Tetraphase Pharmaceuticals
TETRAPHASE PHARMACEUTICALS INC (Form: 10-Q, Received: 08/04/2016 16:19:53)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2016

or

¨

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

For the transition period from                      to                      

Commission File Number: 001-35837

 

TETRAPHASE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-5276217

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

480 Arsenal Street, Suite 110,

Watertown, MA

(Address of principal executive offices)

02472

(Zip Code)

(617) 715-3600

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨   (Do not check if a smaller reporting company)

Smaller reporting company

¨

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

As of August 2, 2016 there were 36,698,560 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

 


 

TETRAPHASE PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS

 

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 201 5

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 201 5

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

27

 

 

PART II. OTHER INFORMATION

28

 

 

 

Item 1

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 6.

Exhibits

55

 

 

 

 

Signatures

56

 

 

2


 

PART I — FINANCI AL INFORMATION

Item 1. Financial Statements

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

178,311

 

 

$

205,912

 

Accounts receivable

 

 

2,981

 

 

 

4,151

 

Prepaid expenses and other current assets

 

 

5,257

 

 

 

3,705

 

Total current assets

 

 

186,549

 

 

 

213,768

 

Property and equipment, net

 

 

982

 

 

 

943

 

Restricted cash

 

 

199

 

 

 

199

 

Other assets

 

 

 

 

 

7

 

Total assets

 

$

187,730

 

 

$

214,917

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,542

 

 

$

2,857

 

Accrued expenses

 

 

6,609

 

 

 

6,931

 

Deferred revenue

 

 

1,195

 

 

 

909

 

Total current liabilities

 

 

10,346

 

 

 

10,697

 

Deferred rent, net of current portion

 

 

137

 

 

 

165

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001 per share; 5,000 shares authorized; no shares issued

   and outstanding

 

 

 

 

 

 

Common stock, par value $0.001 per share; 125,000 shares authorized; 36,654 and

   36,585 shares issued and outstanding at June 30, 2016 and December 31, 2015,

   respectively

 

 

37

 

 

 

37

 

Additional paid-in capital

 

 

480,771

 

 

 

473,670

 

Accumulated deficit

 

 

(303,561

)

 

 

(269,652

)

Total stockholders’ equity

 

 

177,247

 

 

 

204,055

 

Total liabilities and stockholders’ equity

 

$

187,730

 

 

$

214,917

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

3


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

1,243

 

 

$

3,343

 

 

$

3,205

 

 

$

6,359

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,746

 

 

 

22,907

 

 

 

27,269

 

 

 

41,780

 

General and administrative

 

 

4,759

 

 

 

6,489

 

 

 

10,012

 

 

 

11,393

 

Total operating expenses

 

 

18,505

 

 

 

29,396

 

 

 

37,281

 

 

 

53,173

 

Loss from operations

 

 

(17,262

)

 

 

(26,053

)

 

 

(34,076

)

 

 

(46,814

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

94

 

 

 

10

 

 

 

167

 

 

 

(216

)

Net loss

 

$

(17,168

)

 

$

(26,043

)

 

$

(33,909

)

 

$

(47,030

)

Net loss per share-basic and diluted

 

$

(0.47

)

 

$

(0.72

)

 

$

(0.93

)

 

$

(1.38

)

Weighted-average number of common shares used in net loss

   per share-basic and diluted

 

 

36,629

 

 

 

36,207

 

 

 

36,614

 

 

 

33,991

 

Comprehensive loss

 

$

(17,168

)

 

$

(26,043

)

 

$

(33,909

)

 

$

(47,030

)

 

See accompanying notes to condensed consolidated financial statements

 

 

 

4


 

TETRAPHASE PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(33,909

)

 

$

(47,030

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

136

 

 

 

66

 

Amortization of deferred financing costs and debt discount

 

 

 

 

 

93

 

Accretion of final interest payment on term loans

 

 

 

 

 

45

 

Stock-based compensation expense

 

 

6,985

 

 

 

6,717

 

Loss from disposal of property and equipment

 

 

 

 

 

2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,169

 

 

 

35

 

Prepaid expenses and other assets

 

 

(1,543

)

 

 

(765

)

Accounts payable

 

 

(315

)

 

 

1,681

 

Accrued expenses and accrued final interest payment on term loan

 

 

(350

)

 

 

(388

)

Deferred revenue

 

 

285

 

 

 

266

 

Net cash used in operating activities

 

 

(27,542

)

 

 

(39,278

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(175

)

 

 

(714

)

Net cash used in investing activities

 

 

(175

)

 

 

(714

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net of issuance costs

 

 

 

 

 

162,151

 

Repayment of term loan payable

 

 

 

 

 

(4,646

)

Proceeds from issuance of stock under stock plans

 

 

116

 

 

 

3,524

 

Net cash provided by financing activities

 

 

116

 

 

 

161,029

 

Net (decrease) increase in cash and cash equivalents

 

$

(27,601

)

 

$

121,037

 

Cash and cash equivalents at beginning of period

 

 

205,912

 

 

 

121,042

 

Cash and cash equivalents at end of period

 

$

178,311

 

 

$

242,079

 

Supplemental cash flow and noncash financing activities

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

 

 

$

97

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

 

5


 

Tetraphase Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(1) Organization and Operations

Tetraphase Pharmaceuticals, Inc. (the “Company”) is a clinical-stage biopharmaceutical company that was incorporated in Delaware on July 7, 2006 and has a principal place of business in Watertown, Massachusetts. The Company is using its proprietary chemistry technology to create novel antibiotics for serious and life-threatening multidrug-resistant infections. The Company is developing its lead product candidate eravacycline, a fully synthetic tetracycline derivative, as a broad-spectrum intravenous (“IV”) and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multidrug-resistant infections, including multidrug-resistant Gram-negative infections. The Company is conducting a global phase 3 clinical program for eravacycline called IGNITE ( I nvestigating  G ram- N egative  I nfections  T reated with  E ravacycline) which initially consisted of two phase 3 clinical trials: IGNITE1, a clinical trial evaluating the safety and efficacy of eravacycline with IV administration for the treatment of complicated intra-abdominal infections (“cIAI”), and IGNITE2, a second phase 3 clinical trial evaluating the safety and efficacy of eravacycline for the treatment of complicated urinary tract infections (“cUTI”), with IV-to-oral transition therapy. The Company is also pursuing the discovery and development of additional antibiotics that target unmet medical needs, including multidrug-resistant Gram-negative bacteria.

