Intracoastal is not permitted to exercise such warrants to purchase Tetraphase Common Stock to the extent that such exercise would result in Intracoastal and its affiliates beneficially owning more than 4.99% of the number of shares of Tetraphase Common Stock outstanding immediately after giving effect to the issuance of shares of Tetraphase Common Stock issuable upon exercise of such warrants to purchase Tetraphase Common Stock. Intracoastal has shared voting power with Mitchell Kopin and Daniel

 

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  Asher. Intracoastal’s address is 245 Palm Trail, Delray Beach, FL 33483. This information is based, in part, on a Schedule 13G filed by Intracoastal with the SEC on January 31, 2020.

 

(4)

Consists of 666,667 shares of Tetraphase Common Stock held by Sabby Volatility Warrant Master Fund, Ltd. (“Sabby”). As a result of the application of a beneficial ownership cap in the warrants issued to Sabby, the table above under the heading “Shares of Common Stock Beneficially Owned” does not include 666,667 shares of Tetraphase Common Stock issuable upon exercise of warrants to purchase Tetraphase Common Stock held by Sabby. Sabby is not permitted to exercise such warrants to purchase Tetraphase Common Stock to the extent that such exercise would result in Sabby and its affiliates beneficially owning more than 4.99% of the number of shares of Tetraphase Common Stock outstanding immediately after giving effect to the issuance of shares of Tetraphase Common Stock issuable upon exercise of such warrants to purchase Tetraphase Common Stock. Sabby has shared voting and dispositive power with Sabby Management, LLC and Hal Mintz. Sabby’s address is 10 Mountainview Road, Suite 205, Upper Saddle River, NJ 07458. This information is based, in part, on a Schedule 13G filed by Sabby with the SEC on January 28, 2020.

 

(5)

Includes 15,438 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable and 1,000 restricted stock units that will vest within 60 days after March 1, 2020.

 

(6)

Consists of 1,944 shares of Tetraphase Common Stock held directly by Dr. Gage, 191 shares of Tetraphase Common Stock held by Dr. Gage’s spouse and 5,346 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable within 60 days after March 1, 2020.

 

(7)

Consists of 5,997 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable within 60 days after March 1, 2020.

 

(8)

Mr. Boyd is the managing member of Armistice Capital and a director of Armistice.

 

(9)

Consists of 3,869 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable within 60 days after March 1, 2020.

 

(10)

Consists of 4,369 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable within 60 days after March 1, 2020.

 

(11)

Consists of 3,369 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable within 60 days after March 1, 2020.

 

(12)

Dr. Maher is a managing director of Armistice Capital.

 

(13)

Includes 18,156 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable and 1,000 restricted stock units that will vest within 60 days after March 1, 2020.

 

(14)

Includes 7,594 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable that will vest within 60 days after March 1, 2020.

 

(15)

Includes 68,007 shares of Tetraphase Common Stock issuable upon the exercise of options exercisable within 60 days after March 1, 2020 and restricted stock units that will vest within 60 days of March 1, 2020.

 

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PROPOSAL 1: ADOPTION OF THE MERGER AGREEMENT

This proxy statement/prospectus is being furnished to you as a stockholder of Tetraphase as part of the solicitation of proxies by the Tetraphase Board for use at the Special Meeting to consider and vote upon a proposal to adopt the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus.

The Tetraphase Board, after due and careful discussion and consideration, unanimously approved and declared advisable the Merger Agreement, the Merger and the other Contemplated Transactions and determined that the Merger Agreement, the Merger and the other Contemplated Transactions are fair to and in the best interests of Tetraphase and its stockholders.

The Tetraphase Board accordingly unanimously recommends that Tetraphase stockholders adopt the Merger Agreement, which is described in this proxy statement/prospectus and particularly in the sections titled “The Merger” beginning on page 48 of this proxy statement/prospectus and “The Merger Agreement” beginning on page 92 of this proxy statement/prospectus and which is attached as Annex A to this proxy statement/prospectus.

The Merger between AcelRx and Tetraphase cannot be completed without the affirmative vote of the holders of a majority of the outstanding shares of Tetraphase Common Stock entitled to vote thereon. A failure to vote or an abstention will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement.

THE TETRAPHASE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE MERGER AGREEMENT PROPOSAL (PROPOSAL 1).

 

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PROPOSAL 2: ADVISORY (NON-BINDING) VOTE ON MERGER-RELATED

COMPENSATION FOR TETRAPHASE NAMED EXECUTIVE OFFICERS

Pursuant to Section 14A of the Exchange Act and Rule 14a-21(c) thereunder, Tetraphase is seeking a non-binding, advisory stockholder approval of the compensation of Tetraphase’s named executive officers that is based on or otherwise relates to the Merger as disclosed in the section titled “The Merger—Possible Change-in-Control Compensation” beginning on page 84 of this proxy statement/prospectus. The compensation proposal gives stockholders the opportunity to express their views on the merger-related compensation of Tetraphase’s named executive officers.

Accordingly, Tetraphase is asking its stockholders to vote “FOR” the adoption of the following resolution, on a non-binding, advisory basis:

“RESOLVED, that the compensation that will or may be paid or become payable to Tetraphase’s named executive officers, in connection with the Merger, and the agreements or understandings pursuant to which such compensation will or may be paid or become payable, in each case as disclosed pursuant to Item 402(t) of Regulation S-K in the section titled “The Merger—Possible Change-in-Control Compensation” of the proxy statement/prospectus for this meeting is hereby APPROVED.”

The vote on the compensation proposal is a vote separate and apart from the vote to adopt the Merger Agreement. Accordingly, if you are a stockholder, you may vote to adopt the Merger Agreement proposal, and vote not to approve the compensation proposal, and vice versa. Because the vote on the merger-related compensation proposal is advisory only, it will not be binding on Tetraphase. If the Merger is completed, the merger-related compensation may be paid to Tetraphase’s named executive officers to the extent payable in accordance with the terms of the compensation agreements and arrangements even if stockholders fail to approve the advisory vote regarding merger-related compensation.

Assuming a quorum is present at the Special Meeting, approval of the compensation proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on this proposal.

THE TETRAPHASE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE COMPENSATION PROPOSAL (PROPOSAL 2).

 

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PROPOSAL 3: ADJOURNMENT OF THE TETRAPHASE SPECIAL MEETING

The Special Meeting may be adjourned to another time and place if necessary to permit solicitation of additional proxies if there are not sufficient votes to approve the Merger Agreement proposal or to ensure that any supplement or amendment to this proxy statement/prospectus is timely provided to stockholders.

Tetraphase is asking its stockholders to authorize the holder of any proxy solicited by the Tetraphase Board to vote in favor of any adjournment of the Special Meeting to solicit additional proxies if there are not sufficient votes to approve the merger agreement proposal or to ensure that any supplement or amendment to this proxy statement/prospectus is timely provided to stockholders.

Whether or not a quorum is present at the Special Meeting, approval of the adjournment proposal requires the affirmative vote of the holders of shares of Tetraphase Common Stock representing a majority of the votes cast on the proposal. Shares which abstain from voting and “broker non-votes” with respect to this proposal will not be counted as votes in favor of such matter, and will also not be counted as shares voting on such matter. Accordingly, abstentions and “broker non-votes” will have no effect on the voting on this proposal.

Under the Tetraphase Bylaws, the chairman of the Special Meeting may adjourn the Special Meeting regardless of the outcome of the adjournment proposal if a quorum is not present.

THE TETRAPHASE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ADJOURNMENT PROPOSAL (PROPOSAL 3).

 

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THE MERGER

This section of the proxy statement/prospectus describes certain material aspects of the proposed Merger. This section may not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus and the documents incorporated herein by reference, including the full text of the Merger Agreement, which is attached as Annex A, for a more complete understanding of the Merger. In addition, (i) important business and financial information about AcelRx is incorporated into this proxy statement/prospectus by reference and (ii) important business and financial information about Tetraphase is incorporated into this proxy statement/prospectus by reference. See also “Where You Can Find More Information” beginning on page 198 of this proxy statement/prospectus and “Incorporation of Certain Information by Reference” beginning on page 199 of this proxy statement/prospectus.

Background of the Merger

The Tetraphase Board, together with members of the Tetraphase management team, regularly reviews and assesses the performance, future growth prospects, business plans and overall strategic direction of Tetraphase and considers a variety of strategic alternatives that may be available to Tetraphase including continuing to pursue the company’s strategy as a standalone company or pursuing potential strategic or financing transactions with third parties, in each case, with the goal of maximizing shareholder value.

In connection with such a review, representatives of Tetraphase met with representatives of several companies and potential investors at the 2019 J.P. Morgan Conference in San Francisco, California during the period between January 7, 2019 and January 9, 2019. These potential strategic partners included representatives of ten companies, including: AcelRx and companies that are referred to as Company B, Company C, Company D, Company E, Company F and Company G.

On March 1, 2019, Company F sent an unsolicited offer to acquire all the common stock of Tetraphase in a stock-for-stock transaction to Mr. Guy Macdonald, Tetraphase’s then President and Chief Executive Officer, and to other members of Tetraphase’s management team. The offer contemplated a fixed exchange ratio that would result in stockholders of Tetraphase holding approximately 37% of the equity of the combined company.

On March 3, 2019, the Tetraphase Board was notified of the Company F proposal.

On March 4, 2019, the Tetraphase Board held a telephonic meeting to discuss the Company F proposal. At this meeting, representatives of management, Tetraphase’s then financial advisor, which is referred to as Financial Advisor A, and Tetraphase’s special legal counsel for a possible transaction with Company F, which is referred to as Law Firm A, also participated. During this meeting the Tetraphase Board directed representatives of management and Financial Advisor A to conduct a “market check” to determine if there were other parties interested in a potential strategic transaction with the company.

On March 5, 2019, Financial Advisor A contacted representatives of companies that are referred to as Company H and Company I regarding a potential strategic transaction with Tetraphase, which were selected based on a judgment about their potential interest in Tetraphase’s business and assets as a result of their existing commercial products and pipeline. Both companies subsequently declined, indicating that they were not interested in acquiring assets in the antibiotic space. Officers of Tetraphase also contacted representatives of Company E and of a company that is referred to as Company J for the same purpose of determining whether they would be interested in a possible strategic transaction with the company. Company J subsequently declined. Later in the day, representatives of Financial Advisor A contacted representatives of Company F to discuss the timeline for a possible acquisition of Tetraphase.

On March 6, 2019, Maria Stahl, Tetraphase’s Chief Business Officer and General Counsel, e-mailed an officer of Company E with an update on the potential timing of a transaction.

 

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On or about March 8, 2019, such officer of Company E informed Ms. Stahl telephonically that Company E was not interested in pursuing a strategic transaction with Tetraphase at that time, citing structural and valuation concerns with a potential transaction, including a lack of willingness on the part of Company E to seek and obtain approval from its own stockholders for a transaction.

On March 12, 2019, representatives of Tetraphase and Company F met in Boston, Massachusetts to discuss Tetraphase’s business and operations. Representatives of each company’s financial advisors were also present at the meeting.

On March 14, 2019, Company F provided representatives of Tetraphase with access to a data room, and Tetraphase began conducting due diligence on Company F’s business and operations.

On or about March 15, 2019, Tetraphase provided Company F with access to a data room and Company F began conducting due diligence on Tetraphase’s business and operations.

On March 21, 2019, the Tetraphase Board held a telephonic meeting to review the terms and conditions of a draft merger agreement, initially prepared by Tetraphase, and other matters related to a potential strategic transaction with Company F. Representatives of Tetraphase management, Financial Advisor A and Law Firm A also participated in the meeting.

On March 28, 2019, the Tetraphase Board held a telephonic meeting to review matters related to the potential strategic transaction with Company F. Representatives of Tetraphase management, Financial Advisor A and Law Firm A also participated in the meeting.

On or about April 5, 2019, representatives of Company F informed representatives of Tetraphase that Company F was no longer interested in pursuing a strategic transaction with Tetraphase, citing financial and liquidity concerns with Tetraphase’s business.

In late June 2019, Company F’s Chief Executive Officer contacted Mr. Macdonald to discuss the possibility of resuming discussions regarding a possible strategic transaction between Tetraphase and Company F.

On July 2, 2019, representatives of Company F’s management team and Tetraphase’s management team met in Philadelphia, Pennsylvania to discuss the business and operations of both companies and the potential synergies arising out of a combination of the two companies.

From July 3, 2019 to July 31, 2019, discussions between Company F and Tetraphase continued. Also during this period, members of Tetraphase’s management team held discussions with other potential strategic partners and investors, including, but not limited to, Company C, which had earlier not been interested in a potential strategic transaction but, due to developments with its own business, expressed a desire to discuss a potential transaction with Tetraphase.

On July 25, 2019, representatives of Tetraphase management received an offer to acquire the company in a stock-for-stock transaction from Company C. The offer contemplated a fixed exchange ratio that would result in stockholders of Tetraphase holding approximately 20% of the equity of the combined company. On or about the same day, Tetraphase management informed representatives of Financial Advisor A, Law Firm A and all the members of the Tetraphase Board of Company C’s offer.

On July 26, 2019, at a previously scheduled telephonic meeting of a committee of the Tetraphase Board composed of L. Patrick Gage, Garen Bohlin and John Freund which had been formed to evaluate potential equity financing transactions, which is referred to as the Pricing Committee, and at which other members of the Tetraphase Board were present, the Tetraphase directors discussed Company C’s offer and Tetraphase management and Financial Advisor A were instructed to contact other parties to determine whether there was any interest in pursuing a possible strategic transaction with Tetraphase. Financial Advisor A contacted approximately seven parties between July 26, 2019 and August 1, 2019.

 

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On July 29, 2019, Tetraphase and AcelRx entered into a confidentiality agreement in anticipation of the sharing of confidential information by the parties, which did not include a standstill.

On or about August 2, 2019, based on responses to these contacts and following the execution of a confidentiality agreement with the applicable party, Tetraphase provided access to a data room to representatives of Company B, Company C, Company F, Company G and Company I as well as companies that are referred to as Company K and Company L.

On August 4, 2019, the Tetraphase Board held a telephonic meeting to discuss Company C’s proposal as well as ongoing discussions with the other potential interested parties. Representatives of Tetraphase management, Financial Advisor A and Law Firm A also participated in this meeting.

On or about August 12, 2019, Company G provided Tetraphase with a non-binding proposal to acquire the company in an all cash transaction for aggregate consideration of $20 million.

Between late July and late August, representatives of Tetraphase management, Financial Advisor A and Law Firm A continued to work on diligence matters with the interested parties referred to above.

On August 18, 2019, the Tetraphase Board held a telephonic meeting to discuss the terms and conditions of a proposed merger agreement to be delivered to Company G. Representatives of Tetraphase management, Financial Advisor A and Law Firm A also participated in the meeting.

On or prior to August 25, 2019, Company C advised Tetraphase that it was no longer interested in pursuing a potential strategic transaction with the company, citing market conditions.

On or about September 4, 2019, Company G notified Financial Advisor A that following its due diligence review and due to other business development activities it would not be pursuing a potential strategic transaction with Tetraphase. Prior to that date each of Companies B, F, I, K and L had also indicated to Tetraphase or Financial Advisor A that it was not interested in pursuing a strategic transaction with the company, citing, to the extent the parties provided a specific reason, market conditions and judgments regarding valuation and liquidity.

On September 25, 2019 the Tetraphase Board held a regularly scheduled meeting in Boston, Massachusetts, at the offices of Wilmer Cutler Pickering Hale and Dorr LLP, Tetraphase’s outside corporate counsel, which is referred to as WilmerHale. At this meeting, the Tetraphase Board instructed management to engage an investment bank to underwrite a public offering of Tetraphase’s common stock.

On or about September 27, 2019, Ms. Stahl began discussions with representatives of H.C. Wainwright & Co., or HCW, concerning a potential equity financing for Tetraphase.

On September 29, 2019, after approval from the Pricing Committee, Tetraphase management engaged HCW as its exclusive agent, advisor or underwriter for an equity offering for capital raising purposes.

On September 30, 2019 representatives of HCW and its legal counsel, members of Tetraphase management, WilmerHale and representatives of Ernst & Young LLP, Tetraphase’s independent public company registered accountants (“EY”), participated in an organizational call to discuss the structure and timing of a potential public offering.

From September 30, 2019 through the morning of October 7, 2019, representatives of HCW and its legal counsel, members of Tetraphase management, WilmerHale, and EY worked to prepare Tetraphase for a public offering of Tetraphase Common Stock. This work included, but was not limited to, conducting due diligence and drafting and negotiating documentation.

 

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On October 2, 2019, Tetraphase commenced discussions under terms of confidentiality with potential investors for a public offering of Tetraphase Common Stock.

From October 2, 2019 through October 4, 2019, members of Tetraphase management participated in telephone calls with potential investors in the public equity offering.

On October 2, 2019, Ms. Stahl and an officer of Company E met in person. During this meeting, the Company E officer noted that Company E’s board of directors was interested in pursuing a possible strategic transaction with Tetraphase. Following the meeting, Ms. Stahl reported this discussion to Larry Edwards, who had succeeded Mr. Macdonald as Tetraphase’s President and Chief Executive Officer effective as of August 1, 2019.

On the morning of October 4, 2019, Ms. Stahl and the Company E officer spoke by telephone and the officer reiterated Company E’s interest in commencing discussions with Tetraphase regarding a possible strategic transaction.

On the afternoon of October 4, 2019, the Pricing Committee met telephonically with members of Tetraphase management and WilmerHale. During this meeting, management updated the Tetraphase Board on the potential public equity offering, noting the expected terms of the offering, including the fact that investors would likely require warrants to be issued in the offering, including warrants containing “Black-Scholes” provisions potentially requiring any acquirer of Tetraphase to redeem the warrants at their Black-Scholes value, which is referred to as the Black-Scholes Put Provisions. Members of Tetraphase management also discussed with the Pricing Committee the in-bound inquiry by Company E, noting that if Tetraphase were to pursue the in-bound inquiry, then Tetraphase’s efforts regarding a public equity offering would have to cease. The Pricing Committee directed management to call a meeting of the full Board for a discussion of Tetraphase’s alternatives.

Late in the day on October 4, 2019, the President and Chief Executive Officer of Company E called Mr. Edwards to reiterate Company E’s interest in a potential strategic transaction.

In October 2019, Tetraphase engaged an agent to assist the company in exploring the availability of debt financing for Tetraphase. As a result of these efforts, the company entered into confidentiality agreements and engaged in discussions with several third party lenders, following which the company determined that debt financing would not be available due, in part, to the company’s limited cash resources.

On October 7, 2019, Company E delivered a non-binding indication of interest to Tetraphase providing for an acquisition of the company for approximately $14.56 million payable in shares of Company E common stock, representing an approximate 14% ownership in the combined company, with such valuation based on market prices for Tetraphase’s and Company E’s common stock existing at such time, with an exchange ratio to be determined prior to execution of definitive documents based on each company’s current market valuation. Later on October 7, 2019, the Tetraphase Board held a telephonic meeting and determined that management should cease pursuing the public equity offering and instead should focus its efforts on moving forward with a potential strategic transaction with Company E.

From October 7, 2019 to October 10, 2019, representatives of Tetraphase management held discussions with four potential financial advisors.

On or about October 8, 2019, Company E began to conduct due diligence on Tetraphase and Tetraphase informed HCW that it would cease all activities regarding a financing transaction.

On October 9, 2019, representatives of Company E met in person with representatives of Tetraphase, including Mr. Edwards and Ms. Stahl, at the company’s corporate offices to discuss Tetraphase’s business and operations and begin conducting in-person due diligence.

 

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On October 10, 2019, Ms. Stahl and a Company E officer spoke telephonically to discuss process and timing for a potential transaction as well as the likelihood of obtaining necessary consent from the Tetraphase stockholders.

On October 11, 2019, Messrs. Edwards and Christopher Watt, Tetraphase’s Senior Vice President, Finance, held an in-person meeting with representatives of an investor which is referred to as Company M to ascertain whether or not Company M would be interested in making a strategic investment in Tetraphase.

From October 9, 2019 through October 18, 2019, Company E continued to conduct legal and operational due diligence on Tetraphase, including telephonic calls with Tetraphase’s legal advisors and in person meetings with representatives of Tetraphase’s operations team.

On or about October 18, 2019, Company E delivered a draft merger agreement to representatives of Tetraphase.

On October 20, 2019, the Tetraphase Board held a telephonic meeting with WilmerHale to discuss certain provisions of the draft merger agreement provided by Company E, including certain termination provisions in the draft merger agreement.

On October 21, 2019, Mr. Edwards and Ms. Stahl and representatives of Company E spoke telephonically regarding the termination provisions of the draft merger agreement and their implications to Tetraphase in light of its projected cash runway and liquidity position, and the Tetraphase Board’s concerns with these provisions, including the fact that if the merger agreement was executed but ultimately terminated prior to consummation Tetraphase would have insufficient capital to effect an orderly bankruptcy or liquidation process.

On the afternoon of October 23, 2019, Ms. Stahl and a Company E officer discussed certain terms and conditions related to the draft merger agreement, including the proposed termination provisions.

One the evening of October 23, 2019, the Tetraphase Board held a telephonic meeting to discuss certain termination provisions in the draft merger agreement. At the direction of the Tetraphase Board, following this meeting, Tetraphase engaged Janney Montgomery Scott LLC (“Janney”) as the company’s financial advisor, including to provide a fairness opinion with respect to a potential transaction and to conduct a “market check” with certain parties previously contacted and other parties that could be interested in a potential transaction.

On October 23, 2019, Ms. Stahl reviewed with the Tetraphase Board considerations related to certainty of consummating the proposed strategic transaction with Company E, including issues raised by the termination provisions in Company E’s draft merger agreement. Later in the day Ms. Stahl and the Company E officer discussed with WilmerHale and Company E’s outside counsel the potential timing of a transaction. In the early evening on this date, the Company E officer telephoned Ms. Stahl to discuss, once again, certain termination provisions in the draft merger agreement.

On October 24, 2019, representatives of Janney and WilmerHale, Ms. Stahl and Mr. Watt discussed the potential transaction with Company E and Janney’s work process. Also on October 24, 2019, Ms. Stahl and an officer of Company E spoke again regarding the termination provisions of the draft merger agreement.

On October 25, 2019, Mr. Edwards, Ms. Stahl and representatives of Janney discussed the status of prior discussions between Tetraphase and potential strategic partners as well as new potential strategic partners to contact as part of Janney’s “market check.” They also discussed certain considerations related to a potential transaction with Company E, including the termination provisions and the potential timing of a transaction.

On October 26, 2019, the Tetraphase Board held a telephonic meeting to discuss the potential strategic transaction with Company E. Representatives of management, Janney and WilmerHale also participated in this meeting at the Tetraphase Board’s request. During this meeting, the Tetraphase Board determined to cease pursuing a potential strategic transaction with Company E due to Company E’s stated requirements regarding the

 

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termination provisions, particularly in light of the company’s cash runway and financial position. Company E required Tetraphase to meet a specified cash threshold as of the closing of the proposed transaction that Tetraphase determined it could not meet, and Company E had indicated that it would not negotiate on this threshold. Later on October 26, 2019, Ms. Stahl notified Company E of the Tetraphase Board decision. Also on October 26, 2019, at the request of the Tetraphase Board, Ms. Stahl contacted HCW to resume discussions regarding a potential financing transaction and requested that Janney cease outreach to potential counterparties regarding a potential strategic transaction.

From October 26, 2019 to October 29, 2019, representatives of Tetraphase, WilmerHale, and representatives of HCW and its legal counsel worked to prepare and consummate an offering of Tetraphase equity securities. During this period the Pricing Committee met telephonically on multiple occasions to discuss the terms of an offering, including the requirement for the issuance of warrants that included Black-Scholes Put Provisions.

On the morning of October 30, 2019, Tetraphase announced that it had entered into a registered direct offering at the market for $8.0 million of its equity securities, consisting of shares of common stock, common stock warrants (which included the Black-Scholes Put Provisions) and pre-funded warrants, with a single investor, Armistice Capital. The financing was consummated on November 1, 2019. Steve Boyd and Keith Maher, who became members of the Tetraphase Board on January 21, 2020 in connection with the January Offerings described below, are principals of Armistice Capital, a global, long/short, value-oriented and event-driven hedge fund. Upon the consummation of the financing, Armistice Capital became Tetraphase’s largest stockholder, both on an actual basis and a fully-diluted basis.

Also on the morning of October 30, 2019, after Tetraphase issued the financing press release, an officer of Company G contacted Mr. Edwards to congratulate him on the financing and to inquire about the company’s future prospects.

Following the closing of the offering on November 1, 2019 until December 3, 2019, representatives of Tetraphase’s management contacted several parties, including Company E, Company G and Company M, to see if there was any interest in a potential strategic transaction.

From November 1, 2019 to early December 2019, Tetraphase reengaged with an agent to assist the company in exploring the availability of debt financing for Tetraphase. As a result of these efforts, the company entered into confidentiality agreements and engaged in discussions with several third-party lenders, following which the company determined that debt financing continued to be unavailable.

On December 4, 2019, the Tetraphase Board held a regularly scheduled meeting. At this meeting, the Tetraphase Board determined that the company should engage financial and legal advisors to begin preparations for a potential sale of the company through a bankruptcy process.

Between December 5, 2019 to December 12, 2019, Tetraphase entered into engagement letters with a financial advisor that we refer to as Financial Advisor B, another financial advisor that is referred to as Financial Advisor C, and Delaware special bankruptcy counsel.

On December 16, 2019, representatives of Tetraphase and representatives of Financial Advisor B and Financial Advisor C met to discuss the company’s business and operations as well as potential parties for a strategic transaction with the company.

On or about December 19, 2019, a representative of Financial Advisor B contacted representatives of a company referred to as Company N to see if Company N had any interest in making a strategic investment in the company, based on certain public reports indicating Company N’s potential increased involvement in the antibiotic sector.

From December 20, 2019 to December 23, 2019, Mr. Boyd of Armistice Capital had several discussions with members of Tetraphase management regarding the company’s business and financial needs and possible bankruptcy plans.

 

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On December 20, 2019, Mr. Edwards met with representatives of the sole stockholder of Company K, which is referred to as Company O, regarding Tetraphase’s financial and near-term strategic needs.

On December 24, 2019, a company that is referred to as Company P delivered an unsolicited proposal to acquire Tetraphase for an aggregate cash amount of $9.0 million. Company P is affiliated with Armistice Capital, and Mr. Boyd is a member of Company P’s board of directors.

On December 26, 2019, the Tetraphase Board held a telephonic meeting to discuss the Company P proposal. During this meeting the Tetraphase Board instructed representatives of Financial Advisor B to conduct a “market check.” Later on December 26, 2019, a representative of Financial Advisor B contacted several potential parties to gauge their interest in a strategic transaction with Tetraphase, including AcelRx, Company E, Company G, Company L, Company M, Company N and Company O.

Between December 26, 2019 and December 30, 2019, representatives of Financial Advisor B and Tetraphase management held calls with potential parties to a strategic transaction.

On December 28, 2019, Company E delivered a proposal to acquire Tetraphase in an all stock transaction valued at approximately $14.2 million.

On December 30, 2019, Company P executed a confidentiality agreement with Tetraphase and representatives of Company P and Armistice Capital, as an investor in and potential financing source for Company P, began conducting due diligence on Tetraphase.

On December 31, 2019, legal and financial advisors of Company E and Tetraphase held a telephonic meeting to discuss Company E’s proposal, the potential structure of a transaction and other matters related to the timing of a potential transaction.

Also on December 31, 2019, representatives of Financial Advisor B discussed with representatives of Company L a potential strategic transaction with Tetraphase. Based on this discussion, Tetraphase allowed Company L to begin conducting due diligence on the company’s business and operations.

On January 1, 2020, Ms. Stahl provided representatives of Company P and its outside legal counsel a draft merger agreement for review.

On January 2, 2020, an officer of Company P discussed with Ms. Stahl the expected legal requirements for a potential transaction. Also on January 2, 2020, representatives of Armistice Capital held a diligence discussion with representatives of Tetraphase and its financial advisors to discuss Tetraphase’s pipeline, compliance program and other areas of the company’s business and operations.

On January 3, 2020, Mr. Edwards communicated additional financial information to Mr. Boyd as previously requested by Mr. Boyd.

On the morning of January 3, 2020, the Tetraphase Board held a telephonic meeting to discuss the Company P and Company E proposals. Representatives of management, WilmerHale, Financial Advisor B and Financial Advisor C participated in the meeting. At this meeting representatives of Financial Advisor B reviewed with the Tetraphase Board the potential proceeds to Tetraphase stockholders in a transaction with Company P and a transaction with Company E, including the implications of the Black-Scholes Put Provisions. The representative of WilmerHale also reviewed with the Tetraphase Board various timing scenarios with respect to the two proposals and their potential interplay with a bankruptcy filing.

In the evening of January 3, 2020, Tetraphase received a draft non-binding proposal from Company E detailing the terms and conditions by which Company E would be willing to serve as a stalking horse bidder to acquire certain of Tetraphase’s assets in a chapter 11 bankruptcy process.

 

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On January 4, 2020, Mr. Edwards and Ms. Stahl had a brief discussion with representatives of Financial Advisor B and WilmerHale to review the Company E proposal. Following this discussion, Financial Advisor B sent an e-mail to Company E seeking clarification on Company E’s proposal.

On January 6, 2020, WilmerHale held a discussion with counsel for Company P regarding certain terms and conditions of the draft merger agreement previously sent to Company P. Following this call, Mr. Edwards had a discussion with Mr. Boyd regarding the same terms and conditions.

