On June 24, 2020, La Jolla entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tetraphase, a biopharmaceutical company focused on commercializing its novel tetracycline XERAVA to treat serious and life‑threatening infections, and TTP Merger Sub, Inc., a wholly owned subsidiary of La Jolla. On July 28, 2020, La Jolla completed its acquisition of Tetraphase for $43 million in upfront cash plus potential future cash payments of up to $16 million pursuant to contingent value rights (“CVRs”). The holders of the CVRs are entitled to receive potential future cash payments of up to $16 million in the aggregate upon the achievement of certain net sales of XERAVA in the U.S. as follows: (i) $2.5 million if 2021 XERAVA U.S. net sales are at least $20 million; (ii) $4.5 million if XERAVA U.S. net sales are at least $35 million during any calendar year ending on or prior to December 31, 2024; and (iii) $9 million if XERAVA U.S. net sales are at least $55 million during any calendar year ending on or prior to December 31, 2024. Following the acquisition, Tetraphase became a wholly owned subsidiary of La Jolla.

The acquisition of Tetraphase was accounted for as a business combination using the acquisition method pursuant to FASB ASC Topic 805. As the acquirer for accounting purposes, La Jolla has estimated the Purchase Price, assets acquired and liabilities assumed as of the acquisition date, with the excess of the Purchase Price over the fair value of net assets acquired recognized as goodwill. The estimated fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value.

The Purchase Price is comprised of the upfront cash of $43 million and the estimated fair value of potential future cash payments pursuant to the CVRs. The estimated fair value of assets acquired was $54.7 million, and the estimated fair value of liabilities assumed was $9.1 million.

The Purchase Price allocation as of the acquisition date is presented as follows (in thousands):

	July 28,
	2020
Cash	$	42,990
Fair value of CVRs		2,610
Total Purchase Price	$	45,600

Cash and cash equivalents	$	8,778
Accounts receivable		1,187
Inventory		4,767
Prepaid expenses and other current assets		1,218
Property and equipment		58
Right-of-use lease assets		2,302
Restricted cash		699
Identifiable intangible assets		15,520
Goodwill		20,123
Accounts payable		(1,400	)
Accrued expenses		(2,979	)
Lease liabilities, current portion		(967	)
Lease liabilities, less current portion		(1,420	)
Other noncurrent liabilities		(2,286	)
Total Purchase Price	$	45,600

The estimated fair value of potential future cash payments pursuant to the CVRs are based on a Monte Carlo simulation are classified as Level 3 in the ASC Topic 820-10, three-tier fair value hierarchy.

CVRs are measured at fair value on a recurring basis. Subsequent to July 28, 2020 and through December 31, 2020, the Company recorded a $0.8 million gain as other income in the consolidated statements of operations resulting from the change in fair value of CVRs.

The Company recorded a $3.3 million fair value step-up adjustment to Tetraphase’s inventory as of the acquisition date. Raw material components and active pharmaceutical ingredients were recorded based on estimated replacement cost. Finished drug product was valued at estimated selling cost, adjusted for costs of selling effort and a reasonable profit allowance for such selling effort from the viewpoint of a market participant. This fair value step-up adjustment is recorded as cost of product sales when the inventory is sold to customers, $2.5 million of which was included in cost of product sales subsequent to July 28, 2020 and through December 31, 2020.

Identifiable intangible assets consist of certain technology and trade names acquired from Tetraphase, and include the value of the Harvard, Paratek and Everest Licenses (see Note 10). The acquired intangible assets have definite useful lives and are being amortized on a straight-line basis over an estimated useful life of 10 years.

Goodwill represents the excess of the Purchase Price over the fair value of the net assets acquired as of the acquisition date. Goodwill represents the value of the stronger platform to increase patient access to the Company’s commercial products and the operational synergies of the combined Company. Goodwill has an indefinite useful life and is not amortized. The goodwill is only deductible for tax purposes if the Company makes a U.S. Internal Revenue Code Section 338 (“Section 338”) election by April 15, 2021. The Company is currently evaluating whether to make a Section 338 election.

Subsequent to July 28, 2020 and through December 31, 2020, XERAVA U.S. net sales were $4.2 million and operating losses, excluding corporate overhead costs, attributable to Tetraphase were $10.3 million, inclusive of $0.6 million of intangible asset amortization included in selling, general and administrative expense and $2.5 million of the inventory fair value step-up adjustment included in cost of product sales.

Acquisition-related expenses, which were comprised primarily of legal fees, were $0.9 million for the year ended December 31, 2020, and were included in selling, general and administrative expense.