In December 2014, the Company announced that in IGNITE 1 eravacycline met the primary endpoint of statistical non-inferiority compared to ertapenem, the control therapy for the trial, for the treatment of cIAI. In September 2015, the Company announced that eravacycline did not meet the primary endpoint of statistical non-inferiority in IGNITE 2 compared to levofloxacin, the control therapy for this trial. Consistent with guidance issued by the United States Food an d Drug Administration (“FDA”) with respect to the development of antibiotics for cIAI and the Company’s previous discussions with the FDA, the Company had planned to utilize results from these two phase 3 clinical trials to support submission of a new drug application (“NDA”) for eravacycline for the treatment of cIAI and cUTI. Following discussions with the FDA regarding the results of IGNITE1 and IGNITE2, the Company plans to conduct IGNITE4, a second phase 3 clinical trial evaluating the efficacy and safety of twice-daily IV eravacycline compared to meropenem, the control therapy in this trial, in patients with cIAI. The Company expects to enroll approximately 450 patients and the primary analysis will be conducted using a 12.5% non-inferiority margin. The Company expects to initiate this clinical trial in the fourth quarter of 2016, with top-line results expected as early as the fourth quarter of 2017. If IGNITE4 is successful, the Company plans to use the results from IGNITE1 and IGNITE4 to support submission of an NDA for IV eravacycline for the treatment of cIAI. The Company also plans to conduct IGNITE3, a second phase 3 clinical trial to evaluate the efficacy and safety of once-daily IV eravacycline in patients with cUTI. If IGNITE3 is successful, the Company plans to use the results from IGNITE3 to support submission of a supplemental new drug application for IV eravacycline for the treatment of cUTI. The Company is also evaluating the timing of a regulatory submission for eravacycline to the European Medicines Agency.

Separately, the Company continues to develop an oral dose formulation of eravacycline. A phase 1 clinical program is ongoing which is designed to evaluate and optimize the oral dosing regimen for eravacycline. During the second quarter of 2016, the Company completed preliminary clinical testing which indicates that the overall efficacy results in IGNITE2 were driven by lower systemic exposures after oral dosing due to a food effect. Preliminary clinical testing also suggests that administration of oral eravacycline in a fasted state results in increased drug exposure. Further clinical testing is now underway to evaluate several additional variables associated with optimizing the oral eravacycline dosing regimen.

In January 2016, the Company initiated a phase 1 clinical trial of the IV formulation of TP-271, a fully synthetic tetracycline derivative being developed for respiratory disease caused by bacterial biothreat pathogens, in healthy volunteers. In addition to eravacycline and TP-271, the Company is pursuing the discovery and development of additional antibiotics to target unmet medical needs, including multidrug-resistant Gram-negative bacteria. The Company has selected TP-6076, a fully synthetic tetracycline derivative, as a lead candidate under the Company’s second-generation program and in July 2016 the Company initiated a phase 1 clinical trial of the IV formulation of TP-6076 in healthy volunteers.

The Company is devoting substantially all of its efforts to product research and development, and market development. The Company is subject to a number of risks similar to those of other life science companies in a similar stage of development, including rapid technological change, dependence on key individuals, competition from other companies, compliance with government regulations, protection of proprietary technology, dependence on third parties, product liability, the need for development of commercially viable products, regulatory approval of products, uncertainty of market acceptance of products, and the need to obtain additional financing to fund the development of its product candidates. The Company has not completed development of any product candidate and has devoted substantially all of its financial resources and efforts to research and development, including preclinical and

 

6


 

clinical development. The Company expects to continue to incur significant expenses and increasing operating losses for at least the next several years, and expects to require additional financial resources to advance its product candidates.

The Company has incurred annual net operating losses in every year since its inception. As of June 30, 2016, the Company had incurred losses since inception of $303.6 million. The Company has not generated any product revenues and has financed its operations primarily through public offerings and private placements of its equity securities, debt financings and funding from the United States government.

There can be no assurance that the Company will be able to generate product revenue in its anticipated amounts, on a timely basis or at all, or obtain additional debt or equity financing, or generate revenues from collaborative partners on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to generate revenues or obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

 

(2) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2015 contained in the Company’s annual report on Form 10-K filed with the SEC on February 25, 2016 (the “2015 Form 10-K”). The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2016, and the results of operations and comprehensive loss and cash flows for the three and six months ended June 30, 2016 and 2015. Interim operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for future interim periods or for the fiscal year ending December 31, 2016.

The December 31, 2015 condensed consolidated balance sheet included herein was derived from audited consolidated financial statements, but does not include all disclosures including notes required by GAAP for complete financial statements.

Segment Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment, which is the business of developing and commercializing its proprietary chemistry technology to create novel antibiotics for serious and life-threatening infections, including multidrug-resistant infections.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, the Company’s management evaluates its estimates, including estimates related to clinical trial accruals, stock-based compensation expense, contract and grant revenues, and expenses. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents and restricted cash. The Company maintains its cash and cash equivalent balances in the form of cash and money market accounts with financial institutions that management believes are creditworthy. The Company’s investment policy includes guidelines on the quality of the institutions and financial instruments and defines allowable investments that the Company believes minimize its exposure to concentration of credit risk. The Company’s accounts receivable balance consists of amounts from the U.S. government. As a result there is low risk of non-collection. The Company has no financial instruments with off-balance-sheet risk of loss.

 

7


 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents at June 30, 2016 and December 31, 2015 consisted of cash and money market funds.

Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and term loan payable. Fair value measurements are classified and disclosed in one of the following three categories:

 

 

 

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

 

 

Level 2

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial instruments measured at fair value as of June 30, 2016 and December 31, 2015 are classified below based on the three fair value hierarchy tiers described above (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at

Reporting Date Using

 

 

 

Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,321

 

 

$

1,321

 

 

$

 

 

$

 

Money market funds, included in cash equivalents

 

$

176,990

 

 

$

176,990

 

 

$

 

 

$

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

2,065

 

 

$

2,065

 

 

$

 

 

$

 

Money market funds, included in cash equivalents

 

$

203,847

 

 

$

203,847

 

 

$

 

 

$

 

 

The Company measures cash equivalents at fair value on a recurring basis. The fair value of cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.

Accounts Receivable

In September 2011, the National Institutes of Health’s (“NIH”) National Institute of Allergy and Infectious Diseases (“NIAID”) division awarded a contract of up to $35.8 million over a five-year term for the development of TP-271, a phase 1 compound, for respiratory disease caused by bacterial biothreat pathogens (“NIAID Contract”) (Note 3). The Company is collaborating with CUBRC Inc. (“CUBRC”), an independent, not for profit, research corporation that specializes in U.S. government-based contracts, on this NIAID Contract and has entered into a subcontract with CUBRC. This subcontract could potentially provide funding to the Company of up to approximately $13.3 million over the five-year term, including committed funding of $12.6 million from the initial contract date through May 31, 2017, of which $9.8 million had been received by the Company through June 30, 2016. In addition during 2011, the Company was a subawardee under a separate grant from NIAID (“NIAID Grant”) (Note 3).

In January 2012, the Biomedical Advanced Research and Development Authority (“BARDA”), an agency of the U.S. Department of Health and Human Services, awarded a contract of up to $67.0 million for the development of eravacycline as a potential countermeasure for the treatment of disease caused by bacterial biothreat pathogens (“BARDA Contract”). The funding under the BARDA Contract is also being used for certain activities in the development of eravacycline to treat certain infections caused by life-threatening multidrug-resistant bacteria. The Company is also collaborating with CUBRC on the BARDA Contract and has entered into a subcontract with CUBRC. This subcontract could potentially provide funding to the Company of up to approximately $39.8 million, including committed funding of $38.4 million from the initial contract date through February 17, 2017, of which $29.8 million had been received by the Company through June 30, 2016 (Note 3).