On January 7, 2020, Mr. Edwards and Ms. Stahl engaged in a telephonic discussion with Financial Advisor B and WilmerHale regarding the Company E proposal. Following this discussion, Financial Advisor B provided representatives of Company E with feedback on the draft proposal previously sent to Tetraphase.

On January 8, 2020, Mr. Edwards met in New York City with representatives of Armistice Capital to discuss Tetraphase’s business and operations.

Also on January 8, 2020, representatives of Company E and its counsel engaged in a telephonic discussion with representatives of Tetraphase, WilmerHale and Financial Advisor B to discuss Tetraphase’s comments on Company E’s proposal.

Also on January 8, 2020, counsel for Company P provided WilmerHale with a markup of the draft merger agreement previously provided by WilmerHale. Financial Advisor B also had a conversation with Armistice Capital regarding the structure of a potential transaction involving the company and Company P.

On January 8, 2020, Financial Advisor B discussed with representatives of Company N a potential transaction involving Tetraphase.

On January 8, 2020, Tetraphase provided access to its data room to representatives of Company E and to representatives of Company P’s outside legal counsel.

On January 9, 2020, representatives of Financial Advisor B, Financial Advisor C and WilmerHale met with representatives of Tetraphase to discuss in detail the company’s expected cash position over the next few months and the implications and risks associated with entering into a strategic transaction.

On January 9, 2020, WilmerHale discussed Company P’s markup of the merger agreement with counsel for Company P.

On January 9, 2020, Mr. Watt had a discussion with an officer of Company E regarding Tetraphase’s business and cash needs in the event of a potential chapter 11 proceeding.

On January 9, 2020, Ms. Stahl shared a draft bridge financing term sheet, created by Tetraphase for potential distribution to Company P and Mr. Boyd, with the Tetraphase Board. The proposed bridge financing was intended to provide the company with sufficient funds to operate through the closing of a transaction with Company P or, if that transaction failed to close, through a bankruptcy proceeding.

On January 9, 2020, Company E provided Tetraphase a revised non-binding proposal for the purchase of Tetraphase’s assets through a chapter 11 proceeding.

On January 10, 2020, the Tetraphase Board held a telephonic meeting to discuss the terms of a bridge financing proposal to send to Company P and Armistice Capital and the revised Company E asset purchase proposal. Members of management and representatives of WilmerHale, Financial Advisor B and Financial Advisor C also participated in the meeting.

 

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Following this meeting, representatives of Tetraphase delivered on the same day the proposed bridge financing terms to Armistice Capital, Company P and their respective representatives. Representatives of Armistice Capital and Company P also sent representatives of Tetraphase their own set of proposed bridge financing terms.

Later in the day on January 10, 2020, representatives of Financial Advisor B and WilmerHale discussed both sets of the bridge financing proposals with representatives of Armistice Capital and Company P, including Mr. Boyd.

Also on January 10, 2020, representatives of Company E’s financial advisor called Financial Advisor B to discuss the timeline associated with Company E’s revised proposal.

Later in the day on January 10, 2020, Financial Advisor C sent counsel for Company P certain Tetraphase financial information.

On January 12, 2020, representatives of Tetraphase, WilmerHale and Financial Advisor B held a telephonic discussion with representatives of Company E and its counsel and financial advisor regarding Company E’s revised asset purchase proposal. The parties also discussed a request from Company E for up to $250,000 in prepayments of its expenses in connection with potentially serving as a stalking horse bidder in the event of a chapter 11 bankruptcy filing by the company.

Also on January 12, 2020, Mr. Boyd discussed a potential equity investment in the Company, as an alternative to either Company E’s proposal or Company P’s proposal, with HCW and with Mr. Edwards. Later that day representatives of HCW sent a revised engagement letter to Mr. Edwards and Ms. Stahl. HCW also sent Tetraphase a term sheet for a proposed $15 million financing, consisting of the purchase of common stock and warrants by Armistice Capital on substantially the same terms as the October 2019 financing.

On January 13, 2020, Mr. Edwards conveyed HCW’s financing proposal to the Tetraphase Board.

Also on January 13, 2020, in furtherance of the Company E proposal, WilmerHale discussed with counsel for Company E the potential timeline and documentation in the event that Tetraphase were to file for chapter 11 protection.

On or about January 14, 2020, Mr. Boyd informed Mr. Edwards that Armistice Capital would no longer fund the Company P proposal to acquire Tetraphase.

On January 14, 2020, the Tetraphase Board held a telephonic meeting. At the meeting, the Tetraphase Board instructed management to continue working with HCW and Armistice Capital toward a potential capital investment in the company. In response to a request from Company E, the Tetraphase Board also instructed management to pay Company E $75,000 as a prepayment of its expenses in connection with potentially serving as a stalking horse bidder in the event of a chapter 11 bankruptcy filing by the company.

Later on January 14, 2020, Tetraphase entered into an amended engagement letter for a financing transaction with HCW.

On January 15, 2020 Mr. Edwards attended the 2020 JP Morgan Healthcare Conference and met with representatives of several biotechnology companies, including Vince Angotti, President and Chief Executive Officer of AcelRx.

On January 20, 2020, Dr. Freund and Mr. Angotti, who knew each other from prior business dealings, met in Palo Alto. At this meeting, Mr. Angotti indicated that AcelRx was interested in a potential merger with Tetraphase.

On or about January 21, 2020, AcelRx requested certain financial information from Tetraphase, which the company provided.

 

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Also on January 21, 2020, Company E informed Ms. Stahl that Company E was no longer interested in pursuing a transaction to acquire Tetraphase’s assets due in part to the company’s unwillingness to provide Company E with additional reimbursement of its expenses in connection with a potential stalking horse bid in a Tetraphase bankruptcy.

Also, on January 21, 2020, HCW advised Tetraphase that Armistice Capital had indicated that it would not fund the full $15 million in the proposed financing and proposed that HCW contact other potential investors to explore their interest in participating in a concurrent registered direct offering along-side the Armistice Capital investment.

Also on January 21, 2020, the Tetraphase Board held a telephonic meeting to approve moving forward with the proposed financing involving Armistice Capital and certain additional investors. During the meeting the Tetraphase Board reviewed the potential investors in the financing and the terms of the proposed offering, including the issuance of common stock warrants that included the Black-Scholes Put Provisions.

On January 22, 2020, the Pricing Committee met telephonically on two occasions to discuss and approve, and Tetraphase announced, offerings of common stock, common stock warrants and pre-funded warrants with aggregate gross proceeds of approximately $17.5 million, consisting of a $10 million private placement with Armistice Capital and a $7.5 million concurrent registered direct offering with certain additional investors, which is referred to collectively as the January Offerings. Steve Boyd and Keith Maher, who are each affiliated with Armistice Capital, became members of the Tetraphase Board on January 21, 2020 in connection with the January Offerings.

On January 23, 2020, Tetraphase and AcelRx entered into an amendment to the July 29, 2019 confidentiality agreement between the parties to extend the agreed upon confidentiality obligations to cover additional discussions and information sharing between the parties.

On January 24, 2020, Tetraphase completed the January Offerings.

On January 30, 2020 and January 31, 2020, Mr. Edwards, Ms. Stahl, Mr. Watt and Kevin Lloyd, Tetraphase’s Vice President of Program Management, held in person meetings at Tetraphase’s headquarters with Vincent Angotti, AcelRx’s President and Chief Executive Officer, and Raffi Asadorian, AcelRx’s Chief Financial Officer.

On February 2, 2020, the Tetraphase Board held a telephonic meeting and considered, among other things, the status of discussions with and outreach to various parties regarding a potential strategic transaction for the company.

On February 5, 2020, representatives of Tetraphase, including Mr. Edwards, and representatives of AcelRx, including Mr. Angotti, discussed potential synergies in territories and the field teams of the two companies and the possibility of entering into a co-promotion agreement between the parties.

On February 7, 2020, Tetraphase management contacted Janney to re-engage regarding a potential fairness opinion and to conduct a “market check” with various potential counterparties. Also on February 7, 2020, representatives of Tetraphase and representatives of AcelRx held a telephonic discussion regarding potential timing of a possible transaction, and Mr. Boyd spoke with Mr. Angotti, who knew each other as a result of prior business dealings.

On February 9, 2020, representatives of Tetraphase and AcelRx and their legal representatives and AcelRx’s financial advisor met telephonically to discuss a proposed timeline for a potential transaction.

On February 10, 2020, AcelRx delivered to Mr. Edwards a non-binding proposal for an acquisition of Tetraphase in an all-stock transaction for a fully diluted equity value, using a fixed exchange ratio based on market prices as

 

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of the date of the proposal, ranging between $20 million to $25 million, inclusive of amounts payable under the Black-Scholes Put Provisions, subject to a closing adjustment provision based on an assumed $15 million of net cash at Tetraphase at closing. The proposal also contemplated that the parties would enter into the co-promotion agreement. That same day Mr. Edwards shared the term sheet with the Tetraphase Board.

On February 11, 2020, the Tetraphase Board held a telephonic meeting, with representatives of Janney and WilmerHale participating at the invitation of the Board. The Tetraphase Board considered the AcelRx proposal as well as the status of other discussions and outreach regarding a potential strategic transaction for the company. The Board also discussed AcelRx’s request for exclusivity and certain cash balance adjustments at the closing of a transaction.

On February 12 and 13, 2020, representatives of AcelRx met with representatives of Tetraphase at Tetraphase’s offices for purposes of conducting additional reciprocal due diligence.

On February 12, 2020, AcelRx provided Tetraphase with a draft of the co-promotion agreement.

On February 13, 2020, AcelRx sent a revised offer to acquire all the equity of Tetraphase in an all-stock transaction for a fully diluted equity value, using a fixed exchange ratio based on market prices as of the date of the proposal, ranging between $13 million to $18 million, including amounts payable under the Black-Scholes Put Provisions, subject to a closing adjustment provision based on an assumed $8 million of net cash at Tetraphase at closing, and requested exclusivity beginning on February 18, 2020.

Also on February 13, 2020, management instructed Janney on behalf of the Tetraphase Board to contact third parties, including Companies E, H, I and K, to see if there was any interest in a strategic transaction with Tetraphase.

On February 14, 2020, Janney contacted 12 third parties to inquire about their potential interest in a strategic transaction with Tetraphase, including parties that had previously expressed an interest in acquiring Tetraphase. Of the 12 parties contacted by Janney over the course of February 14, 2020 through February 21, 2020, only Company K expressed interest in submitting an offer to acquire Tetraphase. Also on February 14, 2020, representatives of Company K and Janney discussed a potential strategic transaction, in which representatives of Company K expressed interest in moving forward with the process. Also on February 14, 2020, Dr. Freund and Mr. Angotti had a telephone call to discuss a potential merger with Tetraphase.

On February 15, 2020, the Tetraphase Board held a telephonic meeting to discuss AcelRx’s revised proposal and request for exclusivity. Representatives of Tetraphase management, Janney and WilmerHale participated in the meeting.

On February 16, 2020, Mr. Richard Page and Mr. James McNaughton of Janney spoke with a representative of AcelRx’s financial advisor regarding AcelRx’s proposal and the Tetraphase Board’s response to that proposal. Mr. Page and Mr. McNaughton noted that the Tetraphase Board would not agree to exclusivity, and that AcelRx should revisit the valuation included in AcelRx’s proposal.

On February 18, 2020, representatives of Janney followed up with representatives of Company K. Representatives of Company K requested access to the Tetraphase data room and indicated that Company K would be in a position to provide an update the following week.

On February 19, 2020, AcelRx delivered a draft merger agreement to Tetraphase, and then Cooley LLP (“Cooley”), counsel for AcelRx, circulated a revised version on February 20, 2020. On the same day, Tetraphase delivered a revised draft of the co-promotion agreement to AcelRx.

On February 20, 2020, representatives of Tetraphase and WilmerHale spoke to representatives of AcelRx and Cooley regarding the draft co-promotion agreement. Also on February 20, 2020, Dr. Freund and Mr. Angotti met and discussed the timing of the deal and consideration.

 

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On or about February 21, 2020, Tetraphase granted access to its data room to representatives of Company K and representatives of Company O, Company’s K’s sole stockholder.

On February 23, 2020, Cooley delivered a draft voting agreement for the transaction to WilmerHale.

On February 25, 2020, WilmerHale provided Cooley with comments on the draft merger agreement and the draft voting agreement, including, among others, comments related to the termination fee, the obligation to pay AcelRx’s expenses in certain circumstances, certain proposed downward adjustments to the exchange ratio, the covenants applicable to both parties between signing and closing of the merger, and the conditions to the closing of the merger.

On February 26, 2020, representatives of Janney held a call with representatives of Company K to discuss a potential strategic transaction with Tetraphase.

On February 27, 2020, Mr. Edwards and representatives of Company O had an in-person meeting. During this meeting, they discussed a potential strategic transaction involving Tetraphase. Also on February 27, 2020, representatives of Janney held a call with representatives of Company O and Company K to discuss a potential transaction with Tetraphase, including the potential impact of the Black-Scholes Put Provisions.

On February 28, 2020, Company O sent representatives of Janney a non-binding proposal for the acquisition of Tetraphase in a transaction valuing the Company at $10 million in cash, plus contingent value rights, or CVRs, representing the right to receive up to an additional $5 million in cash based on attainment of certain sales milestones. Mr. Edwards shared this non-binding proposal with the Tetraphase Board later that day.

Also on February 28, 2020, representatives of AcelRx provided a capabilities presentation to representatives of Tetraphase and Janney. Representatives of Tetraphase and Janney asked questions of the representatives of AcelRx for the purpose of conducting diligence on the business prospects of AcelRx.

Also on February 28, 2020, AcelRx sent Tetraphase a further revised non-binding proposal to acquire Tetraphase in an all-stock transaction, reflecting a fixed exchange ratio in which each share of Tetraphase Common Stock would be exchanged for the right to receive 0.748 of a share of AcelRx common stock, which, based on then prevailing market prices, reflected a fully-diluted equity value of approximately $17 million, inclusive of amounts payable to the Company’s warrant holders under the Black-Scholes Put Provisions. Also on February 28, 2020, Cooley sent WilmerHale a revised draft of the merger agreement for the proposed transaction.

On February 29, 2010, Cooley sent WilmerHale a revised draft of the voting agreement.

On March 1, 2020, representatives of Tetraphase, Janney and WilmerHale held a discussion regarding the Company O proposal and the revised AcelRx proposal as well as the comments received on the merger agreement, the co-promotion agreement and a proposed voting agreement pursuant to which certain stockholders of Tetraphase would agree, subject to certain terms and conditions, to vote in favor of the merger.

Also on March 1, 2020, Mr. Edwards and Ms. Stahl held a discussion with Messrs. Angotti and Asadorian and AcelRx’s general counsel, regarding certain open business issues.

Also on March 1, 2020, the Tetraphase Board held a telephonic meeting to discuss the Company O proposal and the revised AcelRx proposal, including AcelRx’s continued request for exclusivity. At this meeting the Tetraphase Board formed a mergers and acquisitions committee, which is referred to as the M&A Committee, consisting of Messrs. Gage, Bohlin, Boyd, Freund and Maher, to provide guidance regarding a proposed strategic transaction to Tetraphase’s management and advisors between meetings of the full board.

On March 2, 2020, representatives of Janney contacted representatives of Company O to discuss their initial proposal. Representatives of Janney also contacted representatives of AcelRx’s financial advisor to inform them

 

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that another offer had been presented to Tetraphase, and encouraged AcelRx to revisit the value in their offer letter. Representatives of Janney also indicated that Tetraphase would consider granting a limited period of exclusivity if AcelRx sufficiently increased its offer.

On March 3, 2020, WilmerHale provided Cooley with a revised draft of the merger agreement and the co-promotion agreement, as well as a markup of the draft voting agreement assuming that certain shareholders would be willing to enter into such an agreement.

On March 4, 2020, Cooley and WilmerHale discussed the revised merger agreement and Mr. Edwards and Mr. Angotti also discussed certain open issues in the merger agreement.

Also on March 4, 2020, representatives of Company K and Company O contacted Janney and verbally informed them of a revised offer consisting of $15 million in cash to be paid at closing, without any CVR component. On the same day Mr. Edwards discussed the verbal revised offer with a principal of Company O. Representatives of Janney and Mr. Edwards each expressed to representatives of Company K and Company O that their revised offer was still not as attractive as an alternative offer being considered by Tetraphase and suggested that Company K and Company O should further consider their offer before submitting a revised written proposal.

On March 5, 2020, representatives of Janney held discussions with a representative of Company O regarding the potential for Company K and Company O to revise the verbal offer of March 4, 2020. Later in the day, a representative of Company O spoke to Janney and provided an update indicating that a revised written proposal would be forthcoming and that the revised proposal would be an improvement over the latest verbal offer. Also on the same day, Mr. Edwards shared this new offer with members of the M&A Committee.

Also on March 5, 2020, representatives of Janney engaged in discussions with representatives of AcelRx’s financial advisor regarding various items relating to the business terms of the transaction documents, including AcelRx’s desire for a closing condition and an adjustment to the purchase price tied to Tetraphase’s net cash at the closing, AcelRx’s desire for exclusivity and the need for AcelRx to increase its previous offer before exclusivity would be considered by the Tetraphase Board.

On March 6, 2020, representatives of Janney spoke to representatives of AcelRx’s financial advisor to inform them that Tetraphase was expecting to receive a revised written proposal from a competing bidder. The Janney representatives indicated that the alternative proposal was for upfront cash consideration, rather than shares of stock as in AcelRx’s proposal, and that Tetraphase was asking both parties to submit their best and final proposals by 5:00 p.m. on March 6, 2020, in advance of a Tetraphase M&A Committee meeting on March 7, 2020. In particular, representatives of Janney indicated to representatives of AcelRx’s financial advisor the attractiveness to Tetraphase of the shorter timeline to closing and potential for greater closing certainty provided by the competing bid, as well as the certainty of value presented by the upfront cash consideration in the other proposal.

On March 6, 2020, representatives of Company O sent representatives of Janney an updated non-binding proposal to acquire Tetraphase for $15 million of cash at closing, plus a CVR for an additional $2.5 million based upon the attainment of $20 million of net sales in any four consecutive quarters by 2021. Also on March 6, 2020, representatives of Janney and of Company O exchanged emails and discussed by phone that Tetraphase intended to make a decision to proceed with one party or the other after the Tetraphase M&A Committee meeting on March 7, 2020. During this discussion, representatives of Company O indicated that its offer of $15 million in cash plus a CVR of up to $2.5 million in potential future value represented its “best and final” offer. Company O informed Tetraphase that it had several more weeks of diligence to complete before it would potentially be willing to convert its non-binding proposal to a binding agreement, and the Tetraphase Board determined that not only was the final AcelRx offer more attractive financially, but that AcelRx had also completed its diligence and was willing to sign a binding agreement.

 

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On March 7, 2020, representatives of Janney and representatives of AcelRx’s financial advisor conducted a phone discussion during which representatives of AcelRx’s financial advisor orally provided an updated proposal from AcelRx to acquire Tetraphase in a transaction in which each share of Tetraphase Common Stock would be exchanged for the right to receive (x) 0.791 of a share of AcelRx common stock, representing on the date of the offer a fully diluted upfront equity value of approximately $20 million (inclusive of any consideration payable to warrant holders under the Black-Scholes Put Provisions), subject to a closing adjustment provision based on an assumed $5 million of net cash at Tetraphase at closing, and (y) a CVR for the pro rata portion of up to $12.5 million (payable at AcelRx’s election in cash or shares of its common stock) upon the achievement of certain net sales milestones. AcelRx’s financial advisor sent Janney a written copy of the non-binding proposal from AcelRx following the discussion. Over the course of March 8, 2020 through March 13, 2020, AcelRx with the assistance of its legal and financial advisors revised the exchange ratio within the offer to 0.6303 to reflect the latest fully diluted share count and the inclusion of the CVR value attributable to warrant holders under the Black-Scholes Put Provisions, both of which were not considered in the non-binding proposal from March 7, 2020. Additionally, as a result of the financial and stock markets experiencing unusual volatility from March 9, 2020 through March 13, 2020, the offer, on the date of signing, March 16, 2020, was negatively impacted by the drop in AcelRx’s stock price to $1.03 per share (from $1.43 at the time of the proposal) and as a result represented as of the execution of the merger agreement a lower fully diluted upfront equity value of approximately $14.4 million (inclusive of any consideration payable to warrant holders under the Black-Scholes Put Provisions).

Also on March 7, 2020, Cooley sent to WilmerHale a revised draft of the merger agreement, voting agreement and co-promotion agreement for the proposed transaction.

Later on March 7, 2020, the M&A Committee held a telephonic meeting with representatives of Janney and WilmerHale to discuss the two revised proposals. Members of the Committee and their advisors compared and contrasted the proposals from AcelRx and Company O. Mr. Edwards and representatives of Janney both shared with the M&A Committee Company O’s unwillingness to further increase its offer, and members of the M&A Committee expressed concern that, without granting exclusivity, there was a risk that AcelRx might withdraw its offer. The M&A Committee instructed management to move forward with the AcelRx proposal and authorized management to enter into an agreement with AcelRx granting exclusivity until the end of the day on Wednesday, March 11, 2020. Later that day, Janney communicated the M&A Committee’s decisions to AcelRx’s financial advisor. Also on this day AcelRx and Tetraphase entered into an exclusivity agreement, which provided for exclusivity through March 11, 2020.

On March 8, 2020, Janney communicated Tetraphase’s decisions to Company K and Company O.

Also on March 8, 2020, representatives of Tetraphase and its outside intellectual property counsel held a diligence call with representatives of AcelRx and Cooley. A lengthy discussion also occurred between representatives of Tetraphase and WilmerHale and representatives of AcelRx and Cooley regarding the terms and conditions of the merger agreement.

On March 9, 2020, Ms. Stahl spoke to Dr. Maher of Armistice Capital regarding the Black-Scholes Put Provisions and their implications for a transaction with AcelRx.

Also on March 9, 2020, representatives of Tetraphase and representatives of AcelRx continued to negotiate the terms and conditions of the merger agreement. Revised drafts of the co-promotion agreement and merger agreement were distributed by WilmerHale to Cooley. Later that day, Cooley provided WilmerHale with a first draft of the contingent value rights agreement.

On March 10, 2020, the parties continued to negotiate the terms and conditions of the merger agreement and the other transaction documents, and WilmerHale and Cooley exchanged drafts of the merger agreement.

 

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On March 11, 2020, Ms. Stahl and Mr. Boyd discussed the potential valuation of the warrants held by Armistice Capital and the other warrant holders for purposes of the Black-Scholes Put Provisions. Mr. Boyd informed Ms. Stahl that Armistice Capital would be willing to agree to a fixed exchange ratio for its warrants in connection with the signing of the merger agreement. Also on this day, WilmerHale and Cooley exchanged drafts of the contingent value rights agreement.

On March 12, 2020, the M&A Committee met telephonically on two occasions with representatives of Janney and WilmerHale. During these meetings the M&A Committee discussed the status of ongoing discussions and negotiations with AcelRx, including AcelRx’s request for an extension of the exclusivity period, as well as the status of discussions with the holders of warrants with the Black-Scholes Put Provisions. Ms. Stahl noted that, given the current market turmoil, none of the warrant holders was willing to enter into confidentiality agreements to facilitate a discussion of these issues prior to close of market on Friday, March 13, 2020 and that the warrant holders would not be willing to be out of the market on Monday, March 16, 2020. The M&A Committee directed management to proceed with discussions with the warrant holders after market close on Friday, March 13, 2020, and to agree to an extension of exclusivity with AcelRx through 8:00 am Eastern Time on Monday, March 16, 2020. Also on this day, Cooley sent a revised draft of the merger agreement to WilmerHale and WilmerHale and Cooley exchanged drafts of the contingent value rights agreement.

On March 13, 2020, Ms. Stahl requested that warrant holders other than Armistice Capital enter into confidentiality agreements with Tetraphase, which they did following the close of market. Ms. Stahl then contacted representatives of each warrant holder requesting that they enter into voting agreements and agree to a fixed exchange ratio for the shares of common stock issuable under their warrants pursuant to the Black-Scholes Put Provisions. Also on this day, Cooley and WilmerHale exchanged drafts of the merger agreement, contingent value rights agreement and voting agreement.

On March 14, 2020, Ms. Stahl had discussions with several warrant holders regarding the specifics of the proposed transaction and the value attributable to their warrants. Following these discussions, four of the five warrant holders agreed to enter into voting agreements with AcelRx in connection with the contemplated transactions and to fix the exchange ratio for the shares of common stock issuable under their warrants pursuant to the Black-Scholes Put Provisions and the fifth warrant holder, which did not own shares of Tetraphase Common Stock, agreed to enter into an exchange agreement for the same purpose.

Also on March 14, 2020, materials were provided to the Tetraphase Board for review and consideration in anticipation of the following day’s scheduled board meeting to consider approval of the proposed transactions and Cooley and WilmerHale finalized the transaction documents.

On March 15, 2020, the AcelRx Board met to discuss the contemplated transactions. The AcelRx Board unanimously approved the transactions. Also on March 15, 2020, the Tetraphase Board met to discuss the contemplated transactions. Members of the Tetraphase management team, representatives of WilmerHale and Janney also participated in this meeting. Janney delivered to the Tetraphase Board an oral opinion, which was later confirmed in writing, stating that the Merger Consideration to be received in the merger was fair, from a financial point of view, to the common stockholders of Tetraphase. The Tetraphase Board unanimously approved the merger agreement. Following these two board meetings, the parties entered into the merger agreement and the ancillary agreements. Tetraphase’s warrant holders also entered into either a voting agreement or an exchange agreement with AcelRx relating to the voting of their common stock and exchange ratios of their respective warrants.

On March 16, 2020, each company separately issued a press release before the market open detailing the proposed merger of the two companies. AcelRx also held an investor call prior to market open to discuss its earnings for the year ended December 31, 2019 and to discuss the proposed merger between the two companies.

 

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Effects of the Merger

Upon completion of the Merger, Merger Sub, an indirect wholly-owned subsidiary of AcelRx, will merge with and into Tetraphase. Tetraphase will be the Surviving Corporation and will become an indirect wholly-owned subsidiary of AcelRx.

Merger Consideration

For a discussion of Merger Consideration (including treatment of the Tetraphase Common Stock, Tetraphase equity awards and Tetraphase Warrants) and the Exchange Ratio, please see the section titled “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 92 of this proxy statement/prospectus.

Other Effects

The rights pertaining to AcelRx Common Stock will be different from the rights pertaining to Tetraphase Common Stock, because the AcelRx Charter and the AcelRx Bylaws in effect immediately after the completion of the Merger will be different from the Tetraphase Charter and the Tetraphase Bylaws, respectively. A further description of the rights pertaining to AcelRx Common Stock and the AcelRx Charter and AcelRx Bylaws is set forth under “Comparison of Rights of Holders of AcelRx Common Stock and Tetraphase Common Stock” beginning on page 175 of this proxy statement/prospectus.

AcelRx Board’s Reasons for the Merger

The AcelRx Board authorized and approved the Merger Agreement and approved the Contemplated Transactions, including the issuance of AcelRx Common Stock as Merger Consideration, and such other agreements, instruments and documents as are contemplated by the Merger Agreement, including the Voting Agreements, Exchange Agreement and the form of CVR Agreement, as well as the Co-Promotion Agreement. The AcelRx Board also determined that the terms of the Merger Agreement, the Merger and the other Contemplated Transactions are fair to and in the best interests of AcelRx, Merger Sub and their respective stockholders.

The AcelRx Board believes the combination of the two organizations creates efficiencies resulting from commercializing multiple products with a single salesforce. The combination also creates a growth platform to further consolidate hospital-focused pharmaceutical companies and products expected to generate near-and long-term growth, additional synergies and stockholder value.

Recommendation of the Tetraphase Board; the Tetraphase Board’s Reasons for the Merger

At a meeting held on March 15, 2020, the Tetraphase Board unanimously:

 

   

determined that the Merger Agreement, the Merger and the other Contemplated Transactions are fair to, and in the best interests of, Tetraphase and its stockholders;

 

   

approved and declared advisable the Merger Agreement, the Merger and the other Contemplated Transactions;

 

   

directed that the Merger Agreement be submitted for adoption at a meeting of Tetraphase stockholders; and

 

   

recommended that Tetraphase stockholders vote in favor of the adoption of the Merger Agreement.

 

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Accordingly, the Tetraphase Board has approved the Merger Agreement and unanimously recommends that Tetraphase stockholders vote “FOR” the merger agreement proposal, “FOR” the compensation proposal, and “FOR” the adjournment proposal.

In reaching its decision to approve and declare advisable the Merger Agreement, the Merger and the other Contemplated Transactions, the Tetraphase Board, as described in the section titled “The Merger—Background of the Merger” beginning on page 48 of this proxy statement/prospectus, held a number of meetings, consulted with Tetraphase’s senior management and its outside legal and financial advisors, WilmerHale and Janney, respectively, and considered the business, assets and liabilities, results of operations, financial performance, strategic direction and prospects of Tetraphase and AcelRx. At its meeting held on March 15, 2020, after due consideration and consultation with Tetraphase’s senior management and outside legal and financial advisors and after receipt of its financial advisor’s opinion (as described in the section titled “The MergerOpinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor” beginning on page 67 of this proxy statement/prospectus), the Tetraphase Board unanimously approved and declared advisable the Merger Agreement, the Merger and the other Contemplated Transactions and recommended that Tetraphase stockholders vote in favor of the adoption of the Merger Agreement.

