The clock is ticking at Essential Therapeutics Inc.

Mired in financial trouble, the company is staring at a possible Nasdaq delisting - a consequence that the Waltham, Mass.-based firm said could spell its end.

Terms of Essential's Series B preferred stock specify that if Nasdaq removes its common shares, such preferred stockholders can redeem their Series B preferred shares for $1,000 apiece. The company reported 60,000 Series B shares outstanding, meaning it would be obligated to pay $60 million if it defaults on the terms.

Its shares (NASDAQ:ETRX) traded down 2 cents Wednesday to close at 12 cents.

Essential, which reported $40.3 million in cash, cash equivalents and investments as of Sept. 30. For the first nine months of the year, the company registered a net loss of $34.3 million. If put in a position to pay out $60 million, Essential said subsequent actions could include its dissolution, insolvency or seeking protection under bankruptcy laws.

It will meet March 20 with Nasdaq's listing qualification panel to discuss the appeal of Nasdaq's January decision to delist its stock. Nasdaq said the company violates the $10 million minimum stockholders' equity standard as well as the $1 minimum bid price rule. The delisting has been stayed, pending the hearing.

"Our preferred stock investment is treated as debt, for SEC reporting purposes," Liz Grammer, Essential's general counsel, told BioWorld Today. "That is the reason we do not comply with the stockholders' equity requirement, so obviously we would like to discuss that with Nasdaq as well."

At a mid-January stockholder meeting convened to address the potential delisting, Essential failed to convince its common shareholders to approve a conversion of preferred stock into common stock. A November proposal by the company called for the conversion of the 60,000 series B shares into 80 million new common shares. At the end of its third quarter, Essential reported about 18.5 million shares outstanding.

They also voted against the company's proposal to increase its authorized capital stock. The shareholders only approved one company-backed proposal: authorizing the board to effect a reverse stock split. Following the meeting, Essential accepted the resignation of two directors who had sat on a special committee that sought options to maintain the company's Nasdaq listing.

In a related move, Essential is looking to shed some of its California operations. Essential was formed in the summer of 2001 when Mountain View, Calif.-based Microcide Pharmaceuticals Inc. took over Waltham-based Althexis Company Inc. in a stock swap worth about $22 million. (See BioWorld Today, July 31, 2001.)

The company, which employs 16 people in Massachusetts, received $60 million in private equity funding after the merger was completed.

It expects to sell a portion of its West Coast business. The company said it has begun discussions with an unnamed buyer interested in acquiring certain facilities, selected preclinical infectious disease programs and some of Essential's 55 employees based there.

"The reason and strategy for the divestiture is for the company to conserve its existing resources and to focus on the programs that we believe will generate the best possible opportunities for commercial value for the company," Grammer said. "The programs that we will continue do not require the resources of the Mountain View facilities at this time."

Essential said that if it does not complete a sale by March 31, it would close the doors in California. It will eliminate 42 positions that day while some remaining employees will work to shut down certain California facilities. The remainder will be asked to continue with Essential until it completes a collaboration with Osaka, Japan-based Fujisawa Pharmaceutical Co. Ltd., an agreement expected to wrap up in the third quarter.

"We have a pretty short timeframe in which we need to come to an agreement," Grammer said. "We have our work cut out for us, but I think we are quite interested in pursuing this opportunity and hopefully reaching the right conclusion, and a good conclusion, on the sale."

Though Essential said it would evaluate its other programs, the company plans to continue development of at least two - its preclinical proof-of-concept studies on a small-molecule therapeutic for wound-healing applications and its parenteral cephalosporin candidate in Phase I trials. Essential said the latter program, partnered with Johnson & Johnson Pharmaceutical Research & Development LLC, a unit of New Brunswick, N.J.-based J&J, will not be affected by the California shutdown.

In January Essential said it would stop development of ETRX 101 after Phase I data and findings from other recently completed nonclinical studies demonstrated the drug failed to show signs of sufficient efficacy.