 

8


 

Accounts receivable at June 30, 2016 and December 31, 2015 repr esent amounts due from CUBRC under the Company’s subcontracts under the NIAID Contract and the BARDA Contract and under the Company’s subaward under the NIAID Grant. The Company’s practice is to bill the prime contractor, CUBRC, amounts for which the Compa ny has been invoiced by third parties in the case of contract research or subcontractor costs or for internal costs incurred. Expenses directly associated with the Company’s NIAID and BARDA Contracts and NIAID Grant that have been accrued at the end of the reporting period are not billed to the prime contractor until third-party invoices have been received or until internal costs have been paid. Unbilled accounts receivable related to the NIAID Contract, the BARDA Contract and the subaward under the NIAID G rant, included in accounts receivable in the accompanying balance sheets, were $0.6 million and $2.2 million at June 30, 2016 and December 31, 2015, respectively.

Property and Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the respective assets, which is generally three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful economic lives of the related assets.

  Restricted Cash

At June 30, 2016 and December 31, 2015 the Company had $199,000 in restricted cash deposits with a bank, of which $159,000 is collateral for a letter of credit issued to the landlord of the Company’s leased facility. If the Company defaults on its rental obligations, $159,000 will be payable to the landlord. In addition, the Company has $40,000 in restricted cash to secure the Company’s corporate credit card issued through the same bank.

Revenue Recognition

The Company’s revenue is derived from its subcontracts with CUBRC under the BARDA Contract and the NIAID Contract and its subaward under the NIAID Grant (Note 3). The Company recognizes revenue under these best-efforts, cost-reimbursable and cost-plus-fixed-fee subcontracts and subaward as the Company performs services under the subcontracts and subaward so long as a subcontract and subaward has been executed and the fees for these services are fixed or determinable, legally billable and reasonably assured of collection. Recognized amounts reflect the Company’s partial performance under the subcontracts and subaward and equal direct and indirect costs incurred plus fixed fees, where applicable. The Company does not recognize revenue under these arrangements for amounts related to contract periods where funding is not yet committed as amounts above committed funding thresholds would not be considered fixed or determinable or reasonably assured of collection. Revenues and expenses under these arrangements are presented gross on the condensed consolidated statements of operations and comprehensive loss as the Company has determined it is the primary obligor under these arrangements relative to the research and development services it performs as lead technical expert.

Revenue under the Company’s subcontracts with respect to the BARDA Contract and NIAID Contract is earned under a cost-plus-fixed-fee contract through which the Company is reimbursed for direct costs incurred plus allowable indirect costs and a fixed fee earned. Billings under the Company’s subcontracts under the BARDA Contract and NIAID Contract are based on approved provisional indirect billing rates that permit recovery of allowable fringe benefits, overhead and general and administrative expenses and a fixed fee.

Revenue under the Company’s subaward with respect to the NIAID Grant is earned under a cost-reimbursable contract through which the Company is reimbursed for direct costs incurred plus allowable indirect costs. Billings under the Company’s subaward under the NIAID Grant are based on approved provisional indirect billing rates that permit recovery of allowable fringe benefits and general and administrative expenses.

Research and Development Expenses

Research and development costs are charged to expense as incurred and include, but are not limited to:

 

personnel-related expenses, including salaries, benefits, and stock-based compensation expense;

 

expenses incurred under agreements with contract research organizations, contract manufacturing organizations and consultants that provide preclinical, clinical, regulatory and manufacturing services;

 

payments made under the Company’s license agreement with Harvard University;

 

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies;

 

9


 

 

facility, depreciation and other expenses, which include direct and allocated expenses for rent, maintenance of the Company’s facilities, insurance and other supplies; and  

 

costs associated with preclinical, regulatory and medical affair activities.

Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development. In certain circumstances, the Company is required to make nonrefundable advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the nonrefundable advance payments are deferred and capitalized, even when there is no alternative future use for the research and development, until related goods or services are provided.

Comprehensive Loss

Comprehensive loss consists of net income or loss and changes in equity during a period from transactions and other events and circumstances generated from non-owner sources. The Company’s net loss equals comprehensive loss for all periods presented.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore a valuation allowance has been established for the full amount of the deferred tax assets. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

Stock-Based Compensation

The Company determines equity-based compensation at the grant date using the Black-Scholes option pricing model to estimate fair value for employee equity awards. The Company recognizes the value of the award that is ultimately expected to vest as an expense on a straight-line basis over the requisite service period using the estimated fair market value of the stock. Any changes to the estimated forfeiture rates are accounted for in the period such change in estimate is made. The Company records stock-based compensation expense for share-based payments issued to non-employees based on the fair value of the awards using the Black-Scholes option pricing model. Share-based payments issued to non-employees are revalued at each reporting period and as the equity instruments vest and are recognized as expense using the accelerated attribution method over the related service period.

Recent Accounting Pronouncements Issued

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard will be effective for the Company on January 1, 2019. The Company is currently evaluating the potential impact that this standard may have on its financial position, results of operations and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard will be effective for the Company on January 1, 2017. The Company is currently evaluating the potential impact that this standard may have on its financial position, results of operations and cash flows.

 In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with

 

10


 

Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company is currently evaluating the potential impact that this update may have on its financial position, results of operations and cash flows .

In August 2014, the FASB issued ASU No. 2014-15,   Presentation of Financial Statements-Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern   (“ASU 2014-15”) .   This new standard gives a company’s management the final responsibilities to decide whether there is substantial doubt about the company’s ability to continue as a going concern and to provide related footnote disclosures. The standard provides guidance to management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that companies commonly provide in their footnotes. Under the new standard, management must decide whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued, or within one year after the date that the financial statements are available to be issued when applicable. This guidance is effective for annual reporting ending after December 15, 2016, including interim periods within the year of adoption, with early application permitted. The Company does not expect that the adoption of ASU 2014-15 will have a material impact on its financial position, results of operations or cash flows, however, it may require additional disclosure in future periods.

Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of Common Stock outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, stock options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The amounts in the table below were excluded from the calculation of diluted weighted-average shares outstanding, prior to the use of the treasury stock method, due to their anti-dilutive effect:

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Warrants

 

 

1,103

 

 

 

1,103

 

Unvested restricted stock units

 

 

475,100

 

 

 

-

 

Outstanding stock options

 

 

4,221,517

 

 

 

4,004,187

 

 

 

(3) Significant Agreements and Contracts

License Agreement

In August 2006, the Company entered into a license agreement for certain intellectual property with Harvard University (“Harvard”). Under the license agreement, as of June 30, 2016, the Company has paid Harvard an aggregate of $4.1 million in upfront license fees and development milestone payments, and has issued 31,379 shares of common stock to Harvard.

For each product covered by the license agreement, the Company is obligated to make certain payments totaling up to approximately $15.1 million upon achievement of certain development and regulatory milestones and to pay additional royalties on net sales of such product. In January 2007 and April 2010, the Company and Harvard amended the license agreement to include certain additional intellectual property. The Company paid an additional $25,000 to Harvard with each amendment. In February 2011, the license agreement was further amended to include additional intellectual property in the license granted by Harvard without the payment of any additional consideration.