In making its determination, the Tetraphase Board focused on a number of reasons, including the following potential advantages and opportunities:

 

   

the shares of AcelRx Common Stock payable at closing will provide Tetraphase equityholders with ownership of approximately 14.6% of the combined company on a fully diluted basis and therefore allow Tetraphase’s stockholders to participate in the anticipated growth of the combined company, as well as any synergies resulting from the Merger;

 

   

the fact that the shares of AcelRx Common Stock that Tetraphase stockholders would receive pursuant to the Merger Agreement would be registered and freely tradable following the completion of the Merger;

 

   

in addition to the upfront merger consideration, each share of Tetraphase Common Stock will entitle the holder thereof to one CVR, which may provide Tetraphase stockholders with an opportunity to receive additional payments in cash or shares of AcelRx Common Stock upon the achievement of certain milestones, and AcelRx has agreed in the agreement governing the CVRs to use commercially reasonable efforts to achieve such milestones;

 

   

the expectation that the combined company would generate potentially significant cost synergies, including cost savings relating to the sales infrastructure of the companies;

 

   

the expectation that the combined company could also realize revenue growth, including potentially immediately following execution of the Merger Agreement from activities under the Co-Promotion Agreement;

 

   

the information and discussions with Tetraphase’s senior management and outside advisors regarding AcelRx’s business, assets, financial condition, results of operations, current business strategy and prospects, including the projected results of AcelRx as a stand-alone company, and the expected pro forma effect of the Merger on the combined company;

 

   

the recommendation of Tetraphase’s senior management in favor of the Merger;

 

   

the risk that AcelRx would withdraw its proposal to acquire Tetraphase or reduce its proposed consideration if Tetraphase elected to continue to solicit additional offers from or engage with other parties and a higher offer did not emerge;

 

   

the risks associated with continuing to operate Tetraphase on a stand-alone basis, including the time and resources required to continue to commercialize and market XERAVA;

 

   

the risks, costs and uncertainty associated with Tetraphase’s existing cash position, including the need to obtain additional financing and the amount of cash resources that would be necessary to effect an orderly bankruptcy process;

 

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the view that the combined company will be led by a senior management team from AcelRx with a strong track record;

 

   

the lack of superior alternative transactions and offers despite substantial efforts made over a significant period of time by Tetraphase’s management and financial advisors to solicit strategic alternatives for Tetraphase to the transaction, including the discussions that Tetraphase’s management, Tetraphase’s representatives and the Tetraphase Board had with other potential strategic transaction candidates as described in the section titled “The MergerBackground of the Merger”;

 

   

the current financial market conditions and historical market prices, volatility and trading information with respect to Tetraphase;

 

   

the risks, costs and timing associated with a potential liquidation or bankruptcy event of Tetraphase;

 

   

the oral opinion of Janney, subsequently confirmed in writing, to the Tetraphase Board that, as of March 15, 2020, and based upon and subject to the various assumptions made and matters considered as set forth in its written opinion, the merger consideration pursuant to the Merger Agreement was fair from a financial point of view to the holders of shares of Tetraphase Common Stock, as more fully described under the section titled “The MergerOpinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor” beginning on page 67 of this proxy statement/prospectus and the full text of the written opinion of Janney, which is attached as Annex E to this proxy statement/prospectus; and

 

   

the review by the Tetraphase Board with its advisors of the structure of the Merger and the financial and other terms of the Merger Agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination provisions as well as the likelihood of consummation of the proposed transactions and the evaluation of the Tetraphase Board of the likely time period necessary to complete the Merger, as well as the following specific aspects of the Merger Agreement:

 

   

the Merger is subject to the approval of the Tetraphase stockholders, who are free to approve or reject the Merger;

 

   

the Merger Agreement permits Tetraphase, subject to certain conditions, to respond to and negotiate unsolicited acquisition proposals prior to the time that Tetraphase’s stockholders approve the Merger and to terminate the Merger Agreement to accept an unsolicited acquisition proposal that the Tetraphase Board determines is superior to the Merger;

 

   

the Merger Agreement permits the Tetraphase Board, subject to certain conditions, to make an adverse recommendation change to Tetraphase stockholders, in response to a superior proposal or a change in circumstances if the failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to Tetraphase’s stockholders under applicable law;

 

   

stockholders are entitled to exercise their appraisal rights under the DGCL in connection with the Merger; and

 

   

AcelRx’s obligations to consummate the Merger are not subject to any financing contingency.

The Tetraphase Board weighed these advantages and opportunities against a number of potentially negative reasons in its deliberations concerning the Merger Agreement and the Merger including:

 

   

the number of shares of AcelRx Common Stock to be received for each outstanding share of Tetraphase Common Stock is fixed (subject to a potential downward adjustment if the Tetraphase Net Cash as calculated in connection with the closing is less than $5.0 million) and will not be increased to compensate Tetraphase stockholders in the event of a decline in the share price of AcelRx Common Stock or an increase in the share price of Tetraphase Common Stock prior to the Effective Time;

 

   

the risk that some or all of the net sales milestones necessary to trigger the contingent payments under the CVRs may not be achieved;

 

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the risks and costs to Tetraphase during the pendency of the Merger, including as a result of the reduction in Tetraphase’s sales force and limitation of activities in certain territories pursuant to the Co-Promotion Agreement executed simultaneously with the Merger Agreement;

 

   

the risks and costs to Tetraphase if the Merger is not completed, including that Tetraphase’s cash runway would be limited, its prospects as a stand-alone company would be materially and adversely impacted and it would likely be required to file for protection under applicable bankruptcy laws;

 

   

the risk that AcelRx’s financial performance may not meet Tetraphase’s expectations and the anticipated cost synergies may not be achieved;

 

   

the Merger Agreement contains provisions that restrict the conduct of Tetraphase’s business prior to the completion of the Merger, generally requiring Tetraphase not to take certain actions with respect to the conduct of its business without the prior consent of AcelRx;

 

   

the Merger Agreement contains provisions that could have the effect of discouraging third party offers for Tetraphase, including the restriction on Tetraphase’s ability to solicit third-party proposals for alternative transactions;

 

   

under certain circumstances under the Merger Agreement, Tetraphase may be required to pay to AcelRx (i) the Tetraphase termination fee or (ii) the AcelRx fee reimbursement, as more fully described in the section titled “The Merger Agreement—Termination Fee and Expenses”;

 

   

Tetraphase could incur substantial expenses related to the Merger, including in connection with any litigation that may result from the announcement or pendency of the Merger;

 

   

the risk that Tetraphase stockholders may not approve the proposals at the Special Meeting;

 

   

the expectation that the receipt of the Merger Consideration in exchange for shares of Tetraphase Common Stock pursuant to the Merger will generally be a taxable transaction for U.S. federal income tax purposes; and

 

   

the other various risks associated with the Merger and the business of Tetraphase, AcelRx and the combined company, as described in the section titled “Risk Factors.”

The Tetraphase Board considered all of these reasons as a whole and, on balance, concluded that it supported a favorable determination to approve the Merger Agreement and to make its recommendations to Tetraphase stockholders.

In addition, the Tetraphase Board was aware of and considered the interests of its directors and executive officers that are different from, or in addition to, the interests of Tetraphase stockholders generally, including the treatment of equity awards and warrants held by such directors and executive officers in the Merger described in the section titled “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers” beginning on page 80 of this proxy statement/prospectus and the obligation of the combined company to indemnify Tetraphase directors and officers against certain claims and liabilities.

The foregoing discussion of the information and reasons that the Tetraphase Board considered is not intended to be exhaustive, but rather is meant to include the material reasons that the Tetraphase Board considered. The Tetraphase Board collectively reached the conclusion to approve the Merger Agreement, the Merger and the other Contemplated Transactions in light of the various reasons described above and other reasons that the members of the Tetraphase Board believed were appropriate. In view of the complexity and wide variety of reasons, both positive and negative, that the Tetraphase Board considered in connection with its evaluation of the Merger, the Tetraphase Board did not find it practical, and did not attempt, to quantify, rank or otherwise assign relative or specific weights or values to any of the reasons it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular reason, or any aspect of any particular reason, was favorable or unfavorable to the ultimate determination of the Tetraphase Board. In considering the reasons discussed above, individual directors may have given different weights to different reasons.

 

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The foregoing description of Tetraphase’s consideration of the reasons supporting the Merger is forward-looking in nature. This information should be read in light of the reasons discussed in the section titled “Special Note Regarding Forward-Looking Statements” beginning on page 35.

Opinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor

The Tetraphase Board retained Janney Montgomery Scott LLC (“Janney”) on October 23, 2019 to act as its financial advisor in connection with the Merger and requested Janney to render an opinion, as investment bankers, as of the date of the opinion, whether the Merger Consideration to be received in the Merger is fair, from a financial point of view, to the common stockholders of Tetraphase. In selecting Janney, the Tetraphase Board considered, among other things, the fact that Janney is a reputable investment banking firm with substantial experience advising companies in the healthcare sector and in providing strategic advisory services in general. Janney, as part of its investment banking business, is continuously engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.

On March 15, 2020, at the request of the Tetraphase Board, Janney rendered an oral opinion to the Tetraphase Board, which was subsequently confirmed in a written opinion as of the same date (the “Opinion”), that as of such date, and based upon and subject to the assumptions made, matters considered and limitations and qualifications upon the review undertaken by Janney, the Merger Consideration to be received in the Merger was fair, from a financial point of view, to the common stockholders of Tetraphase.

The full text of Janney’s written Opinion to the Tetraphase Board dated March 15, 2020, is attached to this document as Annex E and is incorporated by reference in this document in its entirety. Holders of shares of Tetraphase’s common stock should read the Opinion carefully and in its entirety. The Opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Janney in rendering its Opinion. Janney’s Opinion was directed to the Tetraphase Board and addressed only the fairness, from a financial point of view, as of the date of the Opinion, of the consideration to be paid to the common stockholders of Tetraphase. Janney’s Opinion did not address any other aspects of the proposed Merger or the Contemplated Transactions and did not address the prices at which shares of AcelRx’s common stock would trade following completion of the proposed Merger or at any time. Janney’s Opinion did not and does not constitute a recommendation as to how any holder of Tetraphase’s common stock should vote in connection with the proposed Merger. The summary of Janney’s Opinion set forth in this document is qualified in its entirety by reference to the full text of such Opinion. The Opinion was approved by Janney’s fairness opinion committee in accordance with the requirements of the Financial Industry Regulatory Authority Rule 5150.

In rendering the Opinion, Janney made such reviews, analyses and inquiries as deemed necessary and appropriate under the circumstances. Among other things, Janney:

 

   

reviewed certain publicly available information such as annual reports, quarterly reports and SEC filings of Tetraphase and AcelRx, respectively;

 

   

reviewed the historical financial performance, current financial position and general prospects of Tetraphase and AcelRx, respectively;

 

   

reviewed certain internal financial and operating information with respect to the business, operations and general prospects of Tetraphase and AcelRx, including certain historical financial non-GAAP adjustments and financial forecasts prepared by the management of Tetraphase and the management of AcelRx;

 

   

discussed Tetraphase’s historical financial performance, current financial position and general prospects with members of Tetraphase’s senior management team;

 

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discussed AcelRx’s historical financial performance, current financial position and general prospects with members of AcelRx’s senior management team and with Tetraphase’s senior management team;

 

   

reviewed the pro forma impact of the Merger on Tetraphase’s cash flow, consolidated capitalization and certain financial measures;

 

   

reviewed the proposed financial terms of the Merger, as set forth in the draft Agreement, dated March 13, 2020, the draft CVR Agreement, dated March 13, 2020, the draft Voting Agreement, dated March 13, 2020, and the draft Exchange Agreement, dated March 13, 2020;

 

   

reviewed the current and historical price ranges and trading activity of Tetraphase’s common stock and AcelRx’s common stock;

 

   

considered the results of Janney’s efforts on behalf of Tetraphase to solicit, at the direction of Tetraphase, indications of interest from third parties with respect to a possible acquisition of Tetraphase;

 

   

to the extent deemed relevant, analyzed the premiums paid for certain selected recent control merger and acquisition transactions of publicly traded companies and compared the implied premium of the Merger Consideration to these transactions;

 

   

to the extent deemed relevant, analyzed information of certain selected publicly traded companies;

 

   

to the extent deemed relevant, analyzed information of certain other selected merger and acquisition transactions and compared the Merger from a financial point of view to these other transactions to the extent information concerning such transactions was publicly available;

 

   

discussed with the Tetraphase Board and certain members of senior management of Tetraphase the strategic aspects of the Merger, including, past and current business operations, financial condition and prospects (including their views on the risks and uncertainties of achieving Tetraphase’s forecasts);

 

   

discussed with AcelRx’s senior management the strategic aspects of the Merger, including, but not limited to, past and current business operations, financial condition and prospects (including their views on the risks and uncertainties of achieving the forecasts); and

 

   

performed such other analyses and examinations as Janney deemed appropriate.

In performing its review, Janney relied upon the accuracy and completeness of all of the financial and other information that was available from public sources, that was provided by Tetraphase and its representatives and by AcelRx and its representatives or that was otherwise reviewed, and assumed such accuracy and completeness for purposes of rendering its Opinion. Janney further relied on the assurances of management of Tetraphase and management of AcelRx that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Janney has not been asked to and has not undertaken any independent verification of any of such information and does not assume any responsibility or liability for the accuracy or completeness thereof. Janney has not been requested to and did not make an independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Tetraphase or any of its affiliates and has not been furnished with any such evaluation or appraisal. Janney has not made any physical inspection of the properties or assets of Tetraphase.

With respect to the financial forecasts prepared by Tetraphase’s management or those prepared by AcelRx’s management, both management teams have confirmed that they were prepared in good faith and reflected then-currently available estimates and judgments of such management of the future financial performance of each respective company. Janney expresses no opinion or view as to such financial projections or the assumptions on which they are based or whether if the Merger were not consummated that Tetraphase’s performance would be consistent with such forecasts. Janney relied only on Tetraphase’s and AcelRx’s historical financial information, except for the financial forecasts prepared by Tetraphase’s management and the management team of AcelRx (which was assumed will be achieved) in connection with the analysis. Janney relied on the assessment by

 

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management of Tetraphase of the strategic, financial and other benefits (including their ability to integrate the businesses) expected to result from the Merger, that such benefits will be realized in the amounts and the time periods indicated thereby, and Janney expressed no opinion with respect to such benefits or the assumptions on which they were based. Janney relied upon and assumed, without independent verification, that the actual amounts that may become payable under the CVR Agreement and the actual Merger Consideration calculated as of the closing of the Merger will not differ from the amounts thereof that Janney was directed to assume in any respect that would be material to its analyses or its Opinion. The financial and stock markets have been experiencing unusual volatility as a result of the coronavirus pandemic and Janney expressed no opinion or view as to any potential effects of such volatility on the Merger, the Company or AcelRx and the Opinion does not purport to address potential developments in any such markets.

Janney’s conclusion was rendered on the basis of market, economic and other conditions prevailing as of March 15, 2020 and on the conditions and prospects, financial and otherwise, of Tetraphase, as they existed and were known on March 15, 2020. Janney’s Opinion is directed only to the fairness, from a financial point of view, as of March 15, 2020, of the Merger Consideration to be received by holders of shares of Tetraphase’s common stock and not any other constituency of Tetraphase and does not address the fairness of the Merger to, or any consideration received in connection therewith by, or the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of Tetraphase, whether relative to the Merger Consideration or otherwise.

Janney is not expressing any opinion as to the solvency or viability of Tetraphase, any of the other parties to the Merger Agreement, the CVR Agreement, the Voting Agreements, the Exchange Agreement or AcelRx or their respective ability to pay their debts when they become due, including any impact of the Merger thereon.

Janney’s Opinion does not address the fairness of the Merger to, or any consideration received in connection therewith by, any warrant holders of Tetraphase. Furthermore, no opinion, counsel or interpretation is intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, Janney relied, with the Tetraphase Board’s consent, on the assessments by Tetraphase and its advisers, as to all legal, regulatory, accounting, insurance and tax matters with respect to Tetraphase and the Merger. Events occurring after March 15, 2020 may affect Janney’s Opinion and the assumptions used in preparing it, and Janney did not assume any obligation to revise or reaffirm its Opinion.

Summary of Financial Analyses

The summary set forth below does not purport to be a complete description of the analyses performed by Janney, but describes, in summary form, the material elements of the presentation that Janney made to the Tetraphase Board on March 15, 2020, in connection with Janney’s Opinion. In accordance with customary investment banking practice, Janney employed generally accepted valuation methods and financial analyses in reaching its Opinion as well as other financial analysis Janney deemed relevant. The following is a summary of the material financial analyses performed by Janney in arriving at its Opinion.

None of the analyses performed were assigned a greater significance by Janney than any other, nor does the order of analyses described represent relative importance or weight given to those analyses by Janney. The summary text describing each financial analysis does not constitute a complete description of Janney’s financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses performed. The summary text set forth below does not represent and should not be viewed by anyone as constituting conclusions reached by Janney with respect to any of the analyses performed in connection with its Opinion. Rather, Janney made its determination as to the fairness of the Merger Consideration to the common stockholders of Tetraphase pursuant to the Merger Agreement, from a financial point of view, on the basis of its experience and professional judgment after considering the results of all of the analyses performed.

 

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In performing its analyses, Janney made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters. These include, among other things, the impact of competition on the businesses of Tetraphase and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Tetraphase, AcelRx, the industry or in the financial markets in general. Many of these assumptions are beyond the control of Tetraphase or AcelRx. Any estimates contained in Janney’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates. Except as otherwise noted, the information utilized by Janney in its analyses, to the extent that it is based on market data, is based on market data as it existed on or before March 13, 2020, the last market trading day prior to signing of the Merger Agreement, and is not necessarily indicative of current market conditions.

In performing its financial analyses summarized below and in arriving at its Opinion, Janney used and relied upon the financial projections of Tetraphase, those of AcelRx and the combined pro forma projections more fully described in the section titled “Certain Information Provided by the Parties—Certain Projected Information.” Some of the financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Janney, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses and must be considered as a whole.

Implied Equity Value of the Merger Consideration

The Merger Consideration consists of (1) 0.6303 shares of AcelRx common stock, or the Exchange Ratio, for each share of Tetraphase Common Stock outstanding immediately prior to the effective time of the Merger (provided that if the Tetraphase Net Cash is less than $5.0 million at the closing of the Merger, the Exchange Ratio shall be adjusted to the ratio determined as follows: (a) (i) $20.0 million, minus (ii) the dollar amount by which the Tetraphase Net Cash is less than $5.0 million, minus (iii) $10,265,292, divided by (b) (i) 10,800,166, divided by (ii) $1.43) plus (2) one contingent value right per share for each share of Tetraphase Common Stock prior to the effective time of the Merger. Janney calculated the upfront value of the AcelRx stock consideration to Tetraphase by multiplying (1) the Exchange Ratio of 0.6303 by both (a) the total number of Tetraphase fully diluted shares estimated to be outstanding immediately prior to closing of 10,800,166 and by (b) AcelRx’s share price of $1.03 as of March 13, 2020 to arrive at an upfront value of AcelRx stock to Tetraphase common stockholders of $7.0 million. Janney then calculated an implied present value of the aggregate amount of $12.5 million of potential CVR payments to common stockholders assuming that Tetraphase would attain the required sales milestones in the latest possible year under the CVR Agreement to adjust for the possibility that Tetraphase may not achieve the exact projected sales figures provided in the section titled “Certain Information Provided by the Parties—Certain Projected Information” in the year forecasted. Janney then applied discount rates, based on an estimate of Tetraphase’s weighted average cost of capital (as further described under the Standalone Discounted Cash Flow Analysis below), ranging from 17.6% to 21.6%, to the following list of potential CVR payments reflecting Tetraphase’s achievement of sales milestones in the latest possible period under the CVR Agreement, as described above: (1) an aggregate amount of $2.5 million on December 31, 2021, (2) an aggregate amount of $4.5 million on December 31, 2024 and (3) an aggregate amount of $5.5 million on December 31, 2024. The analysis yielded a present value range of the total CVR payments of $6.0 million to $6.8 million. Janney then added this CVR value range to the upfront value of the AcelRx stock consideration, to derive a range of total implied equity value of the Merger Consideration to Tetraphase stockholders of $13.0 million to $13.8 million as shown in the following table. Janney then assumed the midpoint of the range, or $13.4 million as the implied total equity value of the Merger Consideration to Tetraphase stockholders for comparison purposes to the rest of its analyses.

 

($ in millions)    Merger Consideration  

Upfront Value of AcelRx Common Stock Consideration

   $ 7.0  

Implied Present Value of CVR Payments

   $ 6.0 - $6.8  

Implied Equity Value of the Merger Consideration (Range)

   $ 13.0 - $13.8  

Implied Equity Value of the Merger Consideration (Midpoint)

   $ 13.4  

 

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Standalone Discounted Cash Flow Analysis

Janney performed a discounted cash flow analysis on Tetraphase, which is designed to provide an implied value of a company on a standalone basis by calculating the present value of the estimated future cash flows of such company.

Tetraphase Discounted Cash Flow Analysis. Janney calculated a range of implied equity values to existing Tetraphase stockholders based on estimates of future cash flows from June 30, 2020 through December 31, 2024. Janney performed its analysis on the estimated future cash flows contained in the Tetraphase projections (see the section titled “Certain Projected Information.” Janney first calculated the estimated unlevered free cash flows of Tetraphase (calculated as tax-effected earnings before interest and taxes less capital expenditures, plus depreciation and amortization, less the increase in net working capital or plus the decrease in net working capital, as appropriate, and plus any non-cash related adjustments). Janney utilized an illustrative terminal value in the year 2024 based on an Enterprise Value/Revenue exit multiple range of 2.25x to 2.75x that was determined based on Janney’s experience and professional judgment, which included, but was not limited to, reviews of relevant multiples from the Selected Precedent Transaction Analysis below. Janney then discounted the unlevered free cash flows and terminal value to a present value as of the anticipated transaction close date of June 30, 2020, using the mid-year discount convention and a range of discount rates of 17.6% to 21.6%. The range of discount rates was derived based on Tetraphase’s assumed weighted average cost of capital under the capital asset pricing model based on Janney’s experience and professional judgment and included assumptions regarding post-tax cost of debt, market risk premium, equity size premium, risk free rate, beta (which was based on a re-levered adjusted beta of selected public companies in the healthcare space with similar characteristics to Tetraphase, including but not limited to anti-bacterial drug focus and similar operating metrics) and debt to total capitalization.

Janney then deducted the net debt or added the net cash, as applicable, of Tetraphase from the resulting value to derive gross equity value. Net debt (cash) was based on Tetraphase’s debt and cash and cash equivalents from management projections as of June 30, 2020. Janney then deducted the present value of projected proceeds from a future $41.4 million equity financing transaction needed to fund projected cash shortfalls below the estimated cash balance on June 30, 2020 until Tetraphase achieved projected positive free cash flow, with such future equity financing proceeds discounted using 19.6%, the mid-point of the assumed discount rate range of 17.6% to 21.6% (which Janney derived based on Tetraphase’s assumed cost of capital calculated under the capital asset pricing model using its experience and professional judgment) to derive adjusted gross equity value.

Based on the above-described analysis, Janney derived the following ranges of the equity value to existing holders of Tetraphase’s common stock as of an assumed transaction close date of June 30, 2020:

 

($ in millions)    Tetraphase Standalone DCF  

Tetraphase Implied Equity Value

   $ 6.4 - $33.6  

Implied Total Equity Value of the Merger Consideration

   $ 13.4  

Analysis of Implied Pro Forma Equity Value Impact to Tetraphase

Janney performed an illustrative analysis of the pro forma impact of the Merger on Tetraphase’s equity value, which compared (1) Tetraphase’s potential standalone equity value to existing common stockholders based on the Tetraphase Management Projections to (2) the combined company’s potential equity value on a pro forma basis and the resultant value to existing Tetraphase common stockholders based on a discounted cash flow analysis (derived from each of the Tetraphase management projections and AcelRx management projections, including illustrative synergies, as applicable, as further described in the section titled “Certain Projected Information” assuming a pro forma equity split of 14.6% Tetraphase and 85.4% AcelRx and reflecting the impact of a future dilutive equity financing to address projected cash shortfalls of the combined pro forma company.

Description of Certain Pro Forma Discounted Cash Flow Assumptions. Janney calculated a range of implied pro forma equity values of the combined entity to existing Tetraphase common stockholders based on estimates of

 

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future pro forma cash flows of both Tetraphase and AcelRx from June 30, 2020 through December 31, 2024. Janney performed its analysis on the estimated future cash flows contained in the management projections (see the section titled “Certain Projected Information”). The pro forma discounted cash flow analysis also included the impact of certain operational synergies expected to be achieved as a result of the Merger provided by AcelRx management, informed by discussions with Tetraphase management. Janney first calculated the estimated unlevered free cash flows of the pro forma combined entity (calculated as tax-effected earnings before interest and taxes less capital expenditures, plus depreciation and amortization, less the increase in net working capital or plus the decrease in net working capital, as appropriate, and plus any non-cash related adjustments). Janney utilized an illustrative terminal value in the year 2024 based on an Enterprise Value/Revenue exit multiple range of 2.25x to 2.75x that was determined based on Janney’s experience and professional judgment, which included, but was not limited to, reviews of relevant multiples from the Selected Precedent Transaction Analysis below. Janney then discounted the unlevered free cash flows and terminal value to present value as of the anticipated transaction close date of June 30, 2020, using the mid-year discount convention and a range of discount rates of 14.7% to 18.7%. The range of discount rates was derived based on AcelRx’s assumed weighted average cost of capital under the capital asset pricing model based on Janney’s experience and professional judgment and included assumptions regarding post- tax cost of debt, market risk premium, equity size premium, risk free rate, beta (which was based on re-levered adjusted beta of selected public companies in the healthcare space with similar characteristics to AcelRx) and debt to total capitalization.

Janney then deducted the net debt or added the net cash, as applicable, of the combined pro forma entity from the resulting value to derive gross equity value. Net debt (cash) was based on Tetraphase and AcelRx’s forecasted debt and cash and cash equivalents as of June 30, 2020 from management projections, and was further adjusted to deduct Tetraphase management’s assumption of $10 million in transaction and severance costs for Tetraphase associated with the Merger. Janney then deducted the present value of projected proceeds from a $4.2 million future equity financing transaction needed to fund projected cash shortfalls of the combined pro forma company below the estimated cash balance on June 30, 2020 until the combined pro forma company achieved projected positive free cash flow, with such future equity financing proceeds discounted using 16.7%, which was the mid-point of the assumed of discount rate range of 14.7% to 18.7%which Janney derived based on AcelRx’s assumed cost of capital calculated under the capital asset pricing model using its experience and professional judgment) to derive adjusted gross equity value.

Based on the above-described analysis, Janney derived the following ranges of equity value to the combined pro forma entity as of June 30, 2020: $528.7 million to $708.3 million. Tetraphase common stockholders and warrant holders, collectively, as part of the Merger Consideration, will receive 14.6% of the total Pro Forma entity, with 48.7% of the AcelRx shares issued to Tetraphase going to Tetraphase common stockholders. The analysis indicated the following implied equity value to existing Tetraphase common stockholders, who own 7.1% of the Pro Forma combined entity (48.7% of the Tetraphase portion of 14.6%).

 

($ in millions)       

Tetraphase Implied Common Stockholder Equity Value

   $ 37.5 - $50.2  

Tetraphase Common Stockholder Ownership of Pro Forma Entity

     7.1

Tetraphase Standalone Implied Equity Value

   $ 6.4 - $ 33.6  

Selected Precedent Transactions Analysis

Janney reviewed and analyzed the following 15 precedent merger and acquisition transactions, which were selected based on Janney’s professional judgment and expertise and include comparable transactions with companies in the healthcare space with similar characteristics to Tetraphase, including but not limited to anti-bacterial drug focus and similar operating metrics. Using publicly available information, Janney calculated, when available, for each selected transaction, the multiple of the target company’s enterprise value (calculated as equity value, plus the book value of debt, preferred stock and minority interests, minus cash and equivalents and the book value of investments in unconsolidated affiliates) implied in the relevant transaction to the target

 

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company’s estimated revenue for the trailing twelve months at the announcement date of each applicable transaction (“LTM Revenue”). Financial data for the selected companies was based on the selected companies’ filings with the SEC, equity research reports, earnings transcripts, company investor presentations and press releases, FactSet Research Systems, BioCentury, Capital IQ and SNL Financial. Enterprise value and revenue calculations for certain of the selected transactions were adjusted, using publicly available information, for certain mergers and acquisitions activity.