 

11


 

Government Grant and Contracts

BARDA Contract for Eravacycline

The Company has received funding for its lead product candidate, eravacycline, under an award from BARDA. In January 2012, BARDA awarded a five-year contract that provides for up to a total of $67.0 million in funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens. The funding under the BARDA Contract is also being used for the development, manufacturing and clinical evaluation of eravacycline to treat certain infections caused by life-threatening multidrug-resistant bacteria.

In connection with the BARDA Contract, in February 2012, the Company entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which it may receive funding of up to approximately $39.8 million, reflecting the portion of the BARDA Contract funding that may be paid to the Company for its activities.

Although the BARDA Contract and the Company’s subcontract with CUBRC under the BARDA Contract have five-year terms, BARDA is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond current-year amounts from Congressionally approved annual appropriations. To the extent that BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to the Company. Committed funding from CUBRC under the Company’s BARDA subcontract is $38.4 million through February 17, 2017, the current contract end date, as a result of the exercise of several options by BARDA under the BARDA Contract. Total funds of $29.8 million had been received by the Company through June 30, 2016 under this contract. During the three months ended June 30, 2016 and 2015, the Company recognized revenue of $0.5 million and $3.2 million, respectively, from the Company’s subcontract under the BARDA Contract. During the six months ended June 30, 2016 and 2015, the Company recognized revenue of $1.6 million and $5.9 million, respectively, from the Company’s subcontract under the BARDA Contract

NIAID Grant and Contract for TP-271

The Company has received funding for its phase 1 compound TP-271 under two awards from NIAID for the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia:

 

the NIAID Grant awarded in July 2011 that provides up to a total of approximately $2.8 million over five years; and

 

the NIAID Contract awarded in September 2011 that provides up to a total of approximately $35.8 million in funding over five years.

In connection with the NIAID Grant, in November 2011, CUBRC awarded the Company a 55-month, no-fee subaward of approximately $980,000, reflecting the portion of the NIAID Grant funding that may be paid to the Company for its activities.

In connection with the NIAID Contract, in October 2011, the Company entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which the Company may receive funding of up to approximately $13.3 million, reflecting the portion of the NIAID Contract funding that may be paid to the Company for its activities.

Although the NIAID Contract, the NIAID Grant and the Company’s subcontract with CUBRC under the NIAID Contract have terms of five years, and the Company’s subaward under the NIAID Grant has a term of 55 months, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond May 31, 2017. To the extent that NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to the Company. As of June 30, 2016, committed funding from CUBRC under the Company’s subcontract with respect to the NIAID Contract is $12.6 million through the current contract end date which has been extended to May 31, 2017, of which $9.8 million had been received through June 30, 2016. Committed funding from CUBRC under the Company’s subaward with respect to the NIAID Grant is $0.9 million through the current contract end date which has been extended to May 31, 2017, of which $0.8 million had been received through June 30, 2016.

During the three months ended June 30, 2016 and 2015, the Company recognized revenue of $0.7 million and $0.1 million, respectively, from the Company’s subcontract under the NIAID Contract. During the three months ended June 30, 2016 and 2015, the Company recognized revenue of $43,000 and $1,000, respectively, from the Company’s subaward under the NIAID Grant. During the six months ended June 30, 2016 and 2015, the Company recognized revenue of $1.6 million and $0.3 million, respectively, from the Company’s subcontract under the NIAID Contract. During the six months ended June 30, 2016 and 2015, the Company recognized revenue of $63,000 and $65,000, respectively, from the Company’s subaward under the NIAID Grant.  

 

 

12


 

(4) Accrued Expenses

Accrued expenses at June 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Salaries and benefits

 

$

1,811

 

 

$

1,856

 

Drug supply and development

 

 

1,773

 

 

 

2,971

 

Clinical trial related

 

 

1,449

 

 

 

677

 

Professional fees

 

 

579

 

 

 

684

 

Preclinical

 

 

486

 

 

 

303

 

Other

 

 

511

 

 

 

440

 

Total

 

$

6,609

 

 

$

6,931

 

 

 

(5) Long-Term Debt

In May 2011, the Company executed a Loan and Security Agreement with Silicon Valley Bank and Oxford Finance (the “Term Loan”), which provided for up to $8.0 million of funding, to be made available in two tranches. The Term Loan was paid in full on March 31, 2015.

In December 2012, the Company amended the Term Loan (the “2012 Term Loan”) to provide for up to an additional $9.2 million in funding, to be made available in two tranches (the “2012 Term A Loan” and the “2012 Term B Loan”). On March 31, 2015, the Company repaid the 2012 Term Loan. As a result, no indebtedness remains outstanding under either the Term Loan or the 2012 Term Loan.

In connection with the funding of the 2012 Term A Loan, the Company issued to the lenders 10-year warrants to purchase shares of Series C Preferred Stock. In connection with the 2012 Term B Loan, the number of shares issuable upon exercise of the warrants issued to Silicon Valley Bank automatically increased and the Company granted a new warrant to purchase shares of Series C Preferred Stock to Oxford Finance.

Upon completion of the Company’s initial public offering (“IPO”), the warrants to purchase Series C Preferred Stock issued in connection with the Term Loan, the 2012 Term A Loan and the 2012 Term B Loan were converted into warrants to purchase common stock of the Company.

In June 2014, Silicon Valley Bank exercised its warrants and the Company issued 12,354 shares of the Company’s common stock. Warrants to purchase 14,470 shares of common stock were cancelled as payment for the aggregate exercise price of the warrants. In connection with the exercise of the warrants under the 2012 Term A Loan, the Company issued 11,366 shares of the Company’s common stock. Warrants to purchase 13,312 shares of common stock were cancelled as payment for the aggregate exercise price of the warrants.

In December 2014, Oxford Finance exercised its warrants under the Term Loan and 2012 Term B Loan described above pursuant to the cashless exercise feature of the warrants. In connection with the exercise of the warrants under the Term Loan, the Company issued 20,488 shares of the Company’s common stock. Warrants to purchase 6,336 shares of common stock were cancelled as payment for the aggregate exercise price of the warrants. In connection with the exercise of the warrants under the 2012 Term B Loan, the Company issued 18,849 shares of the Company’s common stock. Warrants to purchase 5,829 shares of common stock were cancelled as payment for the aggregate exercise price of the warrants.

 

(6) Stock-based Compensation

In February 2013, the Company’s board of directors and stockholders approved, effective upon the closing of the IPO, the 2013 Stock Incentive Plan (the “2013 Plan”). Under the 2013 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for the purchase of that number of shares of Common Stock equal to the sum of (i) 1,688,777 shares of Common Stock, (ii) 258,265 shares of Common Stock that were reserved for issuance under the 2006 Plan that remained available for issuance under the 2006 Plan upon the closing of the IPO, and (iii) any shares of Common Stock subject to awards under the 2006 Plan which awards expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company without having been fully exercised or resulting in any Common Stock being issued. In addition, the number of shares of Common Stock that may be issued under the 2013 Plan is subject to automatic annual increases, to be added on January 1 of each year through and including January 1, 2023, equal to the number of shares that is the lesser of (a) 3,000,000, (b) 4% of the then outstanding shares of Common Stock or (c) an amount determined by the Company’s

 

13


 

board of direc tors. In January 2014, the number of shares authorized for issuance under the 2013 Plan increased by 1,025,171 shares. In January 2015, the number of shares authorized for issuance under the 2013 Plan increased by 1,232,232 shares. In January 2016, the num ber of shares authorized for issuance under the 2013 Plan increased by 1,463,391 shares. As of June 30, 2016, 1,229,286 shares were available for future issuance under the 2013 Plan.

Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2013 Plan. Options granted by the Company typically vest over a four year period. Certain of the options are subject to acceleration of vesting in the event of certain change of control transactions. The options are exercisable from the date of grant for a period of ten years. For options granted prior to the Company’s IPO, the exercise price equaled the estimated fair value of the Common Stock as determined by the board of directors on the date of grant. For options granted subsequent to the Company’s IPO, the exercise price equaled the closing price of the Company’s stock on the NASDAQ Global Select Market on the date of grant.

Stock option activity at June 30, 2016 and changes during the six months then ended is presented in the table and narrative below (in thousands except share and per share data):

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (years)

 

 

Aggregate

Intrinsic

Value

 

Options outstanding at December 31, 2015

 

 

3,833,806

 

 

$

22.72

 

 

 

7.80

 

 

$

5,439

 

Granted

 

 

1,211,700

 

 

 

7.91

 

 

 

 

 

 

 

 

 

Exercised

 

 

(47,797

)

 

 

1.12

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(776,192

)

 

 

23.00

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2016

 

 

4,221,517

 

 

$

18.67

 

 

 

7.72

 

 

$

869

 

Options vested or expected to vest at

   June 30, 2016 (1)

 

 

3,896,547

 

 

$

18.52

 

 

 

7.61

 

 

$

863

 

Options exercisable at June 30, 2016

 

 

1,742,767

 

 

$

14.92

 

 

 

6.18

 

 

$

841

 

 

(1)

This represents the number of vested options as of June 30, 2016, plus the number of unvested options that the Company estimated as of June 30, 2016 would vest, based on the unvested options at June 30, 2016, as adjusted for the estimated forfeiture rate.

The aggregate intrinsic value in the table above was calculated for all in-the-money options equal to the difference between the Company’s closing common stock price on June 30, 2016 and the exercise price of the options, multiplied by the number of in-the-money options. As of June 30, 2016, there was $23.1 million of total unrecognized stock-based compensation cost related to employee and non-employee unvested stock options granted under the 2006 Plan and the 2013 Plan. Total unrecognized compensation cost will be adjusted for future forfeitures. The Company expects to recognize that cost over a remaining weighted-average period of 2.6 years.

Since the Company completed its IPO in March 2013, it has not had sufficient historical data to support a calculation of volatility and expected life. As such, the Company has used a weighted-average volatility considering the Company’s own volatility and the volatilities of a representative group of publicly traded companies. For purposes of identifying similar entities, the Company selected a group of publicly traded life science/biotechnology companies based on their disease focus, stage of development, number of compounds in clinical trials and number of years as a publicly-traded company. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant, commensurate with the expected life assumption. The expected life of stock options granted represents the weighted-average period of time that stock options granted are expected to be outstanding determined using the simplified method for employee grants. For non-employee grants, the expected life is equal to the remaining contractual term. The expected life is applied to the stock option grant group as a whole, as the Company does not expect substantially different exercise or post-vesting termination behavior among its employee population.

 

14


 

The Company estimates the fair value of each employee and director stock option award on the gran t date using the Black-Scholes option-pricing model based on the following assumptions:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Volatility factor

 

86.63-87.37%

 

 

56.49-58.39%

 

Expected term (in years)

 

5.31-6.11

 

 

5.31-6.11

 

Risk-free interest rates

 

1.25-1.38%

 

 

1.46-1.94%

 

Dividend yield

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Volatility factor

 

85.77-87.37%

 

 

56.49-58.64%

 

Expected term (in years)

 

5.31-6.11

 

 

5.31-6.11

 

Risk-free interest rates

 

1.25-1.85%

 

 

1.35-1.94%

 

Dividend yield

 

 

 

 

 

 

 

Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and comprehensive loss was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

 

$

1,089

 

 

$

1,210

 

 

$

3,480

 

 

$

2,515

 

General and administrative

 

 

1,720

 

 

 

2,667

 

 

 

3,505

 

 

 

4,202

 

Total

 

$

2,809

 

 

$

3,877

 

 

$

6,985

 

 

$

6,717

 

 

Stock Option Grants to Non-employees

During the year ended December 31, 2014, the Company granted nonqualified options to purchase 110,000 shares of common stock to non-employee consultants, with an average exercise price of $12.56 per share. The Company initially valued these options using the Black-Scholes option-pricing model and revalues the options at each reporting period and as the options vest and are recognized as expense using the accelerated attribution method over the related service period. Of these options, options to purchase 100,000 shares were cancelled during the year ended December 31, 2015. The re-measurement of the remaining non-employee options to purchase 10,000 shares resulted in less than $1,000 of expense during the three months ended June 30, 2016, and a reversal of expense of $(11,000) during the six months ended June 30, 2016. Stock-based compensation expense related to stock options granted to non-employees was $1.0 million and $1.3 million for the three and six months ended June 30, 2015, respectively.

Restricted Stock Units

In October 2015, the Company granted restricted stock units to employees. These restricted stock units vest in full after one year subject to continued employment with the Company and had a grant date fair value of $7.81 per share, which was the closing price of the Company’s common stock on the date of grant. In January 2016, the Company granted additional restricted stock units to employees. These restricted stock units vest in annual increments over three years, subject to continued employment with the company and had a grant date fair value of $8.47 per share, which was the closing price of the Company’s common stock on the date of grant. The Company recorded stock based compensation expense of $0.2 million and $1.0 million related to restricted stock units for the three and six months ended June 30, 2016, respectively. The restricted stock activity for the six months ended June 30, 2016 is as follows:

 

15


 

 

 

Shares

 

 

Weighted-

Average

Grant Date Fair Value

 

Unvested at December 31, 2015

 

 

308,875

 

 

$

7.81

 

Granted

 

 

296,680

 

 

 

8.47

 

Cancelled

 

 

(130,455

)

 

 

7.99

 

Expired

 

 

-

 

 

 

-

 

Vested/Released

 

 

-

 

 

 

-

 

Unvested at June 30, 2016

 

 

475,100

 

 

$

8.17

 

As of June 30, 2016, there was $2.0 million of total unrecognized stock-based compensation expense related to restricted stock units granted under the 2013 Plan. The expense is expected to be recognized over a weighted-average period of 1.5 years.

 

 

(7) Stockholders’ Equity

In March 2015, the Company sold 4,945,000 shares of common stock in a follow-on public offering at a price to the public of $35.00 per share, resulting in net proceeds to the Company of $162.2 million after deducting underwriting discounts and commissions of $10.4 million and offering costs of $0.5 million.