 

Acquiror

  

Target

   Announcement
Date
Cumberland Pharmaceuticals, Inc.    Theravance Biopharma, Inc. (Vibativ)    11/6/2018
Ligand Pharmaceuticals    Vernalis Research    8/9/2018
Savara, Inc.    Cardeas Pharma Corp.    7/25/2018
Nabriva Therapeutics Plc    Zavante Therapeutics, Inc.    7/24/2018
Summit Therapeutics Plc    Discuva Ltd.    12/23/2017
Melinta Therapeutics, Inc.    The Medicines Company - Infectious Disease Business    11/28/2017
Cempra, Inc.    Melinta Therapeutics, Inc.    8/9/2017
NantCell, Inc.    Altor BioScience Corp.    6/27/2017
Taro Pharmaceutical Industries Ltd    Thallion Pharmaceuticals, Inc.    3/16/2017
Kasten, Inc.    Thru Pharma LLC    3/7/2017
Mast Therapeutics, Inc.    Aravas, Inc.    1/7/2017
Phagelux (Canada), Inc.    Biophage Pharma, Inc.    3/20/2015
Merck & Co., Inc.    Cubist Pharmaceuticals, Inc.    12/8/2014
Actavis Plc    Durata Therapeutics, Inc.    10/6/2014
Transcept Pharmaceuticals, Inc.    Paratek Pharmaceuticals, Inc.    7/1/2014

The following table sets forth a summary of the enterprise values as a multiple of LTM Revenue for the selected acquisitions identified above:

 

     EV / Revenue  

High

     8.4

Low

     0.9

Mean

     4.4

Median

     2.2

In calculating the implied equity values for Tetraphase, Janney utilized LTM Revenue of $3.6 million, which corresponds to the Xerava product revenue for the year end 2019, and added the cash balances to the resulting enterprise values to arrive at the implied equity value under two scenarios: (1) the cash balance as of December 31, 2019 of $21 million and (2) the expected balance sheet cash at the assumed Merger completion date of June 30, 2020 of $5 million. The following table sets forth, for the period indicated, the reference range of revenue multiples utilized by Janney in performing its analysis and the range of the equity values for Tetraphase implied by the analysis, which were selected based upon its professional judgment and experience and after taking into consideration, among other things, the observed data for the selected transactions:

 

     Equity Value to:         
($ in millions)    Relevant Range of
Revenue Multiples
     Implied Range of
Tetraphase Equity Value
     Implied Total Equity Value
of Merger Consideration
 

2019 Xerava Revenue Assuming $21 Million in Cash

     2.0x - 4.5x      $ 28.4 - $37.4        $ 13.4  
     Equity Value to:         
     Relevant Range of
Revenue Multiples
     Implied Range of
Tetraphase Equity Value
     Implied Total Equity Value
of Merger Consideration
 

2019 Xerava Revenue Assuming $5 Million in Cash

     2.0x - 4.5x      $ 12.2 - $21.2        $ 13.4  

 

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Premiums Paid Analysis

Janney reviewed the consideration paid in 30 selected healthcare transactions involving an enterprise value less than $500 million announced subsequent to January 1, 2017, selected based on Janney’s professional judgment and experience in the industry. Janney calculated the premiums paid in these transactions over the applicable, unaffected stock price of the target company on the trading day one trading day prior to the announcement of the acquisition, the trading day five trading days prior to the announcement of the acquisition and the trading day 30 trading days prior to the announcement of the acquisition.

The following table sets forth the ranges of premiums paid utilized by Janney in performing its analysis, which were derived from the selected healthcare transactions identified above using the first and third quartiles to provide a representative sample range, and the ranges of the equity values of Tetraphase Common Stock implied by the analysis.

 

     Premiums  
     1-Day     1-Week     1-Month  

First Quartile

     32.2     29.5     31.9

Third Quartile

     56.1     55.5     61.6
     Premiums  
($ in millions)    1-Day     1-Week     1-Month  

Implied Equity Value

   $ 13.9 - $ 16.4     $ 13.6 - $16.4     $ 13.9 - $17.0  

Implied Total Equity Value of Merger Consideration

   $ 13.4     $ 13.4     $ 13.4  

Other Information

Selected Public Companies Analysis. Janney reviewed, analyzed and compared certain financial information relating to Tetraphase to corresponding publicly available financial information and market multiples for the following thirteen publicly traded antibiotic-focused companies, of which some had commercially available products and others did not:

 

   

Commercially Available Comparable Companies

 

   

Basilea Pharmaceutica AG

 

   

Insmed Incorporated

 

   

Nabriva Therapeutics plc

 

   

Paratek Pharmaceuticals, Inc.

 

   

Pre-Commercial Comparable Companies

 

   

Aridis Pharmaceuticals, Inc.

 

   

Cidara Therapeutics Holdings, Inc.

 

   

ContraFect Corporation

 

   

Entasis Therapeutics Holdings, Inc.

 

   

Iterum Therapeutics plc

 

   

Scynexis, Inc.

 

   

Spero Therapeutics, Inc.

 

   

Summit Therapeutics plc

 

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Janney selected the companies used in the analysis on the basis of its experience and knowledge of companies in the industry and various factors, including the size of the company and the similarity of the lines of business to Tetraphase’s lines of business, as well as the business models, service offerings and end-market exposure of such companies. As noted above, no company used as a comparison is identical to Tetraphase.

Janney reviewed, among other things, the range of enterprise values of the selected publicly traded companies (calculated as equity value, using the closing stock prices on March 13, 2020, plus the book value of debt, preferred stock and minority interests, minus cash and equivalents and the book value of investments in unconsolidated affiliates), as a multiple of estimates of revenue of the applicable selected company for calendar year 2019, 2020 and 2021. Financial data for the selected companies was based on the selected companies’ filings with the SEC and publicly available equity research analyst consensus estimates from FactSet Research Systems.

The selected public companies analysis was presented for reference purposes only, and was not relied upon for valuation purposes. In its professional judgement, Janney did not compare Tetraphase, whose auditor expressed significant doubt in the company continuing as a going concern in its most recently filed 10-K, to other publicly traded companies with commercially available products that did not have a going concern opinion from their auditors. Furthermore, given the uncertainty and challenges surrounding the pre-commercial publicly traded companies in gaining regulatory approval and market acceptance of their products, Janney also did not did not compare Tetraphase to the group of pre-commercial companies, since Tetraphase already has an approved product on the market.

Miscellaneous

This summary is not a complete description of Janney’s Opinion or the underlying analyses and factors considered in connection with Janney’s Opinion. The preparation of a fairness opinion is a complex process involving the application of subjective business and financial judgment in determining the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to partial analysis or summary description. Janney believes that its analyses described above must be considered as a whole and that considering any portion of such analyses and of the factors considered without considering all analyses and factors could create a misleading view of the process underlying its Opinion. No company or transaction in the analyses described above is identical to Tetraphase or the Merger.

In conducting its analyses and arriving at its Opinion, Janney utilized a variety of valuation methods. The analyses were prepared solely for the purpose of enabling Janney to provide its Opinion to the Tetraphase Board as to the fairness, from a financial point of view, to the holders of Tetraphase Common Stock of the consideration to be received by the holders of Tetraphase Common Stock in the Merger, as of the date of the Opinion, and do not purport to be an appraisal or necessarily reflect the prices at which businesses or securities actually may be sold, which are inherently subject to uncertainty.

The terms of the Merger were determined through negotiations between Tetraphase and AcelRx, and were approved by the Tetraphase Board. Although Janney provided advice to Tetraphase’s management team and the Tetraphase Board during the course of these negotiations, the decision to enter into the Merger Agreement was solely that of the Tetraphase Board. Janney did not recommend any specific consideration to Tetraphase or the Tetraphase Board, or that any specific amount or type of consideration constituted the only appropriate consideration for the Merger. As described above, the Opinion of Janney and its presentation to the Tetraphase Board were among a number of factors taken into consideration by the Tetraphase Board in making its determination to approve the Merger Agreement and the Merger.

Pursuant to the terms of the engagement letters between Janney and the Tetraphase Board and between Janney and the management of Tetraphase, Tetraphase agreed to pay to Janney a retainer fee upon signing of the fairness

 

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opinion engagement letter, a fee upon Janney’s delivery of its Opinion, and a fee upon the consummation of the Merger in consideration of financial advisory services rendered in connection with the Merger, for an aggregate amount of fees of approximately $600,000. Approximately half of the amount of the total fees are contingent upon the successful completion of the Merger. The fee for rendering the Opinion is not contingent on the successful completion of the Merger or the conclusions expressed therein. In addition, Tetraphase agreed to reimburse Janney for its reasonable out-of-pocket expenses, including attorneys’ fees and disbursements, and to indemnify Janney and related persons against various liabilities, including certain liabilities under the federal securities laws.

Janney, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. As of the date of the Opinion, Janney, on behalf of its own account and for the accounts of its customers, held 23,100 shares of common stock of Tetraphase and held 23,635 shares of common stock of AcelRx, which represents an immaterial percentage of the overall total amount of shares of all companies held by Janney for its own account and for the account of others. In the two years prior to the date hereof, Janney has not been engaged by Tetraphase or AcelRx on financial advisory or financing assignments in which it received customary investment banking fees. Janney or its affiliates may provide investment and corporate banking services to AcelRx and its respective affiliates in the future, for which Janney or its affiliates would seek customary compensation. Janney provides a full range of financial advisory and securities services and, in the course of its normal trading activities, may from time to time affect transactions and hold securities, including, without limitation, derivative securities, of Tetraphase or its affiliates for its own account and for the accounts of customers.

Certain Information Provided by the Parties

Certain Projected Information

As a matter of course, Tetraphase does not publicly disclose long-term projections of future financial results due to the inherent unpredictability and subjectivity of underlying assumptions and estimates. In connection with its evaluation of the Merger, the Tetraphase Board considered unaudited, non-public financial projections prepared by (i) Tetraphase management with respect to Tetraphase as a standalone company and (ii) AcelRx management with respect to (a) AcelRx as a standalone company and (b) the combined company, which was also used for the purposes of Janney’s financial analyses and opinion (which opinion is attached to this proxy statement/prospectus as Annex E). We refer to these financial projections as the management projections. A summary of the management projections is set forth below. The Tetraphase management projections were provided to AcelRx.

The inclusion of the management projections below should not be deemed an admission or representation by Tetraphase, Janney, AcelRx or any of their respective officers, directors, employees, affiliates, advisors, or other representatives with respect to such projections. The management projections are not included to influence your views on the Merger described in this proxy statement/prospectus but solely to provide stockholders access to certain non-public information that was provided to the Tetraphase Board in connection with its evaluation of the Merger and to Janney to assist with its financial analyses as described in the section titled “The Merger—Opinion of Janney Montgomery Scott LLC, Tetraphase’s Financial Advisor” beginning on page 67 of this proxy statement/prospectus. The information from the management projections included below should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding Tetraphase and AcelRx in their respective public filings with the SEC. Because the management projections (other than the combined company projections summarized below) were prepared on a standalone basis, they do not give effect to the proposed Merger expected to result from the acquisition.

The management projections included in this section regarding AcelRx and its business and projected synergies from the combination of both companies were prepared and provided by AcelRx management. The inclusion of

 

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such management projections should not be deemed an admission or representation by, or in any way adopted by, AcelRx or any of its officers, directors, employees, affiliates, advisors, or other representatives with respect to such projections.

The management projections were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or GAAP. Such financial measures used in the management projections were relied upon by Janney for purposes of its opinion and by the Tetraphase Board in connection with its consideration of the Merger. Such financial measures were provided to a financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction, and therefore are excluded from the definition of non-GAAP financial measures, and as a result, a reconciliation of a non-GAAP financial measure to a GAAP financial measure is not required. Accordingly, Tetraphase has not provided a reconciliation of the financial measures included in the management projections to the relevant GAAP financial measures. Neither the independent registered public accounting firm of Tetraphase, AcelRx, nor any other independent accountant has audited, reviewed, compiled, examined or performed any procedures with respect to the accompanying unaudited prospective financial information for the purpose of its inclusion herein, and accordingly, neither the independent registered public accounting firm of Tetraphase, AcelRx, nor any other independent accountant expresses an opinion or provides any form of assurance with respect thereto for the purpose of this proxy statement/prospectus. This report does not extend to the management projections and should not be read to do so.

The management projections were prepared for internal use and are subjective in many respects. As a result, these management projections are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. Although Tetraphase and AcelRx believe their respective assumptions to be reasonable, all financial projections are inherently uncertain, and Tetraphase and AcelRx expect that differences will exist between actual and projected results. Although presented with numerical specificity, the management projections reflect numerous variables, estimates, and assumptions made by Tetraphase’s and AcelRx management at the time they were prepared, and also reflect general business, economic, regulatory, market, and financial conditions and other matters, all of which are difficult to predict and many of which are beyond Tetraphase’s and AcelRx’s control. In addition, the management projections cover multiple years, and this information by its nature becomes subject to greater uncertainty with each successive year. Furthermore, the projections prepared by AcelRx management reflect numerous variables, estimates, and assumptions made by AcelRx’s management, rather than Tetraphase’s management. Accordingly, there can be no assurance that the estimates and assumptions made in preparing the management projections will prove accurate or that any of the management projections will be realized.

The Tetraphase management projections include certain assumptions relating to, among other things, Tetraphase’s expectations relating to revenue growth rates, including underlying assumptions relating to product pricing, market penetration, the availability and amount of reimbursement, peak U.S. sales, patent life of products, gross margins and operating costs. The projections prepared by AcelRx management include certain assumptions relating to, among other things, the pricing and volume of products sold, the share of the moderate-to-severe acute pain market and the timing to penetrate the market, production costs, the amount of selling, general and administrative expenses and the amount of capital expenditures and debt service.

The management projections are subject to many risks and uncertainties and you are urged to review “Risk Factors” beginning on page 27 of this proxy statement/prospectus for a description of risk factors relating to the Merger. You should also read “Special Note Regarding Forward-Looking Statements” beginning on page 35 of this proxy statement/prospectus for additional information regarding the risks inherent in forward-looking information such as the management projections.

The inclusion of the management projections herein should not be regarded as an indication that Tetraphase, Janney, AcelRx or any of their respective affiliates or representatives considered or consider the management projections to be necessarily indicative of actual future events, and the management projections should not be

 

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relied upon as such. The management projections do not take into account any circumstances or events occurring after the date they were prepared. Tetraphase and AcelRx do not intend to, and disclaim any obligation to, update, correct, or otherwise revise the management projections to reflect circumstances existing or arising after the date the management projections were generated or to reflect the occurrence of future events, even in the event that any or all of the assumptions or other information underlying the management projections are shown to be in error. Furthermore, the management projections do not take into account the effect of any failure of the Merger to be consummated and should not be viewed as accurate or continuing in that context.

The management projections set forth below include earnings before interest and tax (“EBIT”) and unlevered free cash flow, which are (subject to the disclosure above) non-GAAP financial measures.

In light of the foregoing factors and the uncertainties inherent in financial projections, Tetraphase stockholders are cautioned not to place undue reliance, if any, on the management projections.

Tetraphase Projections

Tetraphase Base Case (in millions)

The following table presents a selected summary of the base Tetraphase management projections with respect to net sales of Xerava (the “Tetraphase Base Projections”). The Tetraphase Base Projections were prepared by Tetraphase management, made available to the Tetraphase Board and used by Janney in its financial analyses.

 

     2020E     2021E     2022E     2023E     2024E  

Total Revenue

     14.5       28.7       36.0       55.9       73.6  

EBIT

     (34.1     (20.0     (21.5     (5.4     9.0  

Unlevered Free Cash Flow(1)

     (32.5     (26.6     (17.1     (2.5     12.9  

 

(1)

Unlevered Free Cash Flow is calculated as EBIT plus depreciation plus other non-cash adjustments minus capital expenditures minus change in working capital. Excludes potential impact of net operating losses. Stock-based compensation expense is not treated as a cash expense.

Tetraphase Upside Case (in millions)

The following table presents a selected summary of the upside case Tetraphase management projections with respect to net sales of Xerava (the “Tetraphase Upside Projections”). The Tetraphase Upside Projections were prepared by Tetraphase management and made available to the Tetraphase Board.

 

     2020E     2021E     2022E     2023E      2024E  

Total Revenue

     18.4       39.2       56.8       84.4        105.5  

EBIT

     (31.4     (12.9     (7.0     15.6        32.9  

Unlevered Free Cash Flow(1)

     (29.1     (17.4     1.4       18.4        36.8  

 

(1)

Unlevered Free Cash Flow is calculated as EBIT plus depreciation plus other non-cash adjustments minus capital expenditures minus change in working capital. Excludes potential impact of net operating losses. Stock-based compensation expense is not treated as a cash expense.

 

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AcelRx Projections

AcelRx base case (in millions)

The following table presents a selected summary of the base AcelRx management projections with respect to sales of DSUVIA and of Zalviso in the European Union (the “AcelRx Base Projections”). The AcelRx Base Projections were prepared by AcelRx management, provided to Tetraphase, provided by Tetraphase management to the Tetraphase Board and used by Janney in its financial analyses.

 

     2020E     2021E     2022E      2023E      2024E  

Total Revenue

     14.4       46.5       132.6        217.4        283.8  

EBIT

     (52.0     (30.3     45.9        122.7        184.6  

Unlevered Free Cash Flow(1)

     (51.0     (29.1     40.3        124.8        185.1  

 

(1)

Unlevered Free Cash Flow is calculated as EBIT plus depreciation plus other non-cash adjustments minus capital expenditures minus change in working capital. Excludes potential impact of net operating losses. Stock-based compensation expense is not treated as a cash expense.

Combined pro forma company projections

Combined pro forma projections (in millions)

The following table presents a selected summary of combined revenues and certain other measures, using the Tetraphase Base Projections and AcelRx Base Projections, which give effect to certain revenue and cost synergies projections (the “Combined Pro Forma Projections”). The Combined Pro Forma Projections were prepared by AcelRx management, provided to Tetraphase, provided by Tetraphase management to the Tetraphase Board and used by Janney in its financial analyses.

 

     2H 2020E     2021E     2022E      2023E      2024E  

Total Revenue

     22.9       75.2       168.5        273.3        357.3  

EBIT

     (21.0     (22.0     54.1        146.8        223.2  

Unlevered Free Cash Flow(1)

     (19.3     (27.5     52.9        151.9        227.6  

 

(1)

Unlevered Free Cash Flow is calculated as EBIT plus depreciation plus other non-cash adjustments minus capital expenditures minus change in working capital. Excludes potential impact of net operating losses. Stock-based compensation expense is not treated as a cash expense.

Interests of Tetraphase Directors and Executive Officers in the Merger

In considering the information described in this proxy statement/prospectus, you should be aware that Tetraphase’s executive officers and directors may have economic interests in the Merger that are or were different from, or in addition to, those of Tetraphase’s stockholders generally and that may create potential conflicts of interest. In addition to the rights described below in this section, the executive officers of Tetraphase may be eligible to receive some of the generally applicable benefits described under the heading “The Merger Agreement—Employee Benefit Matters” on page 112, and certain directors will be entitled to receive consideration as described under “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Treatment of Outstanding Tetraphase Warrants.” The Tetraphase Board was aware of and considered those interests, among other matters, in reaching its decision to approve the Merger Agreement, the Merger and the Contemplated Transactions.

Set forth below are the descriptions of the directors’ and executive officers’ interests including, but not limited to, the treatment in the Merger of Tetraphase’s equity compensation awards (including Tetraphase Stock Options, Tetraphase RSUs and Tetraphase PRSUs) and Tetraphase’s outstanding warrants, severance and other rights that may be held by Tetraphase’s executive officers under their offer letters with the Company, and the

 

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indemnification of current and former Tetraphase directors and officers by Tetraphase after completion of the Merger. The dates used in the discussions below to quantify certain of these interests have been selected for illustrative purposes only, and they do not necessarily reflect the dates on which certain events will occur.

Equity Awards Held by Tetraphase Directors and Executive Officers

Treatment of Outstanding Equity Awards in the Merger

The general treatment of Tetraphase Stock Options, Tetraphase RSUs and Tetraphase PRSUs in the Merger, including such awards held by Tetraphase’s directors and executive officers, is described under the section entitled “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 92 of this proxy statement/prospectus. Tetraphase Stock Options, whether vested or unvested, will terminate at the Effective Time, and thus no Merger Consideration will be payable in respect of any outstanding Tetraphase Stock Options.

Effective as of five business days prior to the closing date of the Merger, each outstanding Tetraphase RSU and Tetraphase PRSU will vest in full and Tetraphase will issue to the holder one share of Tetraphase Common Stock in respect of each Tetraphase RSU and each Tetraphase PRSU that vests. The holders of the Tetraphase RSUs and Tetraphase PRSUs are required, pursuant to the applicable award agreements, to sell, on the vesting date, a number of shares that are issued in respect of such awards having a value equal to Tetraphase’s tax withholding obligations. All shares of Tetraphase Common Stock issued on vesting of the Tetraphase RSUs and Tetraphase PRSUs (including the shares that are sold to satisfy tax withholding obligations and any shares that continue to be held by the holder of the award) will be treated as outstanding shares of Tetraphase Common Stock at the Effective Time and will be converted into the right to receive the Merger Consideration.

The following table sets forth, as of five business days prior to the Effective Time, assuming the Effective Time occurs on June 30, 2020 and assuming the applicable Tetraphase executive officer remains employed by Tetraphase as of five business days prior to the Effective Time, the number of Tetraphase RSUs and Tetraphase PRSUs that will vest in full, the value of the shares of Tetraphase Common Stock issued upon the vesting in full of unvested Tetraphase RSUs and Tetraphase PRSUs, and the number of shares of Tetraphase Common Stock to be sold to satisfy tax withholding obligations upon the accelerated vesting of such awards for each of Tetraphase’s executive officers (such sale being required by the applicable award agreement). The Tetraphase non-employee directors do not hold any Tetraphase RSUs or Tetraphase PRSUs. The amounts shown in the following table assume that the relevant price per share of Tetraphase Common Stock as of five business days prior to the Effective Time is $1.28, which is the closing price per share of Tetraphase Common Stock on March 31, 2020, and assumes that Tetraphase must withhold income and employment taxes in respect of the compensation income realized by the executive officer at an aggregate 40% tax rate.

 

Name

   Number of
RSUs to
Vest(1)
     Value of
Accelerated
RSUs
     Shares Sold
to Satisfy
Withholding
Obligations
     Number of
PRSUs to
Vest(2)
     Value of
Accelerated
PRSUs
     Shares Sold
to Satisfy
Withholding
Obligations
 

Executive Officers

                 

Larry Edwards

     12,500      $ 16,000        5,000        6,125      $ 7,840        2,450  

Maria Stahl

     7,516      $ 9,620        3,006        4,300      $ 5,504        1,720  

Christopher Watt

     2,666      $ 3,412        1,066        —          —          —    

 

(1)

Tetraphase RSUs granted to Larry Edwards, Maria Stahl, and Christopher Watt on January 17, 2019 and to Larry Edwards and Maria Stahl on August 1, 2019, would ordinarily vest in three equal installments on each of the first, second and third anniversaries of the applicable grant date. As described under the section entitled “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 92 of this proxy statement/prospectus, as of five business days prior to the Effective Time, each outstanding Tetraphase RSU will vest in full.

 

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(2)

Tetraphase PRSUs granted to Larry Edwards and Maria Stahl on January 17, 2018 (the “2018 Tetraphase PRSUs”), January 17, 2019 (the “2019 Tetraphase PRSUs”), and August 1, 2019 (the “August 2019 Tetraphase PRSUs”), would ordinarily vest only if specific regulatory and commercial milestones are achieved, subject to the named executive officer’s continued employment. Subject to the achievement of such regulatory and commercial milestones, the 2018 Tetraphase PRSUs would ordinarily vest in January 2021, the 2019 Tetraphase PRSUs would ordinarily vest between March 2020 and March 2022 and the August 2019 Tetraphase PRSUs would ordinarily vest between August 2020 and August 2021. As described under the section entitled “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 92 of this proxy statement/prospectus, as of five business days prior to the Effective Time, each unvested Tetraphase PRSU will vest in full.

The following table summarizes, as of the Effective Time, the net number of shares of Tetraphase Common Stock that each of the Tetraphase executive officers will continue to hold following the vesting in full of their outstanding Tetraphase RSUs and Tetraphase PRSUs, after giving effect to the assumed number of shares sold to satisfy Tetraphase’s tax withholding obligations (reflected in the table above), and assuming that such executive officer does not sell any additional shares between the vesting date and the Effective Date. The table also summarizes the Merger Consideration payable to the Tetraphase executive officers in respect of such shares. The table assumes the Effective Time occurs on June 30, 2020. The amounts shown in the following table assume that (i) the Exchange Ratio is 0.6303, (ii) the relevant price per share of AcelRx Common Stock is $1.03, the closing price on March 13, 2020 (the last trading day prior to the execution of the Merger Agreement) and (iii) the value of the CVR is $1.1574. The Tetraphase non-employee directors do not hold any Tetraphase RSUs or Tetraphase PRSUs.

Outstanding Awards

 

Name

  Net Number of Shares Issued
in Respect of RSUs as of the
Effective Time
    Net Number of Shares
Issued in Respect of
PRSUs as of the Effective
Time
    Value of Exchange Ratio
Consideration
Payable in Respect of
shares issued from
RSUs and PRSUs
    Contingent
Consideration Payable
in Respect of shares
issued from RSUs and
PRSUs
 

Executive Officers

       

Larry Edwards

    7,500       3,675     $ 7,255     $ 12,934  

Maria Stahl

    4,510       2,580     $ 4,603     $ 8,206  

Christopher Watt

    1,600       —       $ 1,039     $ 1,852  

Executive Severance Arrangements

Tetraphase has previously entered into employment agreements in the form of offer letters with each of its executive officers, which provide for severance payments and certain benefits to be made in connection with a termination of employment in certain circumstances, including for certain terminations that occur in connection with a change in control. The Merger will constitute a change in control for purposes of each executive officer’s offer letter. Under these employment agreements, the change-in-control benefits are structured as “double trigger” benefits. In other words, the change in control does not itself trigger benefits; rather, benefits will be paid only if the Surviving Corporation or AcelRX, as applicable, terminates the employment of the executive without “cause” or the executive terminates his or her employment for “good reason” during the 12 months after the change in control, with “cause” and “good reason” as defined in the offer letters.

In order to receive these severance benefits, the executive officers must comply with the non-competition, non-solicitation and non-disclosure agreements previously entered into with Tetraphase. Under the non-competition, non-solicitation and non-disclosure agreements, each executive officer has agreed (i) not to compete with Tetraphase during his or her employment and for a period of one year after the termination of his or her employment, (ii) not to solicit Tetraphase’s employees during his or her employment and for a period of

 

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one year after the termination of his or her employment, (iii) to protect Tetraphase’s confidential and proprietary information, and (iv) to assign to Tetraphase related intellectual property developed during the course of his or her employment. If an executive officer fails to comply with these covenants, the terminated executive officer will not be entitled to receive the severance benefits described in this section.

The offer letters generally provide, if, within 12 months following a change in control, a Tetraphase’s executive officer’s employment is terminated by the Surviving Corporation or AcelRX, as applicable, without cause or he or she terminates his or her employment for good reason (as defined in the applicable offer letter), subject to the executive’s signing a separation agreement that will include a general release of potential claims against Tetraphase:

 

   

in the case of Mr. Edwards, (1) he will be entitled to continue to receive his monthly base salary for a period of 18 months, (2) he will be entitled to receive a lump-sum payment equal to 100% of his target bonus at the time he ceases to be employed by the Surviving Corporation or AcelRX, as applicable, and (3) if he is eligible for and elects continuation medical coverage under COBRA, the Surviving Corporation or AcelRX, as applicable, will continue to pay the share of the insurance premiums it pays for active employees who receive the same type of medical coverage (or, if less, the monthly amount it was paying when coverage ended) for 18 months or such earlier date as he becomes eligible for coverage from another employer;

 

   

in the case of each of Ms. Stahl and Mr. Watt, (1) she or he will be entitled to continue to receive her or his monthly base salary for a period of 12 months, (2) she or he will be entitled to receive a lump-sum payment equal to 100% of her or his target bonus at the time she or he ceases to be employed by the Surviving Corporation or AcelRX, as applicable, and (3) if she or he is eligible for and elects continuation medical coverage under COBRA, the Surviving Corporation or AcelRX, as applicable, will continue to pay the share of the insurance premiums it pays for active employees who receive the same type of medical coverage (or, if less, the monthly amount it was paying when coverage ended) for 12 months or such earlier date as she or he becomes eligible for coverage from another employer; and

 

   

in the case of all executive officers, immediate vesting and exercisability of all stock option awards (but no acceleration of vesting of any RSU awards, unless approved by the Tetraphase Board).

Treatment of Outstanding Tetraphase Warrants

Mr. Boyd and Dr. Maher, directors of Tetraphase, are each affiliated with Armistice Capital LLC (“Armistice Capital”), which will receive consideration in exchange for the treatment of Tetraphase Warrants as described below, if the Merger is consummated. The Tetraphase Warrants will each be treated in accordance with their terms, except that, pursuant to the Voting Agreements and Exchange Agreement described below, (i) each outstanding common stock warrant issued by Tetraphase in November 2019 will be converted into the right to receive, at the closing of the Merger, 0.8813 of a share of AcelRx Common Stock for each share of Tetraphase Common Stock underlying such warrant, (ii) each outstanding common stock warrant issued by Tetraphase in January 2020 will be converted into the right to receive, at the closing of the Merger, 0.9087 of a share of AcelRx Common Stock for each share of Tetraphase Common Stock underlying such warrant, and (iii) each outstanding pre-funded warrant will be converted into the right to receive the product of (a) in the case of pre-funded warrants issued by Tetraphase in November 2019, 98.89052%, and in the case of pre-funded warrants issued by Tetraphase in January 2020, 99.88906%, and (b) each element of the Merger Consideration, for each share of Tetraphase Common Stock underlying such warrant.

On March 15, 2020, concurrently with the execution of the Merger Agreement, AcelRx entered into Voting Agreements (the “Voting Agreements”) with the equityholders party thereto, including Armistice Capital, pursuant to which such equityholders agreed, among other things, to vote their shares of Tetraphase Common Stock (i) in favor of adopting the Merger Agreement; and (ii) against (A) any Acquisition Proposal and against any other action, agreement or transaction involving Tetraphase that would reasonably be expected to cause

 

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Tetraphase to abandon, terminate or fail to consummate the Merger or (B) any liquidation, dissolution, extraordinary dividend or other significant corporate reorganization of Tetraphase. Armistice Capital holds (a) common stock warrants representing the right to purchase 5,463,827 shares of Tetraphase Common Stock and (b) pre-funded warrants representing the right to purchase 3,493,827 shares of Tetraphase Common Stock, and Armistice Capital would receive 8,382,271 shares of AcelRx Common Stock upon the closing of the Merger and CVRs.