 

 

 

16


 

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

The interim financial statements included in this quarterly report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2015, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our annual report on Form 10-K filed with the United States Securities and Exchange Commission, or the SEC, on February 25, 2016, which we refer to as our annual report. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those set forth in Part II — Other Information, Item 1A. Risk Factors below and elsewhere in this report that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a clinical-stage biopharmaceutical company using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multidrug-resistant infections. We are using our proprietary chemistry technology to create novel antibiotics for serious and life-threatening multidrug-resistant infections. We are developing our lead product candidate, eravacycline, a fully synthetic tetracycline derivative, as a broad-spectrum intravenous, or IV, and oral antibiotic for use as a first-line empiric monotherapy for the treatment of multidrug-resistant infections, including multidrug-resistant Gram-negative infections. We are conducting a global phase 3 clinical program for eravacycline called IGNITE ( I nvestigating  G ram- N egative I nfections  T reated with  E ravacycline), which initially consisted of two phase 3 clinical trials: IGNITE1, our phase 3 clinical trial evaluating the safety and efficacy of eravacycline with IV administration for the treatment of complicated intra-abdominal infections, or cIAI, and IGNITE2, our second phase 3 clinical trial evaluating the safety and efficacy of eravacycline for the treatment of complicated urinary tract infections, or cUTI, with IV-to-oral transition therapy. We are also pursuing the discovery and development of additional antibiotics that target unmet medical needs, including multidrug-resistant Gram-negative bacteria.

In December 2014, we announced that eravacycline met the primary endpoint of statistical non-inferiority compared to ertapenem in IGNITE1 for the treatment of cIAI. In September 2014, we announced positive data from the lead-in portion of IGNITE2, and in October 2014, we announced the selection of the oral dose for the IV-to-oral transition therapy (1.5 mg/kg IV followed by 200 mg oral dose) to be evaluated in the pivotal portion of IGNITE2 and the initiation of patient enrollment. We completed enrollment of the pivotal portion of IGNITE2 in May 2015 and in September 2015, we announced that eravacycline did not meet the primary endpoint of statistical non-inferiority compared to levofloxacin in IGNITE2 for the treatment of cUTI. Consistent with guidance issued by the United States Food and Drug Administration, or FDA, with respect to the development of antibiotics for cIAI and our previous discussions with the FDA, we had planned to utilize results from these two phase 3 clinical trials to support submission of an NDA for eravacycline for the treatment of cIAI and cUTI. Following discussions with the FDA, we plan to conduct IGNITE4, a second phase 3 clinical trial evaluating the efficacy and safety of twice-daily IV eravacycline compared to meropenem, the control therapy in this trial, in patients with cIAI. We expect to enroll approximately 450 patients and the primary analysis will be conducted using a 12.5% non-inferiority margin. We expect to initiate this clinical trial in the fourth quarter of 2016, with top-line results expected as early as the fourth quarter of 2017. If IGNITE4 is successful, we plan to use the results from IGNITE1 and IGNITE4 to support submission of an NDA for IV eravacycline for the treatment of cIAI. We also plan to conduct IGNITE3, a second phase 3 clinical trial to evaluate the efficacy and safety of once-daily IV eravacycline in patients with cUTI. If IGNITE3 is successful, we plan to use the results from IGNITE3 to support submission of a supplemental new drug application, or sNDA, for IV eravacycline for the treatment of cUTI. We are also evaluating the timing of a regulatory submission for eravacycline to the European Medicines Agency, or EMA.

Separately, we continue to develop an oral dose formulation of eravacycline. A phase 1 clinical program is ongoing which is designed to evaluate and optimize the oral dosing regimen for eravacycline. During the second quarter of 2016, we completed preliminary clinical testing which indicates that the overall efficacy results in IGNITE2 were driven by lower systemic exposures after oral dosing due to a food effect. Preliminary clinical testing also suggests that administration of oral eravacycline in a fasted state results in increased drug exposure. Further clinical testing is now underway to evaluate several additional variables associated with optimizing the oral eravacycline dosing regimen.

In January 2016, we initiated a phase 1 clinical trial of the IV formulation of TP-271, a fully synthetic tetracycline derivative being developed for respiratory disease caused by bacterial biothreat pathogens, in healthy volunteers. In addition to eravacycline and TP-271, we are pursuing the discovery and development of additional antibiotics to target unmet medical needs, including multidrug-resistant Gram-negative bacteria. We have selected TP-6076, a fully synthetic tetracycline derivative, as a lead candidate under our second-generation program and in July 2016 we initiated a phase 1 clinical trial in of the IV formulation of TP-6076 in healthy volunteers.

 

17


 

We commenced business operations in July 2006. Our operations to date have been limited to organizing and sta ffing our company, business planning, raising capital, acquiring and developing our proprietary chemistry technology, identifying potential product candidates and undertaking preclinical studies and clinical trials of our product candidates. To date, we ha ve not generated any product revenue and have primarily financed our operations through public offerings and private placements of our equity securities, debt financings and funding from the United States government. As of June 30, 2016, we had received an aggregate of $460.5 million in net proceeds from the issuance of equity securities and borrowings under debt facilities and an aggregate of $40.5 million from government grants and contracts. As of June 30, 2016, our principal source of liquidity was cash and cash equivalents, which totaled $178.3 million.

As of June 30, 2016, we had an accumulated deficit of $303.6 million. Our net losses were $17.2 million and $26.0 million for the three months ended June 30, 2016 and 2015, respectively. Our net losses were $33.9 million and $47.0 million for the six months ended June 30, 2016 and 2015, respectively. We expect that our expenses will increase substantially as we commence two additional phase 3 clinical trials of eravacycline for the treatment of patients with cIAI and cUTI, respectively , conduct pre-commercialization and launch-related activities for eravacycline, seek marketing approval for eravacycline, pursue development of eravacycline for additional indications, manufacture drug product for our clinical and pre-clinical trials, conduct our phase 1 clinical trials of TP-271 in healthy volunteers, conduct our phase 1 clinical trials of TP-6076 in healthy volunteers and satisfy our obligations under our license agreement with Harvard University, or Harvard. If we obtain marketing approval of eravacycline, we also expect to incur significant sales, marketing, distribution and manufacturing expenses. Furthermore, we expect to incur ongoing research and development expenses relating to our product candidates other than eravacycline and that our general and administrative costs will increase as we grow and continue to operate as a public company, and comply with increased disclosure requirements since we are no longer an emerging growth company.

We believe that our available funds will be sufficient to support our operations into the middle of 2018 which we believe would allow us to obtain results from IGNITE4 and file the NDA for IV eravacycline for the treatment of cIAI. We do not believe these funds will be sufficient, however, to enable us to commercially launch eravacycline, complete IGNITE3, or file an sNDA for IV eravacycline for the treatment of cUTI. It is also possible that we will not achieve the progress that we expect with respect to eravacycline because the actual costs and timing of clinical development activities are difficult to predict and are subject to substantial risks and delays. We will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. Moreover, we will need to generate significant revenue to achieve profitability, and we may never do so.