For additional information on the outstanding Tetraphase awards held by directors Mr. Boyd and Dr. Maher, see “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 92 of this proxy statement/prospectus and “Certain Relationships and Related Party Transactions” beginning on page 196 of this proxy statement/prospectus.

Treatment of Shares of Common Stock in the Merger

Pursuant to the Merger Agreement, at the Effective Time of the Merger, each share of Tetraphase Common Stock issued and outstanding immediately prior to the Effective Time of the Merger (other than Tetraphase Common Stock to be canceled in the Merger or held by stockholders who properly exercise dissenters’ rights) shall be automatically converted into the right to receive, in accordance with the terms of the Merger Agreement, (1) a number of shares of AcelRx Common Stock equal to the Exchange Ratio; provided that if the Tetraphase Net Cash is less than $5.0 million at the closing of the Merger, the Exchange Ratio shall be adjusted to the ratio determined as follows: (a) (i) $20.0 million, minus (ii) the dollar amount by which the Tetraphase Net Cash is less than $5.0 million, minus (iii) $10,265,292, divided by (b) (i) 10,800,166, divided by (ii) $1.43, and (2) one CVR representing the right to receive certain consideration based on the achievement of net sales milestones pursuant to the CVR Agreement (together with the Exchange Ratio, the “Merger Consideration”).

The following table sets forth, as of April 3, 2020, the consideration that each executive officer and director and his or her affiliates would be entitled to receive in respect of outstanding shares beneficially owned by him, her or it (excluding shares underlying Tetraphase Stock Options, Tetraphase RSUs, Tetraphase PRSUs and outstanding warrants of Tetraphase) assuming (1) a price per share of AcelRx common stock of $1.03, the closing price on March 13, 2020 (the last trading day prior to the execution of the Merger Agreement), (2) that all of the milestones under the CVR Agreement are achieved, (3) the Tetraphase Net Cash is greater than or equal to $5.0 million at the closing of the Merger and (4) the number of outstanding CVRs as of each applicable payment date is 10,800,166.

 

Name

   Number of Shares      Value of Exchange Ratio
Consideration
Payable in Respect of
Shares
     Contingent
Consideration Payable
in Respect of Shares(1)
 

Executive Officers

        

Larry Edwards

     5,767      $ 3,744      $ 6,675  

Maria Stahl

     4,975      $ 3,230      $ 5,758  

Christopher Watt

     4,006      $ 2,601      $ 4,637  

Non-Employee Directors

        

L. Patrick Gage

     7,481      $ 4,857      $ 8,658  

Garen Bohlin

     —          —          —    

Steven Boyd(2)

     1,419,507      $ 921,557      $ 1,642,923  

Jeffrey Chodakewitz

     —          —           

John Freund

     —          —          —    

Gerri Henwood

     —          —          —    

Guy Macdonald

     21,000      $ 13,633      $ 24,305  

Keith Maher(3)

     1,419,507      $ 921,557      $ 1,642,923  

Nancy Wysenski

     —          —          —    

 

(1)

Amount payable in respect of CVRs, assuming that the total payments under the CVR for each share will be $1.16 per share, which is calculated by dividing $12,500,000, which represents the aggregate amount of

 

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  contingent payments payable, by 10,800,166, the number of shares of Tetraphase Common Stock outstanding as of March 13, 2020, in accordance with the CVR Agreement. As described above, each CVR payment is conditioned on achieving certain milestones which may not be achieved.
(2)

Consists of 1,419,507 shares of Tetraphase Common Stock held by Armistice Capital Master Fund Ltd. (“Armistice”). Mr. Boyd is the managing member of Armistice Capital and a director of Armistice.

(3)

Consists of 1,419,507 shares of Tetraphase Common Stock held by Armistice. Dr. Maher is a managing director of Armistice Capital.

For information on the CVRs, see “The CVR Agreement” beginning on page 116 of this proxy statement/prospectus.

Employment Arrangements Between AcelRx and Tetraphase’s Executive Officers

AcelRx and Tetraphase have commenced an integration planning process to determine the employment status of Tetraphase’s executive officers following the Effective Time. Additional decisions regarding these individuals are expected to be made closer to, or after, the closing of the Merger.

Possible Change-in-Control Compensation

The following tables set forth the information required by Item 402(t) of Regulation S-K regarding certain compensation which each of Tetraphase’s named executive officers may receive or has already received that is based on or that otherwise relates to the Merger. This compensation is sometimes referred to as “golden parachute” compensation. The “golden parachute” compensation payable to these individuals is subject to a non-binding advisory vote of Tetraphase stockholders, as described under “Proposal 2—Advisory (Non-Binding) Vote on Merger-Related Compensation for Tetraphase Named Executive Officers” beginning on page 46 of this proxy statement/prospectus. Assuming that the Merger is consummated and Tetraphase’s named executive officers are terminated in a qualifying termination of employment and are entitled to full benefits available under their offer letters, these individuals would receive approximately the amounts set forth in the tables below.

No named executive officer will receive any pension or nonqualified deferred compensation that is based on or otherwise triggered by the consummation of the Merger. The amounts indicated below are estimates based on multiple assumptions that may or may not actually occur, including assumptions described in this proxy statement/prospectus. As a result, the actual amounts, if any, to be received by a named executive officer may differ from the amounts set forth below. Specifically, the tables below assume that (i) each named executive officer remains employed by Tetraphase through the Effective Date and that the employment of each such Tetraphase named executive officer will be terminated immediately following the Effective Time in a manner entitling the named executive officer to receive the severance benefits described under “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Executive Severance Arrangements” beginning on page 81 of this proxy statement/prospectus; (ii) no named executive officer receives any additional equity grants on or prior to the Effective Time; (iii) no named executive officer enters into new agreements with Tetraphase or AcelRx, or is otherwise legally entitled to, prior to the Effective Time, additional compensation or benefits; and (iv) no payments are delayed due to Section 409A of the Code. The amounts shown in the tables do not include the value of payments or benefits that would have been earned, or any amounts associated with equity awards that would vest pursuant to their terms, on or prior to the Effective Time, or the value of payments or benefits that are not based on or otherwise related to the Merger.

Change-in-Control Compensation

 

Name

   Cash
($)(1)
     Equity
($)(2)
     Perquisites/
Bonus
($)(3)
     Other
($)(4)
     Total
($)
 

Larry Edwards

     750,000        13,835        45,975        275,000        1,084,810  

Maria Stahl

     415,000        8,777        29,714        166,000        619,491  

Christopher Watt

     312,296        1,980        30,650        93,689        438,615  

 

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(1)

Amount shown represents lump-sum cash severance amounts that would be payable on a “double trigger” basis if the executive officer’s employment is terminated without cause or the executive officer resigns for good reason during the executive officer’s applicable change in control period, as described in “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Executive Severance Arrangements” beginning on page 81 of this proxy statement/prospectus.

(2)

Amount shown represents the “single trigger” accelerated vesting of the named executive officer’s Tetraphase RSUs and Tetraphase PRSUs as of five business days prior to the Effective Time as described in “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Executive Severance Arrangements” beginning on page 81 of this proxy statement/prospectus. Tetraphase Options held by the named executive officers will be terminated in connection with the Merger in exchange for no consideration. For additional information on the outstanding equity awards held by the named executive officers, see the Outstanding Awards table under “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Treatment of Outstanding Equity Awards in the Merger” beginning on page 80 of this proxy statement/prospectus. The amount is based on a per-share value for Tetraphase Common Stock of $0.7428, which represents the average closing market price of Tetraphase Common Stock over the first five business days following the first public announcement of the Merger.

The following table summarizes, as of April 3, 2020, the aggregate value of the Tetraphase RSUs and Tetraphase PRSUs that are currently subject to vesting for each of Tetraphase’s named executive officers, and that, as described under the section entitled “The Merger Agreement—Merger Consideration and the Exchange Ratio” beginning on page 92 of this proxy statement/prospectus, will vest in full five business days prior to the Effective Time, assuming continued employment through the Effective Time, and assuming the Effective Time occurs on June 30, 2020. All Tetraphase Stock Options, including those held by the named executive officers will terminate upon the Effective Time in exchange for no consideration.

 

Name    Aggregate
Value of
Options
($)
     Aggregate
Value of
RSUs
($)
     Aggregate
Value of
PRSUs
($)
     Total
($)
 

Larry Edwards

     —          9,285        4,550        13,835  

Maria Stahl

     —          5,583        3,194        8,777  

Christopher Watt

     —          1,980        —          1,980  

 

(3)

Amount shown represents the estimated value of continued employee benefit plan coverage and participation (or for certain executive officers, cash payments in respect of such coverage and participation) that would be payable on a “double trigger” basis if the executive officer’s employment is terminated without cause or the executive officer resigns for good reason during the executive officer’s applicable change in control period, as described in “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Executive Severance Arrangements” beginning on page 81 of this proxy statement/prospectus. The estimated amounts shown in this column are based on the benefit levels in effect on March 18, 2020, the latest practicable date to determine such amounts before the filing of this proxy statement/prospectus. Therefore, if benefit levels are changed after such date, actual payments to a named executive officer may be different than those listed in this column.

(4)

Amount shown represents lump sum cash bonus severance amounts that would be payable on a “double trigger” basis if the executive officer’s employment is terminated without cause or the executive officer resigns for good reason during the executive officer’s applicable change in control period, as described in “The Merger—Equity Awards Held by Tetraphase Directors and Executive Officers—Executive Severance Arrangements” beginning on page 81 of this proxy statement/prospectus.

Indemnification; Directors’ and Officers’ Insurance

AcelRx has agreed to cause the Surviving Corporation, to the fullest extent permitted by the DGCL, to honor all rights to indemnification, advancement of expenses and exculpation from liabilities existing in favor of the

 

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current or former directors or officers of Tetraphase or its subsidiaries at or prior to the Effective Time for acts or omissions occurring at or prior to the Effective Time, as such indemnification provisions are provided for in the Tetraphase Charter, the Tetraphase Bylaws or indemnification agreements between Tetraphase and such individuals. Such obligations will survive the Merger and will be honored for a period of six years from the closing date of the Merger. AcelRx has further agreed that the certificate of incorporation and bylaws (or comparable organizational documents) of the Surviving Corporation and its subsidiaries will contain provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of such persons as presently set forth in the Tetraphase Charter, the Tetraphase Bylaws or the certificate of incorporation and bylaws of its subsidiaries.

For six years from the Effective Time, the Surviving Corporation must also maintain or obtain directors’ and officers’ liability insurance policies covering acts or omissions occurring on or prior to the Effective Time with respect to the current or former directors or officers of Tetraphase or its subsidiaries at or prior to the Effective Time to the extent that, with respect to such individuals, such policies are fully prepaid; provided, however, that: (i) the Surviving Corporation may instead obtain a fully prepaid policy or policies of comparable coverage or purchase, at Tetraphase’s expense, a six year “tail policy”; and (ii) the annual premiums of the existing insurance policy or tail policy may not exceed 300% of the annual premiums currently paid by Tetraphase with respect to such existing insurance policy. In the event any future annual premiums for the existing insurance policy or tail policy exceed 300% of the annual premiums paid by Tetraphase as of the date of the Merger Agreement, the Surviving Corporation will be entitled to reduce the amount of coverage to the amount of coverage that can be obtained for a premium equal to 300% of such annual premiums.

Prior to the Closing, Tetraphase may, at its sole option, purchase a six year “tail policy” for the existing policy of directors’ and officers’ liability insurance maintained by Tetraphase as of the date of the Merger Agreement.

In the event AcelRx or the Surviving Corporation or any of their respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each such case, AcelRx shall ensure that the successors and assigns of AcelRx or the Surviving Corporation, as the case may be, will assume the obligations described above.

Regulatory Approvals

AcelRx and Tetraphase are not currently aware of any other material governmental consents, approvals or filings that are required prior to the parties’ completion of the Merger. If the parties become aware of any notices, reports and other documents required to filed with respect to the Merger, AcelRx and Tetraphase have agreed to use reasonable best efforts to file, as soon as practicable, such notices, reports and other documents, and to submit promptly any information reasonably requested by any governmental entity in connection therewith.

Nasdaq Listing of AcelRx Common Stock; De-Listing and Deregistration of Tetraphase Common Stock After the Merger

Pursuant to the Merger Agreement, AcelRx must file a Listing of Additional Shares Notification Form with respect to the shares of AcelRx Common Stock to be issued in the Merger. The approval by Nasdaq of the listing of AcelRx Common Stock is a condition to the closing of the Merger.

Prior to the Effective Time, Tetraphase has agreed to cooperate with AcelRx and use its reasonable best efforts to enable the delisting by the Surviving Corporation of the shares of Tetraphase Common Stock from Nasdaq and the deregistration of the shares of Tetraphase Common Stock under the Exchange Act as promptly as practicable after the Effective Time.

 

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Appraisal Rights

If the Merger is consummated, stockholders of Tetraphase who (i) did not vote in favor of the Merger or consent thereto in writing; (ii) follow the procedures set forth in Section 262 of the DGCL; and (iii) do not thereafter withdraw their demand for appraisal of such shares of Tetraphase Common Stock or otherwise lose their appraisal rights, in each case in accordance with the DGCL, will be entitled to receive appraisal for the “fair value” of their shares of Tetraphase Common Stock in accordance with Section 262 of the DGCL. Any stockholder contemplating the exercise of such appraisal rights should review carefully the provisions of Section 262 of the DGCL, particularly the procedural steps required to perfect such rights.

The following is a summary of the procedures to be followed by stockholders that wish to exercise their appraisal rights under Section 262 of the DGCL, the full text of which is attached to this proxy statement/prospectus as Annex F. This summary does not purport to be a complete statement of, and is qualified in its entirety by reference to, Section 262 of the DGCL and to any amendments to such section adopted or otherwise made effective after the date of this proxy statement/prospectus. Failure to follow any of the procedures of Section 262 of the DGCL may result in termination or waiver of appraisal rights under Section 262 of the DGCL. Stockholders should assume that Tetraphase will take no action to perfect any appraisal rights of any stockholder.

Any stockholder who desires to exercise his, her or its appraisal rights should review carefully Section 262 of the DGCL and is urged to consult his, her or its legal advisor before electing or attempting to exercise such rights.

Under Section 262 of the DGCL, a constituent corporation not less than 20 days prior to the stockholder meeting to vote on the merger shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of Section 262. This proxy statement/prospectus constitutes the formal notice of appraisal rights under Section 262 of the DGCL. Any holder of shares of Tetraphase Common Stock who wishes to exercise such appraisal rights or who wishes to preserve his, her or its right to do so should review the following discussion and Annex F carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under the DGCL.

If a stockholder elects to exercise appraisal rights under Section 262 of the DGCL, such stockholder must do all of the following:

 

   

prior to the Special Meeting, deliver to Tetraphase at the address indicated below a written demand for appraisal of shares of Tetraphase Common Stock held, which demand must reasonably inform Tetraphase of the identity of the stockholder and that the stockholder is demanding appraisal;

 

   

not vote in favor of the Merger or consent thereto in writing;

 

   

continuously hold of record the shares of Tetraphase Common Stock from the date on which the written demand for appraisal is made through the Effective Time; and

 

   

comply with the procedures of Section 262 of the DGCL for perfecting appraisal rights thereafter.

Written Demand by the Record Holder

All written demands for appraisal should be addressed to:

Tetraphase Pharmaceuticals, Inc.

480 Arsenal Way

Watertown, Massachusetts 02472

Attn: Secretary

 

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The demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the stockholder’s certificates (whether in book entry or on physical certificates) evidencing such stockholder’s shares of Tetraphase Common Stock. If the shares of Tetraphase Common Stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand should be made in that capacity, and if the shares of Tetraphase Common Stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand must be made by or for all owners of record. An authorized agent, including one or more joint owners, may execute the demand for appraisal for a stockholder of record; however, such agent must identify the record owner or owners and expressly disclose in such demand that the agent is acting as agent for the record owner or owners of such shares of Tetraphase Common Stock.

A record stockholder, such as a broker who holds shares of Tetraphase Common Stock as a nominee for beneficial owners, some or all of whom desire to demand appraisal, must exercise rights on behalf of such beneficial owners with respect to the shares of Tetraphase Common Stock held for such beneficial owners. In such case, the written demand for appraisal must set forth the number of shares covered by such demand. Unless a demand for appraisal specifies a number of shares of Tetraphase Common Stock, such demand will be presumed to cover all shares of Tetraphase Common Stock held in the name of such record owner.

Filing a Petition for Appraisal

Within 120 days after the Effective Time, but not thereafter, the Surviving Corporation, or any holder of shares of Tetraphase Common Stock who has complied with Section 262 of the DGCL and is entitled to appraisal rights under Section 262 may commence an appraisal proceeding by filing a petition (a “Petition”) in the Delaware Court of Chancery (the “Delaware Court”) demanding a determination of the fair value of the shares of Tetraphase Common Stock held by all holders who did not vote in favor of the Merger or consent thereto in writing and demanded appraisal. If no such petition is filed within that 120-day period, appraisal rights will be lost for all holders of shares of Tetraphase Common Stock who had previously demanded appraisal of their shares of Tetraphase Common Stock. Tetraphase is under no obligation to and has no present intention to file a petition and holders should not assume that Tetraphase will file a petition or that it will initiate any negotiations with respect to the fair value of the shares of Tetraphase Common Stock. Accordingly, it is the obligation of the holders of shares of Tetraphase Common Stock to initiate all necessary action to perfect their appraisal rights in respect of the shares of Tetraphase Common Stock within the period prescribed in Section 262 of the DGCL.

Within 120 days after the Effective Time, any holder of shares of Tetraphase Common Stock who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the Surviving Corporation a statement setting forth the aggregate number of shares of Tetraphase Common Stock not voted in favor of the Merger or consented thereto in writing and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares of Tetraphase Common Stock. Such statement must be mailed within 10 days after a written request therefor has been received by the Surviving Corporation or within 10 days after the expiration of the period for delivery of demands for appraisal, whichever is later. Notwithstanding the foregoing requirement that a demand for appraisal must be made by or on behalf of the record owner of the shares of Tetraphase Common Stock, a person who is the beneficial owner of shares of Tetraphase Common Stock held either in a voting trust or by a nominee on behalf of such person, and as to which demand has been properly made and not effectively withdrawn, may, in such person’s own name, file a petition for appraisal or request from the Surviving Corporation the statement described in this paragraph.

Upon the filing of such petition by any such holder of shares of Tetraphase Common Stock (a “Dissenting Stockholder,” and such shares of Tetraphase Common Stock, “Dissenting Tetraphase Shares”), service of a copy thereof must be made upon the Surviving Corporation, which will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares of Tetraphase Common Stock and with whom agreements as to the value of their shares of Tetraphase Common Stock has not been reached. Upon the filing of a Petition by a Dissenting Stockholder, the Delaware Court may order a hearing and that notice of the time and place fixed for

 

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the hearing on the Petition be mailed to the Surviving Corporation and all the Dissenting Stockholders. Notice will also be published at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or in another publication deemed advisable by the Delaware Court. The costs relating to these notices will be borne by the Surviving Corporation.

If a hearing on the Petition is held, the Delaware Court is empowered to determine which Dissenting Stockholders have complied with the provisions of Section 262 of the DGCL and are entitled to an appraisal of their shares of Tetraphase Common Stock. The Delaware Court may require that Dissenting Stockholders submit their share certificates for notation thereon of the pendency of the appraisal proceedings. The Delaware Court is empowered to dismiss the proceedings as to any Dissenting Stockholder who does not comply with such requirement. Accordingly, Dissenting Stockholders are cautioned to retain their Share certificates pending resolution of the appraisal proceedings. In addition, because immediately before the Effective Time, the shares of Tetraphase Common Stock were listed on a national securities exchange, the Delaware Court shall dismiss the proceedings as to all holders of such shares who are otherwise entitled to appraisal rights unless (1) the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of the class or series eligible for appraisal, (2) the value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million, or (3) the merger was approved pursuant to Section 253 or Section 267 of the DGCL.

The shares of Tetraphase Common Stock will be appraised by the Delaware Court at the fair value thereof exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the fair value. Unless the Delaware Court in its discretion determines otherwise for good cause shown, interest from the Effective Time through the date of payment of the judgment will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the Effective Time and the date of payment of the judgment. In determining the value, the court is to take into account all relevant factors. At any time before the entry of judgment in the proceedings, the Surviving Corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided herein only upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Delaware Court, and (2) interest theretofore accrued, unless paid at that time.

The Delaware Court may also (i) assess costs of the proceeding among the parties as the Delaware Court deems equitable and (ii) order all or a portion of the expenses incurred by any Dissenting Stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Determinations by the Delaware Court are subject to appellate review by the Delaware Supreme Court.

Dissenting Stockholders are generally permitted to participate in the appraisal proceedings. No appraisal proceedings in the Delaware Court shall be dismissed as to any Dissenting Stockholder without the approval of the Delaware Court, and this approval may be conditioned upon terms which the Delaware Court deems just.

Stockholders considering whether to seek appraisal should bear in mind that the fair value of their shares of Tetraphase Common Stock determined under Section 262 of the DGCL could be more than, the same as, or less than the value of consideration to be issued and paid in the Merger as set forth in the Merger Agreement. Also, the Surviving Corporation may assert in any appraisal proceeding that, for purposes thereof, the “fair value” of the shares of Tetraphase Common Stock is less than the value of the consideration to be issued and paid in the Merger as set forth in the Merger Agreement.

The process of dissenting and exercising appraisal rights requires strict compliance with technical prerequisites. Stockholders wishing to dissent should consult with their own legal counsel in connection with compliance with Section 262 of the DGCL.

 

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Any stockholder who has duly demanded and perfected appraisal rights in compliance with Section 262 of the DGCL will not, after the Effective Time, be entitled to vote his or her shares of Tetraphase Common Stock for any purpose or be entitled to the payment of dividends or other distributions thereon, except dividends or other distributions payable to holders of record of shares of Tetraphase Common Stock as of a date prior to the Effective Time.

If any stockholder who demands appraisal of shares of Tetraphase Common Stock under Section 262 of the DGCL fails to perfect, successfully withdraws or loses such holder’s right to appraisal, such stockholder’s shares of Tetraphase Common Stock will be deemed to have been converted at the Effective Time into the right to receive the Merger Consideration. A stockholder will fail to perfect, or effectively lose, the stockholder’s right to appraisal if no petition for appraisal is filed within 120 days after the Effective Time. In addition, as indicated above, a stockholder may withdraw his, her or its demand for appraisal in accordance with Section 262 of the DGCL and accept the Merger Consideration.

This summary of appraisal rights under the DGCL is not complete and is qualified in its entirety by reference to Section 262 of the DGCL.

Under the DGCL, the holders of AcelRx Common Stock are not entitled to appraisal rights in connection with the Merger.

Accounting Treatment of the Merger

The Merger will be accounted for by AcelRx as a business combination under the acquisition method of accounting, in conformity with GAAP. Under the acquisition method of accounting, the assets and liabilities of Tetraphase as of the Effective Time will be recorded by AcelRx at their respective fair values and added to those of AcelRx. Any excess of purchase price over the fair value of the net assets will be recorded as goodwill. Tetraphase’s assets and liabilities and results of operations will be consolidated from the date of the Merger.

Litigation Relating to the Merger

On April 9, 2020, a putative class action complaint was filed against Tetraphase, each of its directors, AcelRx and Merger Sub in the United States District Court for the District of Delaware. The lawsuit, captioned Plumley v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-00496 and purportedly brought on behalf of a class of stockholders, alleges that Tetraphase and its directors violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and that Tetraphase’s directors, AcelRx and Merger Sub violated Section 20(a) of the Exchange Act, by allegedly disseminating a materially incomplete and misleading registration statement in connection with the Merger. On April 16, 2020, a complaint was filed against Tetraphase and certain of its directors in the United States District Court for the Southern District of New York. The lawsuit, captioned Sahan v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03069, alleges that the defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and that the individual defendants violated Section 20(a) of the Exchange Act and breached their fiduciary duty of candor/disclosure, by allegedly disseminating a materially incomplete and misleading registration statement in connection with the Merger. On April 20, 2020, complaints were filed against Tetraphase and its directors in each of the United States District Court for the District of Massachusetts and the United States District Court for the Southern District of New York. Each of the Massachusetts lawsuit, captioned Giacobbe v. Tetraphase Pharmaceuticals, Inc. et al., Case No. 1:20-cv-10762, and the New York lawsuit, captioned Ravi v. Tetraphase Pharmaceuticals, Inc., et al., Case No. 1:20-cv-03142, alleges that the defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and that the individual defendants violated Section 20(a) of the Exchange Act, by allegedly disseminating a materially incomplete and misleading registration statement in connection with the Merger.

The plaintiffs in these lawsuits seek various forms of injunctive, declaratory and other relief, including: (i) enjoining the defendants from proceeding with, consummating or closing the Merger; (ii) in the event the

 

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Merger is consummated, rescinding and setting aside the Merger or awarding rescissory damages; (iii) directing Tetraphase’s directors to disseminate a registration statement that does not contain any untrue statements of material fact and that states all material facts required or necessary to make the statements therein not misleading; (iv) declaring that the defendants have violated Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder; and (v) awarding damages, costs, attorneys’ fees and experts’ fees. The defendants believe that the Plumley, Sahan, Giacobbe and Ravi complaints are without merit.

 

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THE MERGER AGREEMENT

The following summary describes certain material provisions of the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus and which is incorporated by reference herein. The description in this section and elsewhere in this proxy statement/prospectus is qualified in its entirety by reference to the Merger Agreement. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. AcelRx and Tetraphase encourage you to read carefully the Merger Agreement in its entirety before making any decisions regarding the Merger because it is the principal document governing the Merger.

The Merger

Subject to the terms and conditions of the Merger Agreement and in accordance with the DGCL, at the Effective Time, Merger Sub, an indirect wholly-owned subsidiary of AcelRx and a party to the Merger Agreement, will merge with and into Tetraphase. Tetraphase will continue as the Surviving Corporation.

Effective Time; Closing

The Merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or such later time as is agreed upon by AcelRx and Tetraphase and specified in such certificate of merger. The closing of the Merger will occur no later than two business days following the day on which the conditions to the Merger set forth in the Merger Agreement and described in this proxy statement/prospectus (other than conditions which by their terms are required to be satisfied or waived at the closing, but subject to the satisfaction or waiver of such conditions at the closing) has been satisfied or waived in accordance with the Merger Agreement.

Although AcelRx and Tetraphase currently expect the Merger to be completed in the second quarter of 2020 (in the event Tetraphase’s stockholders adopt the Merger Agreement), neither AcelRx nor Tetraphase can specify when or make any assurances that AcelRx and Tetraphase will satisfy or waive all of the conditions to the Merger. See “The Merger Agreement—Conditions to the Merger” beginning on page  95 of this proxy statement/prospectus.

Merger Consideration and the Exchange Ratio

Tetraphase Common Stock

At the Effective Time, each share of Tetraphase Common Stock outstanding immediately prior to the Effective Time (other than any Dissenting Tetraphase Shares or shares held by AcelRx, Merger Sub, Tetraphase (or in Tetraphase’s treasury) or any wholly-owned subsidiary of AcelRx or Tetraphase) will be converted into the right to receive the Merger Consideration, i.e., (i) a number of shares of AcelRx Common Stock equal to the Exchange Ratio and (ii) one CVR representing the right to receive the consideration set forth in the CVR Agreement. No fractional shares of AcelRx Common Stock will be issued in the Merger and Tetraphase’s stockholders will receive cash in lieu of any fractional share.

Treatment of Tetraphase Options, RSUs, PRSUs and Warrants

Tetraphase Options

All Tetraphase Options, whether vested or unvested, will terminate at the Effective Time and will be of no further force and effect.

Tetraphase RSUs and Tetraphase PRSUs

Effective as of five business days prior to the closing date of the Merger, each outstanding Tetraphase RSU and Tetraphase PRSU will vest in full and Tetraphase will issue to the holder one share of Tetraphase Common Stock

 

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in respect of each Tetraphase RSU and each Tetraphase PRSU that vests. The holders of the Tetraphase RSUs and Tetraphase PRSUs are required, pursuant to the applicable award agreements, to sell, on the vesting date, a number of shares that are issued in respect of such awards having a value equal to Tetraphase’s tax withholding obligations. All shares of Tetraphase Common Stock issued on vesting of the Tetraphase RSUs and Tetraphase PRSUs (including the shares that are sold to satisfy tax withholding obligations and any shares that continue to be held by the holder of the award) will be treated as outstanding shares of Tetraphase Common Stock at the Effective Time and will be converted into the right to receive the Merger Consideration.

Tetraphase Warrants

Each outstanding and unexercised Tetraphase Warrant will be treated in accordance with its terms, except that, pursuant to the Voting Agreements and the Exchange Agreement, (i) each outstanding common stock warrant issued by Tetraphase in November 2019 will be converted into the right to receive, at the closing of the Merger, 0.8813 of a share of AcelRx Common Stock for each share of Tetraphase Common Stock underlying such Tetraphase Warrant, (ii) each outstanding common stock warrant issued by Tetraphase in January 2020 will be converted into the right to receive, at the closing of the Merger, 0.9087 of a share of AcelRx Common Stock for each share of Tetraphase Common Stock underlying such Tetraphase Warrant, and (iii) each outstanding pre-funded warrant will be converted into the right to receive the product of (a) in the case of pre-funded warrants issued by Tetraphase in November 2019, 98.89052%, and in the case of pre-funded warrants issued by Tetraphase in January 2020, 99.88906%, and (b) each element of the Merger Consideration, for each share of Tetraphase Common Stock underlying such Tetraphase Warrant.

Fractional Shares

AcelRx will not issue any fractional shares of AcelRx Common Stock in connection with the Merger. Any holder of Tetraphase Common Stock (other than any Dissenting Tetraphase Shares) who would otherwise be entitled to receive a fraction of a share of AcelRx Common Stock (after aggregating all fractional shares of AcelRx Common Stock issuable to such holder) will, in lieu of such fraction of a share, be paid in cash the dollar amount (rounded to the nearest whole cent, with numbers ending with .5 or more being rounded up to the nearest whole cent), without interest, determined by multiplying such fraction by the average closing price of a share of AcelRx Common Stock on the Nasdaq Global Select Market for the 10 most recent trading days that AcelRx Common Stock has traded ending on the trading day one day prior to the date on which the Merger becomes effective.

Exchange Ratio

The Exchange Ratio is 0.6303, but may be adjusted in the event that the Tetraphase Net Cash is less than the $5.0 million at the closing of the Merger. If the Tetraphase Net Cash is less than $5.0 million, the Exchange Ratio will mean: (a) (i) (A) $9,734,708, minus (B) the dollar amount by which the Tetraphase Net Cash is less than $5.0 million, divided by (ii) 10,800,166 shares of Tetraphase Common Stock, divided by (b) $1.43.

“Cash and Cash Equivalents” means all cash and cash equivalents determined in a manner consistent with the manner in which such items were historically determined and in accordance with Tetraphase’s financial statements (including any related notes) contained or incorporated by reference in the Tetraphase SEC Documents, and/or Tetraphase’s audited balance sheet, including, for the avoidance of doubt, any cash deposits or similar amounts with respect to Tetraphase’s financial credit card program.

“Tetraphase Net Cash” means, without duplication and determined in a manner consistent with the manner in which such items were historically determined and in accordance with Tetraphase’s financial statements (including any related notes) contained or incorporated by reference in the Tetraphase SEC Documents, Tetraphase’s audited balance sheet, and Schedule I of the disclosure schedules delivered by Tetraphase to AcelRx in connection with the Merger Agreement (a) the sum of Tetraphase and its subsidiaries’ Cash and Cash

 

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Equivalents, in each case as of the anticipated closing date for the Merger as agreed upon by Tetraphase and AcelRx, minus (b) the amount of all fees and expenses incurred by Tetraphase and its subsidiaries in connection with the Contemplated Transactions, including for the avoidance of doubt Transaction Expenses of Tetraphase and its subsidiaries, to the extent unpaid as of the closing of the Merger, minus (c) the cash cost of any unpaid “single trigger” (or “double trigger,” to the extent the second trigger occurs in connection with or within 90 days following the closing of the Merger) change of control payments or severance, termination or similar payments pursuant to any agreement, contract, subcontract, grant, funding agreement, lease, instrument, note, option, warranty, purchase order, license, sublicense, insurance policy, benefit plan or other legally binding understanding, arrangement, commitment or undertaking or applicable legal requirements that are or become due to any current or former employee, director or independent contractor of Tetraphase or its subsidiaries, minus (d) the cash cost of any accrued and unpaid retention payments or other bonuses due to any current or former employee, director or independent contractor of Tetraphase or its subsidiaries as of the closing of the Merger, minus (e) all payroll or employment taxes incurred by Tetraphase or its subsidiaries in connection with any payment amounts set forth in clauses (c) or (d), the exercise of any Tetraphase Option at or prior to the Effective Time, or the vesting and settlement of Tetraphase RSUs or Tetraphase PRSUs at or prior to the Effective Time, minus (f) all withholding taxes deducted or withheld on or prior to the date of the closing of the Merger and not paid to the appropriate governmental body prior to the determination of Tetraphase Net Cash, minus (g) the expected costs and/or any premium related to the directors’ and officers’ insurance tail policy, minus (h) the amount of any accounts payable of Tetraphase or its subsidiaries to the extent such party is delinquent in payment by more than 60 days, minus (i) payments of the unpaid deductible amount under Tetraphase’s directors’ and officers’ insurance reasonably expected to be payable in connection with legal proceedings initiated following the date of the Merger Agreement and before the closing of the Merger assumed by the insurer or expected to be assumed by the insurer (and if such legal proceeding relates to the Contemplated Transactions, provided that, for purposes of the reduction of Tetraphase Net Cash under clause (i), such amount will not exceed $400,000).

“Transaction Expenses” means, without duplication and subject to certain exceptions (including such exceptions with respect to any sharing of fees and/or expenses contemplated by the Merger Agreement), with respect to each party, all fees and expenses incurred by such party at or prior to the Effective Time in connection with the Contemplated Transactions and the Merger Agreement, including (a) any fees and expenses of legal counsel and accountants, the amount of fees and expenses payable to financial advisors, investment bankers, brokers, consultants, and other advisors of such party; (b) fees paid to the SEC in connection with filing this proxy statement/prospectus and the registration statement of which this proxy statement/prospectus is a part, and any amendments or supplements thereto, with the SEC; (c) any fees and expenses in connection with the printing, mailing and distribution of this proxy statement/prospectus and the registration statement of which this proxy statement/prospectus is a part and any amendments or supplements thereto; (d) only with respect to AcelRx, any fees associated with listing the shares of AcelRx Common Stock in connection with the Contemplated Transactions on Nasdaq, including the portion of AcelRx’s periodic Nasdaq fees that is attributable to the shares of AcelRx Common Stock to be issued in connection with the Contemplated Transactions; and (e) only with respect to Tetraphase, any “single-trigger” (or “double trigger,” to the extent the second trigger occurs in connection with or within 90 days following the closing of the Merger), bonus, severance, change-in-control payments or similar payment obligations that become due or payable to any director, officer, employee or consultant of Tetraphase upon, and solely as a result of, the consummation of the Contemplated Transactions (provided, that Transaction Expenses shall not include any amounts (i) payable as a result of any arrangements implemented or actions taken by AcelRx, or by Tetraphase or its subsidiaries after the Effective Time, or (ii) discharged prior to the closing of the Merger).

Dividends and Distributions

No dividends and distributions declared or made with respect to shares of AcelRx Common Stock with a record date after the Effective Time will be paid to the holder of any un-surrendered shares of Tetraphase Common Stock until such shares of Tetraphase Common Stock are surrendered. Following such surrender and subject to

 

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applicable law, the holder of the shares of AcelRx Common Stock issued in exchange for such shares of Tetraphase Common Stock will be entitled, subject to the effect of applicable abandoned property, escheat or similar laws, to receive all such dividends and distributions, without interest.

Conditions to the Merger

The obligations of AcelRx, Merger Sub and Tetraphase to effect the Merger are subject to the satisfaction or waiver of the following conditions:

 

   

no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction preventing, prohibiting, restraining, enjoining or rendering illegal the consummation of the Merger having been issued and continuing in effect; and

 

   

no pending legal proceeding by a governmental body: (a) challenging or seeking to restrain, prohibit, rescind or unwind the consummation of the Merger; (b) seeking to prohibit or limit in any material respect AcelRx’s ability to exercise ownership rights with respect to the stock of the Surviving Corporation; (c) relating to the Merger and that would reasonably be expected to materially and adversely affect the right or ability of AcelRx to own any of the material assets or materially limit the operation of Tetraphase’s business, taken as a whole; (d) seeking to compel any of Tetraphase, AcelRx or their subsidiaries to dispose of or hold separate any material assets or material business as a result of the Merger; or (e) relating to the Merger and seeking to impose (or that would reasonably be expected to result in the imposition of) any criminal sanctions or criminal liability on AcelRx or any of Tetraphase or its subsidiaries.

In addition, AcelRx’s and Merger Sub’s obligations to effect the Merger are subject to the satisfaction or waiver of the following additional conditions:

 

   

the representations and warranties of Tetraphase set forth in the Merger Agreement relating to subsidiaries; due organization; authority; vote required; and financial advisors shall be true and correct (without giving effect to any limitation as to materiality set forth in such representation or warranty or any update of or modification to the disclosure schedules delivered by Tetraphase to AcelRx is connection with the Merger Agreement) in all material respects, as of the closing date of the Merger as if made on and as of such time (except to the extent expressly made as of a specific date, in which case as of such date);

 

   

the representations and warranties of Tetraphase set forth in the Merger Agreement relating to capital stock shall be true and correct (without giving effect to any limitation as to materiality or Tetraphase Material Adverse Effect set forth in such representation or warranty), except for inaccuracies that do not increase aggregate value of the consideration payable of AcelRx Common Stock to be issued in the Merger by more than $325,000, as of the closing date of the Merger as if made on and as of such time (except to the extent expressly made as of a specific date, in which case as of such date);

 

   

all other representations and warranties of Tetraphase set forth in the Merger Agreement shall be true and correct (without giving effect to any limitation as to materiality set forth in such representation or warranty or any update of or modification to the disclosure schedules delivered by Tetraphase to AcelRx is connection with the Merger Agreement), except where the failure of such representations and warranties to be so true and correct do not constitute, collectively, a Tetraphase Material Adverse Effect, as of the closing date of the Merger as if made on and as of such time (except to the extent expressly made as of a specific date, in which case as of such date);

 

   

Tetraphase shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the closing of the Merger;

 

   

the affirmative vote of the holders of a majority of the shares of Tetraphase Common Stock outstanding as of the Record Date to adopt the Merger Agreement;

 

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since the date of the Merger Agreement, there shall not have occurred any Tetraphase Material Adverse Effect;

 

   

the Tetraphase Net Cash shall be equal to or greater than $5.0 million at the closing of the Merger;

 

   

AcelRx shall have received a certificate signed by the chief executive officer of Tetraphase to the effect that the aforementioned seven conditions have been satisfied;

 

   

the registration statement of which this proxy statement/prospectus forms a part shall be declared effective by the SEC under the Securities Act with no stop order suspending such effectiveness issued by the SEC remaining in effect and no proceedings for that purpose initiated or threatened in writing by the SEC; and

 

   

Tetraphase shall have delivered a certificate to AcelRx confirming that Tetraphase is not a “United States real property holding corporation” as defined in Section 897 of the Code.

In addition, Tetraphase’s obligations to effect the Merger are subject to the satisfaction or waiver of the following additional conditions:

 

   

the representations and warranties of AcelRx set forth in the Merger Agreement relating to due organization; authorized and outstanding AcelRx capital stock; authority; and ownership of Tetraphase capital stock shall be true and correct (without giving effect to any limitation as to materiality set forth in such representation or warranty or any update of or modification to the disclosure schedules delivered by AcelRx to Tetraphase is connection with the Merger Agreement) in all material respects, as of the closing date of the Merger as if made on and as of such time (except to the extent expressly made as of a specific date, in which case as of such date);

 

   

all other representations and warranties of AcelRx set forth in the Merger Agreement shall be true and correct (without giving effect to any limitation as to materiality set forth in such representation or warranty or any update of or modification to the disclosure schedules delivered by AcelRx to Tetraphase is connection with the Merger Agreement), except where the failure of such representations and warranties to be so true and correct do not constitute, collectively, an AcelRx Material Adverse Effect, as of the closing date of the Merger as if made on and as of such time (except to the extent expressly made as of a specific date, in which case as of such date);

 

   

each of AcelRx and Merger Sub shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the closing of the Merger;

 

   

the registration statement of which this proxy statement/prospectus forms a part shall be declared effective by the SEC under the Securities Act with no stop order suspending such effectiveness issued by the SEC remaining in effect and no proceedings for that purpose initiated or threatened in writing by the SEC;

 

   

since the date of the Merger Agreement, there shall not have occurred any AcelRx Material Adverse Effect;

 

   

the shares of AcelRx Common Stock issuable as Merger Consideration shall have been approved for listing on Nasdaq;

 

   

Tetraphase shall have received a certificate signed by the chief executive officer of AcelRx to the effect that the aforementioned six conditions have been satisfied;

 

   

the affirmative vote of the holders of a majority of the shares of Tetraphase Common Stock outstanding as of the Record Date to adopt the Merger Agreement; and

 

   

the CVR Agreement shall have been executed by the parties thereto and shall be in full force and effect.

 

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“AcelRx Material Adverse Effect” means any effect, change, claim, event or circumstance, that, considered together, is or would reasonably be expected to be or to become materially adverse to, or has or would reasonably be expected to have or result in a material adverse effect on the business, financial condition or results of operations of AcelRx and its subsidiaries taken as a whole, but in no event shall any of the foregoing resulting from any of the following, alone or in combination, be deemed to constitute, or be taken into account in determining whether there has occurred or could or would occur, an AcelRx Material Adverse Effect: (i) conditions generally affecting the industries in which any of AcelRx or its subsidiaries participates or the U.S. or global economy as a whole, to the extent that such conditions do not have a materially disproportionate impact on AcelRx or its subsidiaries, taken as a whole as compared to other industry participants; (ii) general conditions in the financial markets, and any changes therein, and any changes arising out of acts of terrorism, war, weather conditions, viruses, pandemics or other force majeure events, to the extent that such conditions do not have a materially disproportionate impact on AcelRx or its subsidiaries, taken as a whole, as compared to other industry participants; (iii) changes in the trading price or trading volume of AcelRx Common Stock, or the suspension of trading in or delisting of AcelRx’s securities on Nasdaq; (iv) changes in GAAP (or any interpretations of GAAP) or legal requirements applicable to AcelRx or any of its subsidiaries; (v) the failure to meet public estimates or forecasts of revenues, earnings of other financial metrics, in and of itself, or the failure to meet internal projections, forecasts or budgets of revenues, earnings or other financial metrics, in and of itself; (vi) any stockholder litigation arising from or relating to the Merger Agreement or the Contemplated Transactions and/or relating to a breach of the fiduciary duties of the AcelRx’s Board to the AcelRx’s stockholders under applicable legal requirements; (vii) resulting or arising out of the execution, announcement or performance of the Merger Agreement or the Contemplated Transactions, including loss of employees, suppliers or customers (including customer orders or contracts) resulting directly from the announcement or pendency of the Merger Agreement or the Contemplated Transactions; or (viii) the taking of any action expressly required to be taken pursuant to the Merger Agreement or the taking of any action requested by Tetraphase to be taken pursuant to the terms of the Merger Agreement to the extent taken in accordance with such request.

“Tetraphase Material Adverse Effect” means any effect, change, claim, event or circumstance, that, considered together, is or would reasonably be expected to be or to become materially adverse to, or has or would reasonably be expected to have or result in a material adverse effect on the business, financial condition or results of operations of Tetraphase and its subsidiaries taken as a whole, but in no event shall any of the foregoing resulting from any of the following, alone or in combination, be deemed to constitute, or be taken into account in determining whether there has occurred or could or would occur, a Tetraphase Material Adverse Effect: (i) conditions generally affecting the industry in which Tetraphase or its subsidiaries participate or the U.S. or global economy as a whole, to the extent that such conditions do not have a materially disproportionate impact on Tetraphase or its subsidiaries taken as a whole as compared to other industry participants; (ii) general conditions in the financial markets, and any changes therein, and any changes arising out of acts of terrorism, war, weather conditions, viruses or pandemics or other force majeure events, to the extent that such conditions do not have a materially disproportionate impact on Tetraphase or any of its subsidiaries, taken as a whole, as compared to other industry participants; (iii) changes in the trading price or trading volume of Tetraphase Common Stock, or the suspension of trading in or delisting of Tetraphase’s securities on Nasdaq; (iv) changes in GAAP (or any interpretations of GAAP) or legal requirements applicable to Tetraphase or any of its subsidiaries; (v) the failure to meet public estimates or forecasts of revenues, earnings of other financial metrics, in and of itself, or the failure to meet internal projections, forecasts or budgets of revenues, earnings or other financial metrics, in and of itself; (vi) any stockholder litigation arising from or relating to the Merger Agreement or the Contemplated Transactions and/or relating to a breach of the fiduciary duties of Tetraphase Board to Tetraphase’s stockholders under applicable legal requirements; (vii) resulting or arising out of the execution, announcement or performance of the Merger Agreement or the Contemplated Transactions, including the loss of employees, suppliers or customers (including customer orders or contracts); or (viii) the taking of any action expressly required to be taken pursuant to the Merger Agreement or the taking of any action requested by AcelRx to be taken pursuant to the terms of the Merger Agreement to the extent taken in accordance with such request.

 

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No Solicitation of Acquisition Proposals

The Merger Agreement prohibits, subject to certain exceptions, Tetraphase from soliciting an alternative transaction to the Merger. Under these “no solicitation” provisions, Tetraphase agreed to (and to cause its subsidiaries to) and to direct its and their representatives to immediately cease any solicitation, discussions or negotiations with any persons that may have been ongoing as of the date of the Merger Agreement with respect to an Acquisition Proposal. In addition, from the date of the Merger Agreement until the earlier of the date of the adoption of the merger agreement proposal by the Tetraphase stockholders or the termination of the Merger Agreement in accordance with its terms, Tetraphase will not, and will cause each of its subsidiaries and cause its and their representatives not to, directly or indirectly:

 

   

solicit, initiate or knowingly facilitate or knowingly encourage any inquiries or the making of any proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal;

 

   

engage in, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any other person any non-public information in connection with an Acquisition Proposal or any proposal or offer that would reasonably be expected to lead to an Acquisition Proposal; or

 

   

adopt any resolution for the purpose of exempting any person (other than AcelRx and its subsidiaries) from the restriction on “business combinations” or any similar provision contained in applicable takeover law or Tetraphase’s organizational or other governing documents.

The Merger Agreement also required Tetraphase to, and to cause its subsidiaries and direct its and their representatives, to promptly (but in no event later than within five business days of the date of the Merger Agreement), request the return from, or destruction by, all third parties of all non-public information previously furnished or made available to such parties by or on behalf of the Tetraphase and its subsidiaries relating to any possible Acquisition Proposal within six months prior to the date of the Merger Agreement (and Tetraphase must use commercially reasonable efforts to have such information returned or destroyed) and on the date of the Merger Agreement terminate all physical and electronic data room access previously granted to any such party or its representatives.

Notwithstanding these restrictions, the Merger Agreement also provides that if, at any time from the date of the Merger Agreement until the earlier of the date of the adoption of the merger agreement proposal by the Tetraphase stockholders or the termination of the Merger Agreement in accordance with its terms, Tetraphase or any of its subsidiaries receives a bona fide, written Acquisition Proposal made or renewed after the date of the Merger Agreement (and is not withdrawn), and did not result from any material breach of certain Tetraphase non-solicitation and board recommendation obligations, that the Tetraphase Board determines in good faith, after consultation with its independent financial advisors and outside legal counsel, constitutes or could reasonably be expected to lead to a Superior Offer and that failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements, Tetraphase may take the following actions:

 

   

Furnish, pursuant to (but only pursuant to) an Acceptable Confidentiality Agreement, information (including non-public information) to the person or group of persons who has made such Acquisition Proposal; provided, that Tetraphase shall provide to AcelRx (substantially concurrently with providing access to any such other person) any such non-public information that is provided to any person given such access which was not previously made available to AcelRx or its representatives; and

 

   

engage in, continue or otherwise participate in discussions or negotiations (including the solicitation of revised Acquisition Proposals) (and waive such person’s noncompliance with any provision of any “standstill” agreement to the extent (but only to the extent) necessary to permit such discussions) with the person or group of persons making such Acquisition Proposal and its or their representatives.

 

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The Merger Agreement requires that Tetraphase promptly (and in no event later than one business day after receipt) notify AcelRx orally and in writing of any Acquisition Proposal received by Tetraphase, its subsidiaries, or any of its representatives. Tetraphase must also provide to AcelRx the identity of the person making or submitting such Acquisition Proposal, a copy of any written Acquisition Proposal (and any other written material provided by such person with respect to such Acquisition Proposal to the extent setting forth a material clarification to the material terms and conditions thereof) and a summary of the material terms and conditions of any such Acquisition Proposal that is presented orally. Tetraphase must keep AcelRx reasonably informed of any material developments regarding any such Acquisition Proposal on a reasonably prompt basis, including by providing reasonably prompt (and in any event within one business day) notice of all material amendments or modifications thereto and a copy of any final definitive agreement Tetraphase would be prepared to execute, subject to the terms and conditions of the Merger Agreement. Tetraphase has agreed that it and its subsidiaries will not enter into any confidentiality agreement with any person subsequent to the date of the Merger Agreement that prohibits Tetraphase from providing any information to AcelRx in accordance with the non-solicitation provisions of the Merger Agreement.

Tetraphase (other than as permitted under the “no solicitation” provisions described above) has also agreed that it (i) will not, and it will ensure that none of its subsidiaries will, release or permit the release of any person from, or amend, waive or permit the amendment or waiver of any provision of, any “standstill” or similar agreement or provision to which any of Tetraphase or its subsidiaries is or becomes a party or under which any of Tetraphase or its subsidiaries has or acquires any rights and (ii) will use its reasonable best efforts to enforce or cause to be enforced each such agreement or provision.

In the event any of Tetraphase’s subsidiaries or representatives takes any action which, if taken by Tetraphase, would constitute a breach of its non-solicitation obligations in the Merger Agreement, Tetraphase will be deemed to be in breach of such non-solicitation obligations in the Merger Agreement.

An “Acceptable Confidentiality Agreement” means any customary confidentiality agreement containing provisions as to confidentiality that are materially no less favorable to Tetraphase than those contained in the Confidentiality Agreement and does not prohibit Tetraphase from providing any information to AcelRx in accordance with certain of the non-solicitation provisions in the Merger Agreement and certain obligations with respect to the Tetraphase Adverse Change in Recommendation. Tetraphase shall provide to AcelRx (substantially concurrently with providing access to any such other person) any such non-public information that is provided to any person given such access that was not previously made available to AcelRx or its representatives.

The Special Meeting

Tetraphase will (i) take all action necessary under all applicable laws to establish a Record Date for, duly call, give notice of and convene a Special Meeting to vote on the merger agreement proposal; (ii) submit such proposal to such holders at the Special Meeting; and (iii) not submit any other proposal to such holders in connection with the Special Meeting without the prior written consent of AcelRx. Tetraphase, in consultation with AcelRx, will set a Record Date for persons entitled to notice of, and to vote at, the Special Meeting. Subject to the rights to postpone or adjourn the Special Meeting set forth below, the Special Meeting will be held (on a date selected by Tetraphase in consultation with AcelRx) as promptly as reasonably practicable after the Form S-4 Registration Statement is declared effective under the Securities Act, and in any event will be initially scheduled to be held no later than 45 days thereafter.

Tetraphase will use commercially reasonable efforts to ensure that all proxies solicited by it and its representatives in connection with the Special Meeting are solicited in compliance with all laws. Notwithstanding anything to the contrary contained in the Merger Agreement, if either AcelRx or Tetraphase reasonably believes it is necessary to ensure that (A) Tetraphase will receive proxies sufficient to obtain the required approval of the holders of Tetraphase Common Stock at the Special Meeting for the adoption of the Merger Agreement, whether

 

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or not a quorum would be present at the Special Meeting, or (B) Tetraphase will have sufficient shares of Tetraphase Common Stock represented (whether in person or by proxy) to constitute a quorum necessary to conduct the business of the Special Meeting, Tetraphase may, or, at the request of AcelRx, will, postpone or adjourn the Special Meeting, on one or multiple occasions, as long as the date of the Special Meeting is not postponed or adjourned more than an aggregate of 45 calendar days in connection with such postponement or adjournment. Tetraphase agrees that, unless the Merger Agreement will have been terminated, its obligation to hold the Special Meeting will not be affected by the commencement, public proposal, public disclosure or communication to Tetraphase or any of its subsidiaries of any Acquisition Proposal or by any Tetraphase Adverse Change in Recommendation.

Subject to each party’s termination rights described in “The Merger AgreementTermination Fee and Expenses” beginning on page 104 of this proxy statement/prospectus, Tetraphase agrees that its obligations to duly call, give notice of and convene the Special Meeting, as applicable, will not be affected, including if a competing proposal or superior proposal shall have been made or received or if the board of directors shall have effected a recommendation change or announced or proposed any intention to do so.

Tetraphase Board Recommendation

Until the earlier of the date of the adoption of the merger agreement proposal by the Tetraphase stockholders or the termination of the Merger Agreement in accordance with its terms, none of the Tetraphase Board or any committee of the Tetraphase Board shall: (1) (A) withhold, withdraw, qualify or modify in a manner adverse to AcelRx, or resolve to or publicly propose to withhold, withdraw, qualify, or modify in a manner adverse to AcelRx, the recommendation that the Tetraphase stockholders vote to adopt the Merger Agreement at the Special Meeting (the “Tetraphase Board Recommendation,” (B) remove the Tetraphase Board Recommendation from this proxy statement/prospectus or (C) approve, recommend or declare advisable, or publicly propose to approve, recommend or declare advisable, any Acquisition Proposal (any action described in this clause (1) being referred to as a “Tetraphase Adverse Change in Recommendation”) or (2) adopt, approve, recommend, submit to stockholders or declare advisable, or propose to adopt, approve, recommend, submit to stockholders or declare advisable, or allow Tetraphase or any of its subsidiaries to execute or enter into any letter of intent (whether or not binding), term sheet, merger agreement, acquisition agreement, option agreement, agreement in principle or similar agreement providing for any Acquisition Proposal, or requiring Tetraphase to abandon, terminate, delay or fail to consummate the Contemplated Transactions (other than an Acceptable Confidentiality Agreement).

The Tetraphase Board may, however, prior to the adoption of the merger agreement proposal by the Tetraphase stockholders, effect a Tetraphase Adverse Change in Recommendation or terminate the Merger Agreement to substantially concurrently enter into a binding written definitive acquisition agreement providing for the consummation of a transaction constituting a Superior Offer (a “Specified Agreement”) and pay the termination fee pursuant to the Merger Agreement if (and only if):

 

   

a bona fide written Acquisition Proposal is made to Tetraphase (that has not been withdrawn);

 

   

such Acquisition Proposal did not result from a material breach of certain Tetraphase non-solicitation obligations in the Merger Agreement;

 

   

the Tetraphase Board determines in good faith, after consultation with outside legal counsel and independent financial advisors, that such Acquisition Proposal is a Superior Offer and that the failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements;

 

   

Tetraphase provides AcelRx prior written notice of its intention to consider making a Tetraphase Adverse Change in Recommendation or terminate the Merger Agreement pursuant to the Superior Offer Termination Right at least four business days prior to making any such Tetraphase Adverse Change in Recommendation or termination (a “Determination Notice”);

 

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Tetraphase has made available to AcelRx the identity of the offeror, a summary of the material terms and conditions of the Acquisition Proposal and copies of all written materials and other documents required under the non-solicitation provisions of the Merger Agreement;

 

   

Tetraphase has given AcelRx the four business days after the Determination Notice to propose revisions to the terms of the Merger Agreement or make other proposals and shall have made available its representatives to negotiate with AcelRx with respect to such proposed revisions or other proposal, if any (provided, that AcelRx may revise such offer or proposal in response to any revisions to a Superior Offer);

 

   

after considering any such revised proposal from AcelRx, including whether such proposal was a written, binding and irrevocable offer, and the results of any such negotiations and giving effect to the proposals made by AcelRx, if any, after consultation with outside legal counsel and its independent financial advisors, the Tetraphase Board shall have determined in good faith that such Acquisition Proposal is a Superior Offer and that the failure to make the Tetraphase Adverse Change in Recommendation and/or terminate the Merger Agreement pursuant to the Superior Offer Termination Right could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements; and

 

   

if Tetraphase intends terminate the Merger Agreement to enter into a Specified Agreement, Tetraphase has complied with the termination provisions of the Merger Agreement pursuant to the Superior Offer Termination Right, including the payment of the termination fee.

If there are any material amendments to such Acquisition Proposal, a new Determination Notice must be delivered to AcelRx except the references to four business days will be reduced to two business days.

Further, the Tetraphase Board may, prior to the adoption of the merger agreement proposal by the Tetraphase stockholders, make a Tetraphase Change of Recommendation in response to a Change in Circumstance if (and only if):

 

   

the Tetraphase Board determines in good faith, after consultation with Tetraphase’s outside legal counsel, that the failure to take such action could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements;

 

   

Tetraphase has given AcelRx a Determination Notice at least four business days prior to making any such Tetraphase Adverse Change in Recommendation;

 

   

Tetraphase has specified the Change in Circumstance in reasonable detail including a summary of the material facts and circumstances involved in such Change in Circumstance;

 

   

Tetraphase has given AcelRx the four business days after the Determination Notice to propose revisions to the terms of the Merger Agreement or make other proposals and shall have made available its representatives to negotiate with AcelRx with respect to such proposed revisions or other proposal, if any, such that the applicable Change in Circumstance would no longer necessitate a Tetraphase Adverse Change in Recommendation under the Merger Agreement; and

 

   

after considering any such proposal, including whether such proposal was a written, binding and irrevocable offer, and the results of such negotiations and giving effect to the proposals made by AcelRx, if any, after consultation with outside legal counsel and its independent financial advisors, the Tetraphase Board shall have determined in good faith that the failure to make the Tetraphase Adverse Change in Recommendation could reasonably be expected to be inconsistent with the fiduciary duties of the Tetraphase Board to the Tetraphase stockholders under applicable legal requirements.