Financial overview

Contract and Grant Revenue

We have derived all of our revenue to date from funding provided under three U.S. government awards for the development of our compounds as potential counter measures for the treatment of disease caused by bacterial biothreat pathogens through our collaborator CUBRC Inc., or CUBRC, an independent, not-for-profit, research corporation that specializes in U.S. government-based contracts:

 

·

We have received funding for our lead product candidate, eravacycline, under an award from the Biomedical Advanced Research and Development Authority, or BARDA, an agency of the U.S. Department of Health and Human Services. In January 2012, BARDA awarded CUBRC a five-year contract that provides for up to a total of $67.0 million in funding for the development, manufacturing and clinical evaluation of eravacycline for the treatment of disease caused by bacterial biothreat pathogens. The funding under the BARDA Contract is also being used for the development, manufacturing and clinical evaluation of eravacycline to treat certain infections caused by life-threatening multidrug-resistant bacteria. We refer to this contract as the BARDA Contract.

 

·

We have received funding for our phase 1 compound TP-271 under two awards from the National Institute of Allergy and Infectious Diseases, or NIAID, a division of National Institutes of Health, for the development, manufacturing and clinical evaluation of TP-271 for respiratory diseases caused by biothreat and antibiotic-resistant public health pathogens, as well as bacterial pathogens associated with community-acquired bacterial pneumonia:

 

·

a grant awarded to CUBRC in July 2011 that provides up to a total of approximately $2.8 million over five years, which we refer to as the NIAID Grant; and

 

·

a contract awarded to CUBRC in September 2011 that provides up to a total of approximately $35.8 million in funding over five years, which we refer to as the NIAID Contract.

 

18


 

We are collaborating with CUBRC, because when we initially decided to seek government funding, we recognized that we did not have any expertise in bidding for, administrating or managing government-funded contracts. CUBRC serves as the prime contractor under the BARDA Contract, the NIAID Grant and the NIAID Contract, primarily carrying out a program management and administrative role wit h additional responsibility for the management of preclinical studies. We serve as lead technical expert on all aspects of these awards and also serve as a subcontractor responsible for management of chemistry, manufacturing and control activities and clin ical studies. We derive all of our revenue under these collaborations through subcontracts with, and a subaward from, CUBRC, with the flow of funds following the respective activities being conducted by us and by CUBRC.

 

·

In connection with the BARDA Contract, in February 2012, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $39.8 million, reflecting the portion of the BARDA Contract funding that may be paid to us for our activities.

 

·

In connection with the NIAID Contract, in October 2011, we entered into a five-year cost-plus-fixed-fee subcontract with CUBRC under which we may receive funding of up to approximately $13.3 million, reflecting the portion of the NIAID Contract funding that may be paid to us for our activities.

 

·

In connection with the NIAID Grant, in November 2011, CUBRC awarded us a 55-month, no-fee subaward of approximately $980,000, reflecting the portion of the NIAID Grant funding that may be paid to us for our activities.

Although the BARDA Contract and our subcontract with CUBRC under the BARDA Contract have five-year terms, BARDA is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond current-year amounts from Congressionally approved annual appropriations. To the extent that BARDA ceases to provide funding of the program to CUBRC, CUBRC has the right to cease providing funding to us. Committed funding from CUBRC under our BARDA subcontract is $38.4 million from the initial contract date through February 17, 2017, of which $29.8 million had been received through June 30, 2016.

Similarly, although the NIAID Contract and our subcontract with CUBRC under the NIAID Contract have five-year terms, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond May 31, 2017. To the extent NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to us. Committed funding from CUBRC under our subcontract with respect to the NIAID Contract is $12.6 million, from the initial contract date through May 31, 2017, of which $9.8 million had been received through June 30, 2016. In addition, although the NIAID Grant has a term of five years and our subaward from CUBRC has a term of 55 months, NIAID is entitled to terminate the project for convenience at any time, and is not obligated to provide continued funding beyond May 31, 2017. To the extent NIAID ceases to provide funding of the programs to CUBRC, CUBRC has the right to cease providing funding to us. Committed funding from CUBRC under our subaward with respect to the NIAID Grant is $0.9 million from the initial grant date through May 31, 2017, of which $0.8 million had been received through June 30, 2016.

We have no products approved for sale. Other than the government funding described above, we do not expect to receive any revenue from any product candidates that we develop, including eravacycline, until we obtain regulatory approval and commercialize such products or until we potentially enter into collaborative agreements with third parties for the development and commercialization of such product candidates. We continue to pursue government funding for other preclinical and clinical programs. If our development efforts for any of our product candidates result in clinical success and regulatory approval, or collaboration agreements with third parties, we may generate revenue from those product candidates.

We expect that our revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Even if we are able to generate revenue from the sale of one or more products, we may not become profitable.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, and include:

 

·

personnel-related expenses, including salaries, benefits and stock-based compensation expense;

 

·

expenses incurred under agreements with contract research organizations, contract manufacturing organizations, and consultants that provide preclinical, clinical, regulatory and manufacturing services;

 

·

payments made under our license agreement with Harvard;

 

·

the cost of acquiring, developing and manufacturing clinical trial materials and lab supplies;

 

19


 

 

·

f acility, depreciation and other expenses, which include direct and allocated expenses for rent, maintenance of our facilities, insurance and other supplies; and  

 

·

costs associated with preclinical, regulatory and medical affair activities.

We expense research and development costs to operations as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or information provided to us by our vendors.

We track external development expenses and personnel expense on a program-by-program basis and allocate common expenses, such as scientific consultants and laboratory supplies, to each program based on the personnel resources allocated to such program. Expenses related to facilities, consulting, travel, conferences, stock-based compensation and depreciation are not allocated to a program and are separately classified as other research and development expenses. The following table summarizes our research and development expenses on a program-specific basis for the three and six months ended June 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Eravacycline

 

$

6,970

 

 

$

16,419

 

 

$

12,860

 

 

$

29,599

 

BARDA Contract

 

 

197

 

 

 

3,101

 

 

 

1,202

 

 

 

5,767

 

NIAID Contract and NIAID Grant

 

 

653

 

 

 

116

 

 

 

1,321

 

 

 

416

 

TP-6076

 

 

1,967

 

 

 

573

 

 

 

3,121

 

 

 

1,050

 

Other development programs

 

 

489

 

 

 

-

 

 

 

1,100

 

 

 

-

 

Other research and development

 

 

3,470

 

 

 

2,698

 

 

 

7,665

 

 

 

4,948

 

Total research and development expenses

 

$

13,746

 

 

$

22,907

 

 

$

27,269

 

 

$

41,780

 

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

As of June 30, 2016, we had incurred an aggregate of $156.2 million in research and development expenses related to the development of eravacycline, and $29.9 million in research and development expenses related to the development of eravacycline that were funded under the BARDA Contract. We expect that our research and development expenses will increase as we commence two additional phase 3 clinical trials of eravacycline for the treatment of patients with cIAI and cUTI, respectively , incur nonclinical, regulatory and drug manufacturing costs in support of NDA-related activities, pursue development of eravacycline for additional indications, advance our other product candidates and satisfy our obligations under our license agreement with Harvard.

Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of current or future clinical trials of eravacycline or our other product candidates. We may never succeed in achieving regulatory approval for eravacycline or any of our other product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rate and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability.