If there is a material change to the status of such Change in Circumstance, a new Determination Notice must be delivered to AcelRx except the references to four business days will be reduced to two business days.

 

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“Acquisition Proposal” means any offer or proposal (other than an offer or proposal by AcelRx) for an Acquisition Transaction.

“Acquisition Transaction” means any transaction or series of related transactions (other than the Contemplated Transactions) for: (i) any acquisition or purchase from Tetraphase or any of its subsidiaries by any person or “group” (as defined in or under Section 13(d) of the Exchange Act), directly or indirectly, of more than a 15% beneficial or record interest in the total outstanding voting securities of any class (or instruments convertible into or exercisable or exchangeable for more than 15% of any such class) of Tetraphase, including pursuant to a stock purchase, merger, consolidation, tender offer, share exchange or other transaction involving Tetraphase or any of its subsidiaries; (ii) any tender offer (including self-tender) or exchange offer that if consummated would result in any person or “group” (as defined in or under Section 13(d) of the Exchange Act) owning (beneficially or on record) more than 15% of the total outstanding voting securities of any class (or instruments convertible into or exercisable or exchangeable for more than 15% of any such class) of Tetraphase; (iii) any merger, consolidation, business combination, share exchange, issuance of securities, acquisition of securities, reorganization, recapitalization or other similar transaction for more than 15% of the voting securities of Tetraphase or the consolidated assets of Tetraphase or its subsidiaries, taken as a whole; (iv) any sale, lease, exchange, transfer, exclusive license or disposition, in each case, other than in the ordinary course of business, of more than 15% of the consolidated assets of Tetraphase or its subsidiaries, taken as a whole (measured by the lesser of book or fair market value thereof); or (v) any combination of the foregoing.

“Change in Circumstance” means any material event, development or change in circumstances with respect to Tetraphase and its subsidiaries that (a) was neither known to, nor was reasonably foreseeable by, the Tetraphase Board on or prior to the date of the Merger Agreement and (b) does not relate to an Acquisition Proposal.

“Superior Offer” means any bona fide written Acquisition Proposal involving an Acquisition Transaction that is not subject to any financing contingency, which the Tetraphase Board shall have determined (after consultation with its independent financial advisor and its outside legal counsel) (a) is reasonably likely to be consummated in accordance with its terms, taking into account all legal, regulatory and financing aspects (including certainty of financing and certainty of closing) of the proposal, the person making the proposal and other aspects of the Acquisition Proposal that the Tetraphase Board deems relevant and (b) if consummated, would be more favorable to the Tetraphase stockholders (in their capacity as such) and creditors than the transaction contemplated under the Merger Agreement; provided, that for purposes of the definition of “Superior Offer”, the references to “15%” in the definition of Acquisition Proposal shall be deemed to be references to “80%.”

Efforts to Consummate the Merger; Regulatory Matters

Each of AcelRx, Merger Sub and Tetraphase have agreed to use its reasonable best efforts to cause the closing of the Merger to occur and effect the Contemplated Transactions, including to:

 

   

make all filings (if any) and give all notices (if any) required to be made and given in connection with the Merger and the other Contemplated Transactions;

 

   

use reasonable best efforts to obtain each consent (if any), including pursuant to any applicable legal requirement and under any contracts, necessary to permit the consummation of the Merger (provided, neither AcelRx nor Tetraphase will be required to pay any monies or agree to any material undertaking in connection with any such consent that may be required); and

 

   

use reasonable best efforts to lift any restraint, injunction or other legal bar to the Merger.

Each of AcelRx and Tetraphase agreed to, as soon as practicable after the date of the Merger Agreement, cooperate with each other and use reasonable best efforts to file all governmental notices, reports and other documents required to be filed with respect to the Merger and the other Contemplated Transactions, and to submit promptly any information reasonably requested by any governmental body. Tetraphase and AcelRx must

 

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also (i) give the other party prompt notice upon becoming aware of the commencement or known threat of commencement of any legal proceeding by or before any governmental body with respect to the Merger or any of the other Contemplated Transactions, (ii) keep the other party reasonably informed as to the status of any such legal proceeding or threat, and (iii) in connection with any such legal proceeding, permit authorized representatives of the other party to be present at each meeting or conference relating to any such legal proceeding and to have access to and be consulted in connection with any document, opinion or proposal made or submitted to any governmental body in connection with any such legal proceeding.

Termination

The Merger Agreement may be terminated, and the Merger abandoned, at any time prior to the Effective Time under the following circumstances:

 

   

by mutual written consent of AcelRx and Tetraphase;

 

   

by either AcelRx or Tetraphase if a court of competent jurisdiction or other governmental body has issued a final and nonappealable order, or has taken any other final and nonappealable action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; provided, that this termination right is not available to AcelRx or Tetraphase if the issuance of such final and nonappealable order results primarily from the failure on the part of AcelRx or Tetraphase, respectively, to perform any covenant or obligation in the Merger Agreement required to be performed by it at or prior to the Effective Time;

 

   

by either AcelRx or Tetraphase if the Tetraphase stockholders have taken a final vote on the proposal to adopt the Merger Agreement at the Special Meeting, as adjourned or postponed from time to time, and the Merger Agreement has not been adopted (the “Approval Failure Termination Right”);

 

   

by AcelRx at any time prior to the adoption of the Merger Agreement by the Tetraphase stockholders, if, whether or not permitted to do so: (i) the Tetraphase Board or any committee thereof has made a Tetraphase Adverse Change in Recommendation; (ii) Tetraphase, the Tetraphase Board or any committee thereof has adopted, approved, recommended, submitted to stockholders, declared advisable, executed or entered into, or resolved to do the same, any letter of intent, term sheet, merger agreement, acquisition agreement, option agreement, agreement in principle or similar agreement providing for any Acquisition Proposal, or requiring Tetraphase to abandon, terminate, delay or fail to consummate the Contemplated Transactions (other than an Acceptable Confidentiality Agreement); (iii) following the public disclosure of an Acquisition Proposal (other than a tender or exchange offer which is the subject of clause (iv) below), the Tetraphase Board fails to publicly reaffirm its recommendation that the Tetraphase stockholders adopt the Merger Agreement within five business days after AcelRx requests in writing (provided that, AcelRx may only make such request on two occasions); (iv) a tender offer or exchange offer for outstanding shares of Tetraphase Common Stock has been commenced (other than by the AcelRx or an affiliate of AcelRx) and the Tetraphase Board has recommended that the Tetraphase stockholders tender their shares in such tender or exchange offer or, within 10 business days after the commencement of such tender or exchange offer, the Tetraphase Board has failed to recommend against acceptance of such offer; (v) Tetraphase has materially breached its non-solicitation and board recommendation obligations set forth in the Merger Agreement; or (vi) other than in connection with an Acquisition Proposal, Tetraphase has failed to issue a press release that reaffirms the Tetraphase Board’s recommendation that the Tetraphase stockholders adopt the Merger Agreement within five business days after AcelRx requests in writing (provided that, AcelRx may only make such request on two occasions) (each of the foregoing “Triggering Event”), provided, that any such termination pursuant to a Triggering Event must occur within 10 business days of the applicable Triggering Event;

 

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by either AcelRx or Tetraphase if the Merger has not been consummated by July 15, 2020; provided, however, that this termination right is not available to either party if the failure to consummate the Merger by July 15, 2020 resulted primarily from such party’s failure to perform any of its obligations under the Merger Agreement at or prior to the Effective Time (the “Termination Date Termination Right”);

 

   

by Tetraphase at any time prior to the adoption of the Merger Agreement by the Tetraphase stockholders, in order to, substantially concurrent with such termination, enter into a Specified Agreement if (i) Tetraphase has not materially breached certain of its non-solicitation and board recommendation obligations set forth in the Merger Agreement with respect to such Superior Offer, (ii) the Tetraphase Board has authorized Tetraphase to enter into such Specified Agreement and (iii) substantially concurrently with such termination, Tetraphase pays the termination fee described below (the “Superior Offer Termination Right”);

 

   

by AcelRx if Tetraphase breaches any of it representations and warranties or covenants or obligations contained in the Merger Agreement such that the applicable closing condition would not be satisfied (or, if capable of being cured by July 15, 2020, shall remain uncured for 30 days following written notice from AcelRx to Tetraphase of such breach); provided, that this termination right is not available if AcelRx or Merger Sub is then in material breach of any of its representations, warranties, covenants or obligations under the Merger Agreement (the “Tetraphase Breach Termination Right”); or

 

   

by Tetraphase if AcelRx breaches any of it representations and warranties or covenants or obligations contained in the Merger Agreement such that the applicable closing condition would not be satisfied (or, if capable of being cured by July 15, 2020, shall remain uncured for 30 days following written notice from Tetraphase to AcelRx of such breach); provided, that this termination right is not available if Tetraphase is then in material breach of any of its representations, warranties, covenants or obligations under the Merger Agreement.

If the Merger Agreement is terminated in accordance with the termination provisions described above, it will have no effect or liability thereunder on the part of any party thereto, subject to certain exceptions including any obligation to pay the termination fees and expenses described below. No such termination, however, will relieve AcelRx, Merger Sub or Tetraphase, as applicable, from liability for intentional common fraud or Tetraphase’s willful breach of its pre-closing operating covenants under the Merger Agreement by entering into or otherwise initiating bankruptcy proceedings.

Termination Fee and Expenses

AcelRx, Merger Sub and Tetraphase will generally each pay its own fees and expenses in connection with the Merger, whether or not the Merger is consummated. However, AcelRx and Tetraphase will share equally all fees and expenses, other than attorneys’ fees, incurred in connection with the filing, printing and mailing of this proxy statement/prospectus and the registration statement of which this proxy statement/prospectus is a part and any amendments or supplements thereto.

In addition, Tetraphase must pay a termination fee of $810,000 to AcelRx, if:

 

   

Tetraphase terminates the Merger Agreement pursuant to the Superior Offer Termination Right, which termination fee must be paid prior to or concurrently with the termination of the Merger Agreement and execution of the Specified Agreement;

 

   

AcelRx terminates the Merger Agreement due to a Triggering Event, which termination fee must be paid two business days after such termination;

 

   

Tetraphase or AcelRx terminates the Merger Agreement pursuant to the Approval Failure Termination Right;

 

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Tetraphase or AcelRx terminates the Merger Agreement pursuant to the Termination Date Termination Right; or

 

   

AcelRx terminates the Merger Agreement pursuant to the Tetraphase Breach Termination Right.

With respect to the last three bullets above, the Termination Fee is payable by Tetraphase only if (i) prior to such termination, an Acquisition Proposal is publicly announced and not withdrawn; and (ii) within 12 months of such termination Tetraphase has consummated an Acquisition Proposal or entered into a definitive agreement with respect to any Acquisition Proposal that is thereafter consummated; provided, that for purposes of this clause (ii) the references to “15%” in the definition of “Acquisition Transaction” shall be deemed to be references to “50%”. If such conditions are met, Tetraphase must pay to AcelRx the termination fee within two business days of consummation of such Acquisition Proposal.

Further, if the Merger Agreement is terminated pursuant to the Approval Failure Termination Right, Tetraphase must reimburse AcelRx for any transaction expenses, including disbursements and fees of outside legal counsel and outside strategic advisors, incurred by AcelRx in connection with the Merger Agreement or the Contemplated Transactions, up to $200,000. Such reimbursement must be paid by Tetraphase within two business days after AcelRx’s demand for reimbursement. Such reimbursement may only be paid on one occasion. If Tetraphase fails to promptly pay the termination fee or such reimbursement when such payment becomes payable, Tetraphase must also pay AcelRx its reasonable and documented costs and expenses (including reasonable and documented fees of outside legal counsel) in connection with enforcing its right to such payment, together with interest on such payment at the prime rate published in The Wall Street Journal in effect on the date such payment was required to be made, plus 2% per annum, through the date such payment was actually received.

If AcelRx receives full payment of the termination fee, then the receipt of the termination fee by AcelRx will be the sole and exclusive remedy of AcelRx and Merger Sub for any liability or damage relating to or arising out of the Merger Agreement or the Merger (other than any reimbursement of AcelRx’s expenses, if applicable); however, no such payment will relieve AcelRx, Merger Sub or Tetraphase, as applicable, from liability or damages for any intentional common law fraud.

Conduct of Business Pending the Merger

Tetraphase has agreed to, until the earlier of the Effective Time and the termination of the Merger Agreement in accordance with its terms and subject to certain exceptions (including such exceptions as disclosed in the disclosure schedules delivered by Tetraphase to AcelRx in connection with the Merger Agreement, as otherwise contemplated by the Merger Agreement, as required by legal requirements or existing Tetraphase contracts that have been made available to AcelRx or that are otherwise not required to be made available pursuant to the terms of the Merger Agreement, or with AcelRx’s written consent (not to be unreasonably withheld, conditioned or delayed)), use commercially reasonable best efforts to (i) cause each of Tetraphase and its subsidiaries to conduct its business and operations in the ordinary course and in accordance in all material respects with past practice and to pay its debt, payables and taxes when due (including taxes due in connection with the vesting or settlement of Tetraphase RSUs or Tetraphase PRSUs pursuant to the Merger Agreement), and (ii) attempt to ensure that each of Tetraphase and its subsidiaries preserves intact the material components of its current business organization and maintains its relations and goodwill with all material suppliers, material customers, material licensors and governmental bodies.

In addition, Tetraphase has agreed not to, except as disclosed in the disclosure schedules delivered by Tetraphase to AcelRx in connection with the Merger Agreement, as otherwise contemplated by the Merger Agreement, as required by legal requirements, or with AcelRx’s written consent (not to be unreasonably withheld, conditioned or delayed):

 

   

declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock, or repurchase, redeem or otherwise reacquire any shares of capital stock or other

 

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securities, other than: (A) dividends or distributions between or among any of Tetraphase or its subsidiaries to the extent consistent with past practice; (B) pursuant to Tetraphase’s right to repurchase restricted stock held by an employee of Tetraphase upon termination of such employee’s employment; or (C) in connection with the withholding of shares of Tetraphase Common Stock to satisfy tax obligations with respect to the exercise of Tetraphase Options, vesting of Tetraphase RSUs or settlement of Tetraphase PRSUs;

 

   

sell, issue, grant or authorize the sale, issuance or grant of: (A) any capital stock or other security; (B) any option, call, warrant or right to acquire any capital stock or other security; or (C) any instrument convertible into or exchangeable for any capital stock or other security (except that Tetraphase may issue shares of Tetraphase Common Stock upon the valid exercise of Tetraphase Options or Tetraphase Warrants outstanding as of the date of the Merger Agreement);

 

   

amend or waive any of its rights under, or accelerate the vesting under, any provision of any of the Tetraphase Option Plans, any provision of any agreement evidencing any outstanding stock option, any restricted stock unit grant, or performance-based vesting restricted stock unit grant, or otherwise modify any of the terms of any outstanding option, restricted stock unit, warrant or other security or any related contract;

 

   

subject to certain exceptions under the Merger Agreement, amend, terminate or grant any waiver under any standstill agreements;

 

   

amend or permit the adoption of any amendment to the Tetraphase Charter or Tetraphase Bylaws or other charter or organizational documents;

 

   

(A) acquire any equity interest or other interest in any other entity; (B) form any subsidiary; (C) effect or become a party to, or adopt a plan of complete or partial liquidation, dissolution, business combination, amalgamation, merger, consolidation, employee restructuring, recapitalization, other reorganization of Tetraphase or its subsidiaries, or any share exchange, reclassification of shares, stock split, reverse stock split, division or subdivision of shares, consolidation of shares or similar transaction;

 

   

make any capital expenditure (except any capital expenditure that: (A) is provided for in Tetraphase’s budget made available to AcelRx prior to the date of the Merger Agreement; or (B) when added to all other capital expenditures made on behalf of all of Tetraphase and its subsidiaries since the date of the Merger Agreement but not provided for in Tetraphase’s budget made available to AcelRx prior to the date of the Merger Agreement, does not exceed $50,000 in the aggregate);

 

   

(A) enter into or become bound by, or permit any of the assets owned or used by it to become bound by, any material contract or any other contract that would be a material contract had it been in effect at the signing of the Merger Agreement; or (B) amend, terminate, or waive any material right or remedy under, any material contract, other than termination thereof upon the expiration of any such contract in accordance with its terms or if permitted by the terms of such material contract, upon a material breach thereof by the counterparty thereto;

 

   

acquire, lease or license any right or other asset from any other person or sell or otherwise dispose of, or lease or license, any right or other asset to any other person (except in each case for assets: (A) acquired, leased, licensed or disposed of by Tetraphase in the ordinary course of business consistent in all material respects with past practice; or (B) that are immaterial to the business of Tetraphase and its subsidiaries, taken as a whole);

 

   

make any pledge of any of its material assets or permit any of its material assets to become subject to any encumbrances, except for encumbrances permitted under the Merger Agreement and encumbrances that do not materially detract from the value of such assets or that do not materially impair the operations of any of Tetraphase or its subsidiaries (taken as a whole);

 

   

lend money to any person (other than intercompany indebtedness and routine travel and business expense advances made to directors or employees, in each case in the ordinary course of business), or,

 

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except in the ordinary course of business consistent in all material respects with past practice, incur or guarantee any indebtedness;

 

   

establish, adopt, enter into any new, amend, terminate or take any action to accelerate rights or payments under, or exercise discretion with respect to performance under, any employee plan or employment agreement (except entering into customary releases with departing employees), pay any bonus or make any profit-sharing or similar payment to, or increase the amount of the wages, salary, commissions, fringe benefits or other compensation (including equity-based compensation, whether payable in stock, cash or other property), any other similar payment (including severance, change of control or termination payments) or remuneration payable to, any of its directors or any of its officers or other employees, except that Tetraphase: (A) may amend existing employee plans to the extent required by applicable legal requirements or the applicable provisions of the Merger Agreement; and (B) may make payments and provide such benefits in accordance with employee plans or employment agreements existing on the date of the Merger Agreement;

 

   

hire any employee;

 

   

other than as required by concurrent changes in GAAP or SEC rules and regulations, change any of its methods of accounting or accounting practices in any respect;

 

   

make, change or revoke any material election in respect of taxes, amend any material tax return, adopt or change any material accounting method in respect of taxes, settle or compromise any material governmental proceeding with respect to taxes, surrender any right or claim of a material refund of tax, request any tax ruling, enter into any closing agreement within the meaning of Section 7121 of the Code (or any similar provision of other applicable legal requirement), enter into any tax sharing or similar contract or arrangement, consent to any extension or waiver of the limitation period applicable to any tax claim or assessment (other than in the ordinary course of an audit);

 

   

commence any legal proceeding, except with respect to: (A) routine matters in the ordinary course of business consistent in all material respects with past practice involving only claims for monetary damages of not more than $200,000 in the aggregate; (B) in such cases where Tetraphase reasonably determines in good faith that the failure to commence suit could result in a material impairment of a valuable aspect of its business (provided that Tetraphase consults with AcelRx in advance and considers the views and comments of AcelRx); or (C) in connection with the Contemplated Transactions or a breach of the Merger Agreement or the other agreements listed in the definition of “Contemplated Transactions;”

 

   

settle any material legal proceeding, other than pursuant to a settlement: (A) that results solely in monetary obligation involving payment by Tetraphase or its subsidiaries of the amount specifically reserved in accordance with GAAP with respect to such legal proceedings on Tetraphase’s most recent audited balance sheet; (B) that results solely in monetary obligation involving only the payment of monies by Tetraphase or its subsidiaries of not more than $50,000 in the aggregate; or (C) pursuant to or otherwise in accordance with the Merger Agreement;

 

   

enter into any contract covering any Tetraphase employee, or make any payment to any Tetraphase employee, that, considered individually or considered collectively with any other such contracts or payments, will, or would reasonably be expected to, be characterized as a “parachute payment” within the meaning of Section 280G(b)(2) of the Code in connection with the Contemplated Transactions;

 

   

recognize, or enter into, any collective bargaining agreement or any other contract or other agreement with any labor organization, except as otherwise required by applicable legal requirements and after advance notice to AcelRx; or

 

   

agree or commit to take any of the actions described above.

 

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In turn, AcelRx has agreed, until the earlier of the Effective Time and the termination of the Merger Agreement in accordance with its terms and subject to certain exceptions (including in connection with a Permitted Acquisition or Permitted Financing, as contemplated by the Merger Agreement, as required by legal requirements or existing AcelRx contracts made available to Tetraphase, or with Tetraphase’s written consent (not to be unreasonably withheld, conditioned or delayed)), to (i) use commercially reasonable efforts to cause each of AcelRx and its subsidiaries to conduct its business and operations in the ordinary course and consistent in all material respects with past practice, (ii) use commercially reasonable efforts to attempt to ensure that each of AcelRx and its subsidiaries preserves intact the material components of its current business organization and maintains its relations and goodwill with all material suppliers, material customers, material licensors, and governmental bodies, and (iii) to promptly notify Tetraphase following its becoming aware of any claim asserted or legal proceeding commenced, or, to AcelRx’s knowledge, threatened against, relating to, involving or otherwise affecting any of AcelRx or its subsidiaries and that relates to any of the Contemplated Transactions.

In addition, AcelRx has agreed not to, subject to certain exceptions (including such exceptions otherwise contemplated by the Merger Agreement, as required by legal requirements or existing AcelRx contracts made available to Tetraphase, or with Tetraphase’s prior written consent (not to be unreasonably withheld, conditioned or delayed)):

 

   

declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock, or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities, other than: (A) dividends or distributions between or among any of AcelRx and its subsidiaries to the extent consistent with past practice; (B) pursuant to AcelRx’s right to repurchase shares of AcelRx restricted stock held by an employee of AcelRx upon termination of such employee’s employment; or (C) in connection with the withholding of shares of AcelRx Common Stock to satisfy tax obligations with respect to the exercise of AcelRx Options or the vesting of AcelRx RSUs;

 

   

other than to the extent required to consummate a Permitted Acquisition or a Permitted Financing, amend or permit the adoption of any amendment to its certificate of incorporation or bylaws or other charter or organizational documents;

 

   

other than a Permitted Acquisition or a Permitted Financing: (A) except in the ordinary course of business consistent in all material respects with past practice acquire any equity interest or other interest in any other entity; (B) effect or become a party to any merger, consolidation, share exchange, business combination, amalgamation, recapitalization, reclassification of shares, stock split, reverse stock split, division or subdivision of shares, consolidation of shares or similar transaction;

 

   

other than in the ordinary course of business consistent in all material respects with past practice or as required by concurrent changes in GAAP or SEC rules and regulations, change any of its methods of accounting or accounting practices in any respect; or

 

   

agree or commit to take any of the actions described above.

“Permitted Acquisition” means a merger, acquisition, share exchange, business combination, in-licensing, out-licensing or similar transaction (other than a Prohibited Acquisition) with respect to AcelRx or one of its subsidiaries, in each case as would not reasonably be expected to, individually or in the aggregate with any other Permitted Acquisition(s), impair or delay, in any material respect, AcelRx’s ability to consummate the Contemplated Transactions on or before July 15, 2020.

“Permitted Financing” means any bona fide financing (including any equity financing involving AcelRx Common Stock (including warrants) or any debt financing, but excluding an equity financing involving AcelRx Preferred Stock).

“Prohibited Acquisition” means any acquisition by AcelRx of an antibiotic product through a merger, acquisition, share exchange, business combination, in-licensing or similar transaction.

 

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Disclosure

Tetraphase and AcelRx must consult with each other before issuing any press release(s) or otherwise making any public statement or making any announcement to any current or former officer, employee, independent contractor, consultant or director, of or to any of Tetraphase or its subsidiaries (to the extent not previously issued or made in accordance with the Merger Agreement) with respect to the Merger or the Contemplated Transactions and shall not issue any such press release, public statement or announcement to current or former officers, employees, independent contractors, consultants or directors, of or to any of Tetraphase or its subsidiaries without the other party’s written consent (not to be unreasonably withheld, delayed or conditioned). However, either party may (a) make any public statement in response to questions from the press, analysts, investors or those attending industry conferences, make internal announcements to employees and make disclosures in the AcelRx SEC Documents or Tetraphase SEC Documents, as applicable, so long as such statements are consistent with previous press releases, public disclosures or public statements made jointly by the parties (or individually, if approved by the other party), (b) subject, to the extent practical, to giving advance notice to the other party and giving due consideration to comments from the other party, issue any such press release or make any such public announcement or statement as may be required by legal requirement and (c) issue any press release or make public statement or filing pursuant to or in connection with any Acquisition Proposal, Superior Offer or Tetraphase Adverse Change in Recommendation. Additionally, Tetraphase is not prohibited from (i) taking and disclosing to the Tetraphase stockholders a position contemplated by Rule 14e-2(a), Rule 14d-9 or Item 1012(a) of Regulation M-A promulgated under the Exchange Act, (ii) making any disclosure to the Tetraphase stockholders if, in the good faith judgment of the Tetraphase Board, after consultation with outside counsel, failure to so disclose would be reasonably likely to be inconsistent with its fiduciary duties under applicable legal requirements or (iii) making any “stop, look and listen” communication pursuant to Rule 14d-9(f) promulgated under the Exchange Act; provided, that none of the foregoing will permit the Tetraphase Board to make a Tetraphase Adverse Change in Recommendation except to the extent expressly permitted by, and in accordance with, the Merger Agreement.

Access to Information; Confidentiality

From the date of the Merger Agreement to the earlier of the Effective Time and the termination of the Merger Agreement in accordance with its terms, each of AcelRx and Tetraphase must upon reasonable notice, and must cause its subsidiaries and each of its and their respective representatives to:

 

   

provide the representatives of the other party with reasonable access during normal business hours to its representatives and assets and to all existing books, records, tax returns, work papers and other documents and information relating to such entity or any of its subsidiaries, in each case as reasonably requested by AcelRx or Tetraphase, as the case may be; and

 

   

provide the representatives of the other party with such copies of the existing books, records, tax returns, work papers and other documents and information relating to such entity and its subsidiaries as reasonably requested by AcelRx or Tetraphase, as the case may be.

Without limiting the generality of any of the foregoing, during such period (but subject to applicable legal requirements, and except in the case of any document relating to any Acquisition Proposal, Superior Offer or Triggering Event), Tetraphase and AcelRx must each promptly provide the other with copies of any notice, report or other document filed with or sent to any governmental body on behalf of any of Tetraphase or its subsidiaries or AcelRx or Merger Sub in connection with the Merger or any of the other Contemplated Transactions a reasonable time in advance of the filing or sending of such document in order to permit a review thereof.

Notwithstanding the foregoing obligations, neither AcelRx nor Tetraphase is required to disclose such information if such disclosure would:

 

   

jeopardize any attorney-client privilege; or

 

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contravene any applicable legal requirement or binding agreement entered into prior to the date of the Merger Agreement.

Securityholder Litigation

Pursuant to the terms of the Merger Agreement, in the event that any litigation related to the Merger Agreement or the Contemplated Transactions is brought by any stockholder of Tetraphase or any holder of Tetraphase’s other securities against Tetraphase and/or its directors or officers, Tetraphase will promptly notify AcelRx of such litigation and will keep AcelRx reasonably informed with respect to the status thereof. Notwithstanding anything to the contrary herein (but subject to the following sentence), Tetraphase will have the right to control the defense of any litigation related to the Merger Agreement or the Contemplated Transactions brought by any stockholder of Tetraphase or any holder of Tetraphase’s other securities against Tetraphase and/or its directors or officers; provided that Tetraphase will give AcelRx the opportunity to participate, at AcelRx’s expense, in the defense of any such litigation and Tetraphase will give due consideration to AcelRx’s advice with respect to such litigation. Notwithstanding anything to the contrary contained in the Merger Agreement, Tetraphase will not settle or enter into any negotiations or agreement with respect to the settlement of any such litigation without the prior written consent of AcelRx, which consent will not be unreasonably conditioned, withheld or delayed (provided that AcelRx will not withhold its consent if the settlement involves (a) solely the payment of an aggregate amount not to exceed $400,000 and supplemental disclosure (provided, further that AcelRx will be given reasonable opportunity to review and comment on any supplemental disclosure and Tetraphase will consider in good faith any reasonable changes thereto proposed by AcelRx), (b) no admission of wrongdoing or liability, (c) no injunctive or similar relief, (d) a complete and unconditional release from the named plaintiff(s) of all defendants in respect of all disclosure claims then pending relating to the Merger Agreement and the Contemplated Transactions and (e) the withdrawal or dismissal of all claims and actions then pending relating to the Merger Agreement and the Contemplated Transactions). Each of AcelRx and Tetraphase has agreed to notify the other promptly of the commencement of any such stockholder litigation of which it has received notice.

Additional Agreements

Preparation of this Proxy Statement/Prospectus

Each party will use commercially reasonable efforts to cause to be delivered to AcelRx a customary consent letter of such party’s independent accounting firm, before the date on which the registration statement of which this proxy statement/prospectus is a part becomes effective. Tetraphase and AcelRx are also required to cooperate with each other and provide each other a reasonable opportunity to review and comment in advance on this proxy statement/prospectus or the registration statement of which this proxy statement/prospectus is a part prior to its filing (or any related amendment or supplement), and any comments of the SEC or any response thereto.

If either of Tetraphase or AcelRx becomes aware of any information that should be set forth in an amendment of, or supplement to, this proxy statement/prospectus or the registration statement of which it is a part, the discovering party must notify the other party, provide the other party (and its counsel) a reasonable opportunity to review and comment in advance on any amendment or supplement to this proxy statement/prospectus or the registration statement of which this proxy statement/prospectus is a part prior to its filing, provide a copy of such amendment or supplement after it is filed with the SEC and cooperate, if appropriate, in the prompt mailing of such amendment or supplement to the Tetraphase stockholders.

Each of AcelRx and Tetraphase shall use commercially reasonable efforts: (i) to cause the registration statement and the proxy statement/prospectus to comply with the applicable rules and regulations promulgated by the SEC; (ii) to promptly notify the other of, cooperate with each other with respect to, provide the other party (and its counsel) with a reasonable opportunity to review and comment on, and respond promptly to, in each case, any comments of the SEC or its staff with respect to the registration statement and the proxy statement/prospectus;

 

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(iii) to provide the other party (and its counsel) with a reasonable opportunity to review and comment on the registration statement and the proxy statement/prospectus, and any amendment or supplement thereto, prior to filing of any such document with the SEC; (iv) to have the registration statement become effective under the Securities Act as promptly as practicable after it is filed with the SEC; and (v) to keep the registration statement effective through the closing of the Contemplated Transactions in order to permit the consummation of the Merger.

As promptly as practicable after the registration statement of which this proxy statement/prospectus is a part is declared effective under the Securities Act, Tetraphase shall use commercially reasonable efforts to cause this proxy statement/prospectus to be mailed to its stockholders entitled to vote at the Special Meeting.

AcelRx has agreed to use commercially reasonable efforts to obtain all regulatory approvals needed to ensure that the AcelRx Common Stock to be issued in the Merger will (to the extent required) be registered or qualified or exempt from registration or qualification under the securities law of every state of the United States in which any registered holder of Tetraphase Common Stock has an address of record on the Record Date for determining the stockholders entitled to notice of and to vote at the Special Meeting; provided, that AcelRx is not required to (i) qualify to do business as a foreign corporation in any jurisdiction in which it is not now qualified or (ii) file a general consent to service of process in any jurisdiction.

Stock Exchange Listing; Delisting and Deregistration

AcelRx will file a Listing of Additional Shares Notification Form with respect to the shares of AcelRx Common Stock to be issued in the Merger. AcelRx has also agreed to use reasonable best efforts to receive an email from Nasdaq stating that their review is complete at or prior to the Effective Time.

Prior to the Effective Time, Tetraphase will cooperate with AcelRx and use its reasonable best efforts to take, or cause to be taken, all actions, and do or cause to be done all things, reasonably necessary, proper or advisable (to the extent that such actions can reasonably be taken prior to the Effective Time) on its part under applicable laws and rules and policies of Nasdaq to enable the delisting by the Surviving Corporation of the shares of Tetraphase Common Stock from Nasdaq and the deregistration of the shares of Tetraphase Common Stock under the Exchange Act as promptly as practicable after the Effective Time.

Resignations

Tetraphase will use commercially reasonable efforts to obtain and deliver, as or prior to the Effective Time, to AcelRx resignations from each officer and director of Tetraphase and its subsidiaries.

Section 16 Matters

Prior to the Effective Time, each of AcelRx and the Tetraphase will take all such steps as may be required by applicable law to cause any dispositions of Tetraphase Common Stock (including derivative securities with respect to Tetraphase Common Stock) and acquisitions of AcelRx equity securities pursuant to the Contemplated Transactions by each individual who is a director or officer of Tetraphase subject to the reporting requirements of Section 16(a) of the Exchange Act to be exempt under Rule 16b-3 promulgated under the Exchange Act.

State Takeover Laws

If any “moratorium,” “fair price,” “business combination,” “control share acquisition” or similar provision of any state anti-takeover legal requirement is or may become applicable to any of the Contemplated Transactions or the transactions contemplated by the CVR Agreement, Tetraphase, the Tetraphase Board, AcelRx and Merger Sub, as applicable, each shall use its respective reasonable best efforts to (a) take such actions as are reasonably necessary so that the Contemplated Transactions may be consummated as promptly as practicable on the terms contemplated thereby and (b) otherwise take all such actions as are necessary to eliminate the effects of any such statute or regulation on such transactions.

 

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Pediatric Trial Waiver

Tetraphase will, prior to the closing of the Merger, in good faith request from the FDA a full waiver under 21 USC 355c(a)(5)(A) of pediatric studies 3472-1 and 3472 from the FDA approval letter dated August 27, 2019 of NDA 21109.

Governance of the Surviving Corporation

The Merger Agreement provides that Merger Sub’s directors and officers immediately prior to the Effective Time will be the directors and officers, respectively, of the Surviving Corporation immediately after the Effective Time. At the Effective Time, the certificate of incorporation and bylaws of the Surviving Corporation will be amended and restated to read as the certificate of incorporation and bylaws set forth as exhibits to the Merger Agreement.

Employee Benefit Matters

Subject to a commercially reasonable transition period and subject to any applicable plan provisions, contractual requirements or legal requirements, AcelRx has agreed to permit all employees of Tetraphase who remain employed by Tetraphase until the closing date of the Merger and remain employed by Tetraphase or become employed by AcelRx or any of its subsidiaries at such date to participate in the employee benefit programs of AcelRx or the applicable subsidiary to the same extent as similarly situated employees of AcelRx. Until the date that is six months following the closing date of the Merger, AcelRx has agreed to provide, or cause to be provided, each continuing employee with, as applicable, (i) a rate of salary, bonus opportunity and commission opportunity payable or otherwise provided to such employee that is substantially comparable in the aggregate to that provided to such employee immediately prior to the Effective Time, and (ii) severance and similar benefits that are no less favorable than the severance and similar benefits provided to the applicable employees of Tetraphase as of the date hereof.

AcelRx has agreed to cause continuing employees to receive customary service credit for prior employment with Tetraphase and, subject to any insurer consents, to use commercially reasonable efforts to (i) waive certain preexisting conditions, exclusions and waiting periods with respect to participation and coverage requirements under AcelRx welfare benefit plans; and (ii) provide each continuing employee with credit for any co-payments and deductibles paid prior to the Effective Time in satisfying any applicable deductible or out-of-pocket requirements under any AcelRx benefit plan that is a welfare plan in which such continuing employees may be eligible to participate after the Effective Time.

The Merger Agreement provides that Tetraphase will, upon AcelRx’s advance request, formally terminate its 401(k) plan prior to the closing of the Merger.

Nothing in the Merger Agreement may be construed to create any right to continued employment with AcelRx, the Surviving Corporation or any of AcelRx’s subsidiaries for any current or former officer, employee, independent contractor, consultant or director, of or to Tetraphase or any of its subsidiaries, and no such person will be deemed to be a third party beneficiary of the Merger Agreement, except to the extent any such person is entitled to certain rights of indemnification under the Merger Agreement as a current or former director or officer of Tetraphase or its subsidiaries.

Representations and Warranties

The Merger Agreement contains representations and warranties by Tetraphase, AcelRx and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the Merger Agreement or in the disclosure schedules delivered by AcelRx and Tetraphase in connection with the Merger Agreement.

 

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These representations and warranties relate to, among other things:

 

   

subsidiaries, corporate organization and qualification, valid existence, good standing and qualification and similar corporate matters;

 

   

certificates of incorporation and bylaws or comparable organizational documents;

 

   

capital structure;

 

   

corporate power and authority to enter into and perform such party’s obligations under the Merger Agreement and the CVR Agreement and to consummate the Contemplated Transactions;

 

   

filing of required AcelRx SEC Documents and Tetraphase SEC Documents;

 

   

compliance of the financial statements included in the AcelRx SEC Documents and the Tetraphase SEC Documents, respectively, with the published rules and regulations of the SEC, the preparation of such statements in accordance with GAAP applied on a consistent basis during the periods involved;

 

   

maintenance of a system of internal control over financial reporting and disclosure controls and procedures;

 

   

absence of certain changes or events;

 

   

absence of pending or threatened legal proceedings or investigations;

 

   

absence of undisclosed liabilities;

 

   

compliance with the laws and orders of any regulatory authority or governmental authority;

 

   

matters related to the FDA and comparable regulatory or governmental authorities;

 

   

compliance with healthcare regulations;

 

   

compliance with anti-corruption laws;

 

   

non-contravention and required third party consents;

 

   

brokers’ fees;

 

   

intellectual property matters;

 

   

tax matters;

 

   

transactions with affiliates; and

 

   

acknowledgements that no other representations or warranties are made other than as set forth in the Merger Agreement.

Additional representations made only by Tetraphase relate to, among other things:

 

   

good and marketable title to property and assets;

 

   

outstanding loans and advances;

 

   

customers, suppliers and manufacturers;

 

   

equipment and real property;

 

   

material contracts;

 

   

holding of and compliance with material governmental authorizations and necessary permits;

 

   

employee benefit plan and ERISA matters;

 

   

labor matters;

 

   

environmental matters;

 

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insurance matters;

 

   

government contracts;

 

   

inapplicability of Section 203 of the DGCL; and

 

   

the stockholder vote required to adopt the Merger Agreement.

Additional representations made only by AcelRx and Merger Sub relate to, among other things:

 

   

purposes and business activities of Merger Sub;

 

   

ownership of Tetraphase Common Stock or any other shares of Tetraphase’s capital stock; and

 

   

issuance of the AcelRx Common Stock in the Merger.

None of the representations or warranties of Tetraphase, AcelRx and Merger Sub will survive the Effective Time.

Amendment of the Merger Agreement; Waiver

AcelRx, Tetraphase and Merger Sub may amend the Merger Agreement at any time prior to the Effective Time with the approval of the respective boards of directors of AcelRx and Tetraphase.

At any time prior to the Effective Time, any party may (i) extend the time for the performance of any obligation or other act of the other parties under the Merger Agreement, (ii) waive any breach or inaccuracies in the representations and warranties of the other party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement or (iii) waive compliance with any covenant, obligation or condition for the benefit of such party contained in the Merger Agreement.

The failure of any party to the Merger Agreement to exercise or assert any of its rights under the Merger Agreement will not constitute a waiver of such rights.

Applicable Law; Jurisdiction; Specific Performance

The Merger Agreement will be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any laws, rules or provisions that would cause the application of the laws of any jurisdiction other than the State of Delaware.

Each of the parties to the Merger Agreement has irrevocably and unconditionally submitted to the exclusive jurisdiction of the Court of Chancery of the State of Delaware and has irrevocably waived any right such party may have to a trial by jury.

Each of the parties to the Merger Agreement has also agreed that irreparable damage may occur and there may not be an adequate remedy at law in the event that any provision of the Merger Agreement were not performed in accordance with their specific terms or were otherwise breached. The parties have further agreed that in the event of any breach or threatened breach by any other party to the Merger Agreement of any covenant or obligation contained in the Merger Agreement, the non-breaching party will be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement. This right to seek specific performance will be in addition to any other remedy available to such non-breaching party at law or in equity.

 

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THE CONFIDENTIALITY AGREEMENT

On July 29, 2019, AcelRx and Tetraphase entered into the Confidentiality Agreement, which contained customary mutual confidentiality and non-solicitation obligations but did not contain a “standstill” obligation. The parties amended the Confidentiality Agreement on January 23, 2020 to extend the confidentiality obligations until December 31, 2020.

THE VOTING AGREEMENTS AND EXCHANGE AGREEMENT

In connection with the execution of the Merger Agreement, AcelRx entered into Voting Agreements with certain Tetraphase equityholders (including certain entities holding shares of Tetraphase Common Stock on their behalf), and collectively beneficially owning approximately 31% of the outstanding voting power of Tetraphase (the “Voting Agreement Equityholder”). The following summary of the Voting Agreements does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Form of Voting Agreement attached to this proxy statement/prospectus as Annex B.

Pursuant to the Voting Agreements, each Voting Agreement Equityholder agreed, among other things, to vote its shares of Tetraphase Common Stock (i) in favor of adopting the Merger Agreement; and (ii) against (A) any Acquisition Proposal and against any other action, agreement or transaction involving Tetraphase that would reasonably be expected to cause Tetraphase to abandon, terminate or fail to consummate the Merger or (B) any liquidation, dissolution, extraordinary dividend or other significant corporate reorganization of Tetraphase. Each Voting Agreement Equityholder that holds Tetraphase Warrants also agreed to (i) exchange its outstanding Tetraphase Common Stock warrants, if applicable, for a fixed number of shares of AcelRx Common Stock and (ii) exchange its outstanding Tetraphase pre-funded common stock warrants, if applicable, for a specified percentage of the per share Merger Consideration.

Each Voting Agreement Equityholder is also restricted from transferring his, her or its shares of Tetraphase Common Stock, subject to certain limited permitted transfers. In addition, each Voting Agreement Equityholder agreed that it will not take any action that Tetraphase is prohibited from taking in respect of Tetraphase’s non-solicitation obligations in the Merger Agreement. Further, each Voting Agreement Equityholder agreed not to commence or participate in any class action with respect to, any litigation related to the Merger Agreement, the Merger or any of the other Contemplated Transactions.

The Voting Agreements will terminate automatically with respect to a Voting Agreement Equityholder, without any notice or other action by any person, upon the first to occur of (a) the termination of the Merger Agreement in accordance with its terms, (b) the Effective Time, (c) any amendment to the Merger Agreement that reduces the amount, or changes the form, of consideration payable to such Voting Agreement Equityholder in the Contemplated Transactions, imposes additional restrictions on such Voting Agreement Equityholder or otherwise materially and adversely impacts such Voting Agreement Equityholder, (d) a Tetraphase Adverse Change in Recommendation or (e) the mutual written consent of AcelRx and such Voting Agreement Equityholder. Upon termination of any Voting Agreement, no party shall have any further obligations or liabilities under such Voting Agreement; provided, however, that a party shall not be relieved from liability for any willful breach of such Voting Agreement prior to termination thereof.

In addition, Tetraphase entered into an Exchange Agreement with one warrantholder under which such warrantholder agreed to exchange its outstanding Tetraphase Common Stock warrants for a fixed number of shares of AcelRx Common Stock. In addition, such warrantholder agreed that it will not take any action that Tetraphase is prohibited from taking in respect of Tetraphase’s non-solicitation obligations in the Merger Agreement. Further, such warrantholder agreed not to commence or participate in any class action with respect to, any litigation related to the Merger Agreement, the Merger or any of the other Contemplated Transactions.

 

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The above summary of the Exchange Agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Form of Exchange Agreement attached to this proxy statement/prospectus as Annex C.

THE CVR AGREEMENT

Prior to the Effective Time of the Merger, AcelRx will enter into the CVR Agreement with a rights agent selected by AcelRx and reasonably acceptable to Tetraphase (the “Rights Agent”) governing the terms of certain consideration payable thereunder. The CVRs represent the right to receive contingent payments, payable to the Rights Agent for the benefit of the holders of CVRs, of up to $12.5 million in the aggregate, payable in cash or shares of AcelRx Common Stock at AcelRx’s election, without interest and less any applicable withholding taxes, and allocated among the CVRs, if the following milestones are achieved:

 

   

$2.5 million upon the achievement of annual net sales of XERAVA in the United States of at least $20.0 million during the calendar year ending on December 31, 2021;

 

   

$4.5 million upon the achievement of annual net sales of XERAVA in the United States of at least $35.0 million during any calendar year ending on or before December 31, 2024; and/or

 

   

$5.5 million upon the achievement of annual net sales of XERAVA in the United States of at least $55.0 million during any calendar year ending on or before December 31, 2024.

The CVR Agreement provides that all milestones or a combination of any two milestones can be earned in the same year, in which case all such applicable milestone amounts shall be payable. If AcelRx elects to pay milestone amounts in shares of AcelRx Common Stock, the number of shares of AcelRx Common Stock shall be determined by reference to the number of shares of AcelRx Common Stock equal to the applicable milestone amount divided by the average closing price of a share of AcelRx Common Stock on the Nasdaq Global Select Market for the 10 most recent trading days that AcelRx Common Stock has traded ending on the trading day one day prior to the date of the applicable payment date. Notwithstanding anything to the contrary in the CVR Agreement, AcelRx shall not be required to pay any milestone amounts in shares of AcelRx Common Stock in excess of a number of shares of AcelRx Common Stock equal to 19.9% of the total number of shares of AcelRx Common Stock issued and outstanding immediately prior to the execution and delivery of the Merger Agreement; provided that this limitation shall not limit any CVR holder’s right to receive any milestone amount in full, and any portion of a milestone amount that would otherwise exceed such limitation shall be paid in cash.

Additionally, commencing upon the closing of the Merger and continuing until the earlier of December 31, 2024 or the achievement of all milestones, AcelRx has agreed to, and has agreed to cause its affiliates and licensees to, use Commercially Reasonable Efforts (as defined in the CVR Agreement) to achieve the milestones. Without limiting the foregoing, AcelRx has further agreed that neither it nor any of its Affiliates shall act in bad faith for the purpose of avoiding achievement of any milestone or the payment of any milestone amount.

The terms of the CVRs described above reflect the parties’ agreement over the sharing of potential economic upside benefits from future net sales of XERAVA and do not reflect anticipated net sales of XERAVA. There can be no assurance that such levels of net sales will occur or that any or all of the payments in respect of the CVRs will be made.

If a milestone is not achieved during any of 2021, 2022, 2023 or 2024, then within 60 days after the end of such applicable year, AcelRx shall deliver to the Rights Agent a milestone non-achievement certificate, which certifies that such milestone has not occurred, accompanied by a statement setting forth, in reasonable detail, a calculation of net sales of XERAVA for the applicable period. The Rights Agent will have 10 business days after receipt of a milestone non-achievement certificate to send each CVR holder a copy of the applicable milestone non-achievement certificate. Unless holders representing at least 40% of the outstanding CVRs send the Rights Agent a written objection to a milestone non-achievement certificate within 180 days of delivery by the Rights

 

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Agent of such milestone non-achievement certificate (i) with respect to the first milestone, or (ii) with respect to 2024 and any of the second, third or fourth milestones, then, in each case, the holders of CVRs will be deemed to have accepted such milestone non-achievement certificate and AcelRx and its affiliates will have no further obligation with respect to the applicable milestone payment. Until December 31, 2025, holders representing at least 40% of the outstanding CVRs will have limited rights to request an audit by an independent accounting firm of AcelRx’s records in order to evaluate and verify AcelRx’s calculation of net sales of XERAVA under the CVR Agreement. If such independent accountant concludes that payment with respect to the achievement of a milestone should have been paid but was not paid when due, then AcelRx will be required to pay any such unpaid amount, plus interest.

The CVR Agreement provides that the holders of CVRs are intended third-party beneficiaries of the CVR Agreement.

The right to payments under the CVRs as evidenced by the CVR Agreement is a contractual right only and will not be transferable, except in the limited circumstances specified in the CVR Agreement, including: (i) upon death of a CVR holder by will or intestacy; (ii) by instrument to an inter vivos or testamentary trust in which the CVRs are to be passed to beneficiaries upon the death of the trustee; (iii) pursuant to a court order; (iv) by operation of law (including by consolidation or merger) or without consideration in connection with the dissolution, liquidation or termination of any corporation, limited liability company, partnership or other entity; (v) in the case of CVRs held in book-entry or other similar nominee form, from a nominee to a beneficial owner and, if applicable, through an intermediary, as allowable by the Depository Trust Company; or (vi) to AcelRx in connection with an abandonment of the CVR or in connection with a negotiated transaction.

The foregoing description of the CVR Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the CVR Agreement, the form of which is filed as Annex D to this proxy statement/prospectus.

THE CO-PROMOTION AGREEMENT

Concurrently with the Merger Agreement, AcelRx and Tetraphase entered into the Co-Promotion Agreement, pursuant to which AcelRx agreed that its sales force would detail and promote Tetraphase products, and Tetraphase agreed that its sales force would detail and promote AcelRx’s products, in the United States in accordance with marketing plans to be agreed to by the parties.

The co-promotion activities are overseen by a joint marketing and sales committee, which is responsible for developing marketing plans for the products, provided, that each party is responsible for developing the marketing strategy for, creating the promotional materials for, and handling sales and distribution of, its own products.

Each of AcelRx and Tetraphase has agreed that each member of its sales force will use reasonable efforts to conduct at least 40 details of the other party’s product per month with at least 20 as the primary presentation, and to conduct details at least ten separate institutions, subject to certain adjustments.

There are no payments being made between the parties under the agreement, and each party will continue to receive all the revenues from the sales of its own products. In addition, each party will bear its own costs and expenses incurred by it in the conduct of activities under the Co-Promotion Agreement.

The Co-Promotion Agreement has a five-year term, unless terminated earlier pursuant to its terms. Either party may terminate the Co-Promotion Agreement upon a 15-month notice period. Additionally, either party may terminate the Co-Promotion Agreement in the event of an uncured material breach or insolvency event of the other party and in the event of other specified circumstances relating to the other party’s products, such as safety.

 

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In the event of a change of control of either party, the other party may terminate the agreement upon one month’s notice and, upon a material breach by the change of control party, may be entitled to receive a 10% royalty for a specified period of time (but not to exceed eighteen months).

THE EXCLUSIVITY AGREEMENT

AcelRx and Tetraphase also entered into an exclusivity agreement dated March 7, 2020, which was extended by the parties on March 12, 2020. Pursuant to the exclusivity agreement and subject to the terms set forth therein, Tetraphase agreed not to solicit or knowingly encourage or facilitate certain proposals regarding a possible acquisition transaction, engage in discussions or negotiations or furnish non-public information in connection with a possible acquisition transaction, or enter into an agreement with a party other than AcelRx with respect to an acquisition transaction. The exclusivity agreement terminated upon the execution of the Merger Agreement.

 

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INFORMATION ABOUT TETRAPHASE

The information provided under “Information About Tetraphase” reflects certain information set forth in Tetraphase’s Annual Report on Form 10-K for the year ended December 31, 2019, and, except as indicated by the context, has not been updated to reflect subsequent developments.

Tetraphase’s Business

Tetraphase is a biopharmaceutical company using its proprietary chemistry technology to create, develop and commercialize novel tetracyclines for serious and life-threatening conditions, including bacterial infections caused by multidrug-resistant (“MDR”), bacteria. There is a medical need for new antibiotics as resistance to existing antibiotics increases. In recognition of this need, Tetraphase developed its product, Xerava (eravacycline), a fully synthetic fluorocycline, as an intravenous (“IV”), antibiotic for use as a first-line empiric monotherapy for the treatment of MDR infections, including MDR Gram-negative infections, such as those found in complicated intra-abdominal infections (“cIAI”).

On August 27, 2018, the FDA approved Xerava for the treatment of cIAI in adults. Approval of Xerava was based on Tetraphase’s IGNITE (Investigating Gram-Negative Infections Treated with Eravacycline) phase 3 program. In the first pivotal phase 3 trial in the IGNITE program in patients with cIAI, twice-daily IV Xerava met the primary endpoint by demonstrating statistical non-inferiority of clinical response compared to ertapenem, a carbapenem and a standard of care treatment for cIAI, and was well-tolerated. Tetraphase refers to this trial as IGNITE1. In Tetraphase’s other pivotal phase 3 clinical trial of Xerava in patients with cIAI, twice-daily IV Xerava met the primary endpoint by demonstrating statistical non-inferiority of clinical response compared to meropenem, another standard of care treatment, and was well-tolerated. Tetraphase refers to this trial as IGNITE4. In both IGNITE1 and IGNITE4, Xerava achieved high cure rates in patients with poly-microbial infections (Gram-negative, Gram-positive, and anaerobic infections), including resistant isolates.

In October 2018, Tetraphase commenced sales of Xerava in the United States. Tetraphase is commercializing Xerava in the United States using a small, targeted commercial and medical affairs groups to build and promote access to Xerava. As a result, as of March 3, 2020, Tetraphase has approximately 27 sales representatives, 3 regional business directors, 3 strategic market access executives and approximately 7 medical affairs personnel supporting Xerava in the United States.

On September 20, 2018, based on the results of IGNITE, the European Commission granted marketing authorization for Xerava for the treatment of cIAI in adults in all 28 countries of the European Union (“EU”), plus Norway, Iceland and Liechtenstein. In February 2018 Tetraphase entered into a license agreement with Everest Medicines Limited (“Everest Medicines”), granting Everest Medicines commercialization rights to eravacycline in China and other Asian territories. In June 2018, Everest Medicines submitted an Investigational New Drug (“IND”) application to the China National Medical Products Administration (formerly China FDA) for a phase 3 clinical trial of eravacycline in cIAI. The application was approved, and Everest Medicines began enrolling patients in this phase 3 trial in the second quarter of 2019.

Tetraphase believes that the ability of Xerava to cover MDR Gram-negative bacteria, as well as MDR Gram-positive, anaerobic and atypical bacteria, may enable Xerava to become the drug of choice for first-line empiric treatment of patients with cIAI. In in vitro studies, Xerava has demonstrated the ability to cover a wide variety of MDR Gram-negative, Gram-positive, anaerobic and atypical bacteria, including MDR Klebsiella pneumoniae and MDR Acinetobacter. Multidrug-resistant Klebsiella pneumoniae (carbapenem-resistant Enterobacteriaceae (CRE)) and MDR Acinetobacter are listed as urgent threats and Extended-spectrum beta-lactamase (ESBL)-producing Enterobacteriaceae is listed as serious threats by the Centers for Disease Control and Prevention in a 2019 report. They are also listed as “Priority 1; Critical Pathogens” in the World Health Organization’s priority pathogens list for R&D, published in February 2017. CREs were a confirmed area of great concern by the World Health Organization in an April 2014 global surveillance report. Gram-negative bacteria that are resistant to multiple available existing antibiotics are increasingly common and a growing threat to public health.

 

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In addition to Xerava, Tetraphase has also developed other fluorocycline antibiotic compounds, TP-6076 and TP-271, and TP-2846, a tetracycline for the treatment of acute myeloid leukemia. Tetraphase developed TP-6076, a fully-synthetic fluorocycline derivative, as a lead candidate under its second-generation program to target unmet medical needs, including MDR Gram-negative bacteria such as carbapenem-resistant Enterobacteriaceae and carbapenem-resistant or pan-resistant Acinetobacter baumanii. To date, Tetraphase has conducted phase 1 single-ascending and multiple-ascending dose studies evaluating the safety, tolerability and pharmacokinetics of IV TP-6076 in healthy volunteers. Tetraphase also conducted a Phase 1 study to assess the bronchopulmonary disposition, pharmacokinetics, and safety of TP-6076 in healthy volunteers. TP-271 is a fully-synthetic fluorocycline that Tetraphase developed for respiratory disease caused by bacterial biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia. To date, Tetraphase has completed single-ascending and multiple-ascending dose trials for IV and oral formulations of TP-271. Tetraphase has completed pre-clinical toxicology studies for TP-2846 and intends to file an IND with the FDA for TP-2846 upon identifying a partner.

Going Concern

Tetraphase has identified conditions and events that raise substantial doubt about its ability to continue as a going concern. As of December 31, 2019, Tetraphase had cash, cash equivalents and short-term investments of $21.2 million. Based on its recurring losses and cash outflows from operations since inception, expectation of continuing operating losses and cash outflows from operations for the foreseeable future and the need to raise additional capital to finance its future operations, Tetraphase has concluded that there is substantial doubt about its ability to continue as a going concern. For a further discussion of Tetraphase’s liquidity, please refer to page 166 of this proxy statement/prospectus under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Note 1 to Tetraphase’s consolidated financial statements, which are incorporated by reference into this proxy statement/prospectus from Tetraphase’s Annual Report on Form 10-K for the year ended December 31, 2019.

Drug-Resistant Antibiotic Market

Physicians commonly prescribe antibiotics to treat patients with acute and chronic infectious diseases that are either presumed or known to be caused by bacteria. Inappropriate use of antibiotics and lack of new therapies has resulted in a rapid increase in bacterial infections that are resistant to multiple antibacterial agents. Global microbial resistance, including bacteria, viruses and fungi, now results in the death of at least 700,000 people each year, according to The Review on Antimicrobial Resistance, an analysis commissioned by the U.K. government in 2016. The report predicts that failing to develop effective treatments for drug-resistant bacteria by 2050 would lead to 10 million extra deaths a year. Further, in a 2019 report, the CDC estimated that every year in the United States, more than 2.8 million people acquire serious infections that are resistant to one or more of the antibiotics designed to treat those infections, with at least 35,000 dying as a result, and many more dying from other conditions that are complicated by the occurrence of an antibiotic-resistant infection. These antibiotic-resistant infections add considerable and avoidable costs to the United States healthcare system. In a September 2013 report, the CDC noted that the total economic cost of antibiotic-resistant infections to the United States economy has been estimated to be as high as $20 billion in excess direct healthcare costs. Over the last decade there has been an increase in antibiotics that target resistant Gram-positive bacteria, but there still remain limited therapeutic options for resistant Gram-negative infections. According to the CDC, among all of the bacterial resistance problems, Gram-negative pathogens are particularly worrisome because they are becoming resistant to nearly all drugs that would be considered for treatment, with the most serious Gram-negative infections being healthcare associated and the most common pathogens being Enterobacteriaceae, Pseudomonas aeruginosa and Acinetobacter.

Antibiotics that treat bacterial infections can be classified as broad-spectrum or narrow-spectrum. Antibiotics that are active against a mixture of Gram-positive, Gram-negative and anaerobic bacteria are referred to as broad-spectrum. Antibiotics that are active only against a select subset of bacteria are referred to as narrow-spectrum.

 

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Because it usually takes from 24 to 72 hours from the time a specimen is received in the laboratory to definitively diagnose a particular bacterial infection, physicians may be required to prescribe antibiotics for serious infections without having identified the bacteria. As such, effective first-line treatment of serious infections, commonly referred to as empiric treatment, requires the use of broad-spectrum antibiotics with activity against a broad range of bacteria