We have licensed our proprietary chemistry technology from Harvard on an exclusive worldwide basis under a license agreement that we entered into in August 2006. Under our license agreement, we have paid Harvard an aggregate of $4.1 million in upfront license fees and development milestone payments. We have also issued 31,379 shares of our common stock to Harvard under the license agreement. In addition, we have agreed to make payments to Harvard upon the achievement of specified future development and regulatory milestones totaling up to $15.1 million for each licensed product candidate ($3.1 million of which has already been paid with respect to eravacycline), and to pay tiered royalties in the single digits based on annual worldwide net sales, if any, of licensed products, our affiliates and our sublicensees. We are also obligated to pay Harvard a specified share of non-royalty sublicensing revenues that we receive from sublicensees for the grant of sublicenses under the license and to reimburse Harvard for specified patent prosecution and maintenance costs. The next milestone payment due under the license agreement with respect to eravacycline would be a $3.0 million payment upon acceptance of an NDA filing to the FDA.

 

20


 

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, including salaries and related costs such as benefits and stock-based compensation for personnel in executive, finance, legal, operational, corporate communications, marketing and human resource functions. Other significant general and administrative expenses include professional fees for legal, patent, auditing and tax services, consulting, and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase for a number of reasons, including:

 

·

support of the anticipated expansion of our research and development activities as we continue the development of our product candidates;

 

·

expansion of infrastructure, including increases in personnel-related costs, consulting, legal, accounting and investor relations costs, and directors and officers insurance premiums; and

 

·

if and when we believe a regulatory approval of our first product candidate appears likely, anticipated increases in our personnel-related and consulting costs as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.

Other Income (Expense)

Other income primarily consists of interest earned on our cash and cash equivalents. The primary objective of our investment policy is capital preservation. Other expense primarily consists of interest expense on our previously outstanding indebtedness and non-cash interest related to the amortization of debt discount costs associated with our term loan facility with Silicon Valley Bank and Oxford Finance. We repaid the remaining indebtedness under the term loan facility on March 31, 2015 and, accordingly, will not incur any more interest expense under the term loan facility.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued clinical expenses, and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we and our management believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to our critical accounting policies since the beginning of this fiscal year. Our critical accounting policies are described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report.

 

21


 

Results of Operations

Comparison of the Three Months Ended June 30, 2016 and 2015

The following table summarizes the results of our operations for each of the three months ended June 30, 2016 and 2015, together with the changes in those items in dollars and as a percentage:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

 

 

2016

 

 

2015

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

Revenues

 

$

1,243

 

 

$

3,343

 

 

$

(2,100

)

 

 

(63

)%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,746

 

 

 

22,907

 

 

 

(9,161

)

 

 

(40

)%

General and administrative

 

 

4,759

 

 

 

6,489

 

 

 

(1,730

)

 

 

(27

)%

Total operating expenses

 

 

18,505

 

 

 

29,396

 

 

 

(10,891

)

 

 

(37

)%

Loss from operations

 

 

(17,262

)

 

 

(26,053

)

 

 

8,791

 

 

 

(34

)%

Other income

 

 

94

 

 

 

10

 

 

 

84

 

 

 

840

%

Net loss

 

$

(17,168

)

 

$

(26,043

)

 

$

8,875

 

 

 

(34

)%

 

Revenue from U.S. Government Contracts and Grants

The following table sets forth our contract and grant revenue for the three months ended June 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

Revenue

 

2016

 

 

2015

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

BARDA Contract

 

$

483

 

 

$

3,221

 

 

$

(2,738

)

 

 

(85

)%

NIAID Contract

 

 

718

 

 

 

122

 

 

 

596

 

 

 

489

%

NIAID Grant

 

 

42

 

 

 

 

 

 

42

 

 

 

100

%

 

 

$

1,243

 

 

$

3,343

 

 

$

(2,100

)

 

 

(63

)%

 

Contract and grant revenue was $1.2 million for the three months ended June 30, 2016 compared to $3.3 million for the three months ended June 30, 2015, a decrease of $2.1 million, or 63%. This decrease was primarily due to the scope and timing of activities conducted under our subcontract with respect to the BARDA Contract during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, offset in part by an increase in activities under our subcontract with respect to the NIAID Contract.

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2016 were $13.7 million compared to $22.9 million for the three months ended June 30, 2015, a decrease of $9.2 million, or 40%. This decrease was primarily due to a decrease in clinical trial costs of $5.4 million principally reflecting a decrease in costs for our IGNITE 2 clinical trial as this clinical trial concluded during the three months ended March 31, 2016; a decrease in manufacturing costs of $2.5 million, principally related to a decrease in costs for drug supply in support of our NDA-related activities; a decrease of $1.0 million in manufacturing costs and a decrease of $0.5 million in clinical costs under our government programs due to decreased activity as compared to the three months ended June 30, 2015; and a decrease in certain preclinical activities of $0.4 million. These decreases were offset in part by an increase in personnel-related costs of $0.9 million due to additional headcount.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2016 were $4.8 million compared to $6.5 million for the three months ended June 30, 2015, a decrease of $1.7 million, or 27%. This decrease was primarily due to a decrease in stock-based compensation expense of $0.9 million reflecting non-employee compensation expense during the three months ended June 30, 2015 associated with non-employee stock options that were mostly cancelled in December 2015; and a decrease of $0.5 million in consulting expense due to a decrease in market research and pre-commercialization activities.

 

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Other Income (Expense)

Other income for the three months ended June 30, 2016 was $0.1 million compared to $10,000 for the three months ended June 30, 2015. Other income during the three months ended June 30, 2016 and June 30, 2015 resulted from interest income earned on marketable securities during each period.

 

Comparison of the Six Months Ended June 30, 2016 and 2015

The following table summarizes the results of our operations for each of the six months ended June 30, 2016 and 2015, together with the changes in those items in dollars and as a percentage:

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

 

 

2016

 

 

2015

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

Revenues

 

$

3,205

 

 

$

6,359

 

 

$

(3,154

)

 

 

(50

)%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

27,269

 

 

 

41,780

 

 

 

(14,511

)

 

 

(35

)%

General and administrative

 

 

10,012

 

 

 

11,393

 

 

 

(1,381

)

 

 

(12

)%

Total operating expenses

 

 

37,281

 

 

 

53,173

 

 

 

(15,892

)

 

 

(30

)%

Loss from operations

 

 

(34,076

)

 

 

(46,814

)

 

 

12,738

 

 

 

(27

)%

Other income (expense)

 

 

167

 

 

 

(216

)

 

 

383

 

 

 

(177

)%

Net loss

 

$

(33,909

)

 

$

(47,030

)

 

$

13,121

 

 

 

(28

)%

 

Revenue from U.S. Government Contracts and Grants

The following table sets forth our contract and grant revenue for the six months ended June 30, 2016 and 2015:

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Increase/

 

 

 

 

 

Revenue

 

2016

 

 

2015

 

 

(decrease)

 

 

%

 

 

 

(in thousands)

 

BARDA Contract

 

$

1,574

 

 

$

5,945

 

 

$

(4,371

)

 

 

(74

)%

NIAID Contract

 

 

1,568

 

 

 

349

 

 

 

1,219