1. Organization and Description of Business
Entasis Therapeutics Holdings Inc. (“Entasis” or the “Company”) is a clinical‑stage biopharmaceutical company focused on the discovery, development and commercialization of novel antibacterial products to treat serious infections caused by multidrug-resistant Gram‑negative bacteria. The Company has three subsidiaries: Entasis Therapeutics Limited; Entasis Therapeutics Inc.; and Entasis Therapeutics Security Corporation.
The Company was initially formed as Entasis Therapeutics Limited (“Entasis Limited”) on March 6, 2015 in the United Kingdom (“U.K.”) as a wholly owned subsidiary of AstraZeneca AB (“AstraZeneca”). In connection with the spin‑out of Entasis Limited from AstraZeneca in May 2015, Entasis Limited issued 4 ordinary shares to AstraZeneca. Additionally, pursuant to a business transfer and subscription agreement with AstraZeneca (the “A Subscription Agreement”), Entasis Limited also issued 33,499,900 shares of A redeemable convertible preference shares (“A Preferred Stock”) to AstraZeneca in May 2015. In March 2016, Entasis Limited issued 25,000,000 shares of B redeemable convertible preference shares (“B Preferred Stock”) to third‑party investors, at which point AstraZeneca no longer held a controlling interest in Entasis Limited.
On April 23, 2018, Entasis Limited completed a corporate reorganization (the “Reorganization”). As part of the Reorganization, Entasis Limited formed Entasis Therapeutics Holdings Inc., a Delaware corporation, in March 2018 with nominal assets and liabilities for the purpose of consummating the Reorganization. In connection with the Reorganization, the existing shareholders of Entasis Limited exchanged each of their classes of shares of Entasis Limited for the same number and classes of common stock and preferred stock of Entasis Therapeutics Holdings Inc. on a one‑to‑one basis. The newly issued stock of Entasis Therapeutics Holdings Inc. have substantially identical rights to the exchanged shares of Entasis Limited. As a result of the exchange, Entasis Therapeutics Holdings Inc. became the sole shareholder of Entasis Limited. Upon the completion of the Reorganization on April 23, 2018, the historical consolidated financial statements of Entasis Limited became the historical consolidated financial statements of Entasis Therapeutics Holdings Inc.
On September 28, 2018, the Company completed an initial public offering of its common stock, in which the Company issued and sold 5,000,000 shares of common stock at a price to the public of $15.00 per share. The aggregate net proceeds to the Company from the initial public offering were approximately $65.6 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. Upon the completion of the Company’s initial public offering, all of the outstanding shares of redeemable convertible preferred stock of the Company, including accrued dividends, automatically converted into 8,084,414 shares of the Company’s common stock.
Risks and Uncertainties
As of March 31, 2019, the Company had $74.6 million in cash, cash equivalents and short-term investments and an accumulated deficit of $103.1 million. Since its inception through March 31, 2019, the Company has funded its operations primarily with proceeds from the sale of redeemable convertible preferred stock and the sale of its common stock. The Company has also either directly received funding or financial commitments from, or has had its program activities conducted and funded by, United States (“U.S.”) government agencies and non-profit entities. In the absence of positive cash flows from operations, the Company is highly dependent on its ability to find additional sources of funding in the form of debt or equity financing. The Company believes its existing cash, cash equivalents and short-term investments will enable it to fund its operating expenses and capital requirements into the fourth quarter of 2020.
As an early-stage company, the Company is subject to a number of risks common to other life science companies, including, but not limited to, raising additional capital, development by its competitors of new technological innovations, risk of failure in preclinical and clinical studies, safety and efficacy of its product candidates in clinical trials, the risk of relying on external parties such as contract research organizations (“CROs”) and contract manufacturing organizations (“CMOs”), the regulatory approval process, market acceptance of the Company’s products
once approved, lack of marketing and sales history, dependence on key personnel and protection of proprietary technology. The Company’s therapeutic programs are currently pre-commercial, spanning discovery through late development and will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization of any product candidates. These efforts require significant amounts of additional capital, adequate personnel, infrastructure, and extensive compliance-reporting capabilities. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate revenue from product sales. The Company may never achieve profitability, and unless and until it does, it will continue to need to raise additional capital or obtain financing from other sources, such as strategic collaborations or partnerships.
2. Summary of Significant Accounting Policies
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2018 and the notes thereto, which are included in the Company’s most recent Annual Report on Form 10-K. Since the date of those consolidated financial statements, there have been no material changes to its significant accounting policies, with the exception of significant accounting policies related to the adoption of FASB ASC Topic 842,
Leases
, effective January 1, 2019, as described below.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. The December 31, 2018 consolidated balance sheet was derived from audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2019. The interim consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations.
The accompanying consolidated financial statements include the Company’s accounts and those of the Company’s wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the recognition of revenue, the recognition of research and development expenses and the valuation of common stock used in the determination of stock-based compensation expense. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.
September 2022 to obtain the reimbursements from USAMRAA for the specified research expenditures incurred and paid by the Company during the performance period.
The Company recognized grant income of $37,000 for the three months ended March 31, 2019 and $0.1 million for the three months ended March 31, 2018. The Company received $0.2 million of funding under the grant for the three months ended March 31, 2019 and $0.5 million of funding under the grant for the three months ended March 31, 2018. The Company recorded a receivable to reflect unreimbursed, eligible costs incurred under the grant in the amount of $45,000 and $0.2 million as of March 31, 2019 and December 31, 2018, respectively.
In March 2017 and October 2017, the Company entered into funding arrangements with the Trustees of Boston University to utilize funds from the U.S. government through the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator (CARB‑X) program. These funding arrangements will cover up to $16.4 million of specified research expenditures of the Company from April 2017 through September 2021.
The Company recognized grant income in connection with the CARB-X agreements of $0.8 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively. The Company received $0.6 million and $0.2 million of funding under the grant for the three months ended March 31, 2019 and 2018, respectively. The Company recorded a receivable to reflect unreimbursed, eligible costs incurred under the CARB-X agreements in the amount of $1.7 million and $1.5 million as of March 31, 2019 and December 31, 2018, respectively.
Collaboration Agreement
In July 2017, the Company entered into a collaboration agreement (the “Agreement”) with the Global Antibiotic Research and Development Partnership (“GARDP”) for the development, manufacture and commercialization of the product candidate zoliflodacin in certain countries. The Phase 3 clinical trial has not commenced and there have been no material transactions with respect to the agreement as of March 31, 2019.
The Company also had zoliflodacin program activities conducted and funded by the U.S. government through its arrangements with the U.S. National Institute of Allergy and Infectious Diseases, or NIAID.
8. License and Collaboration Agreement with Zai Lab
In April 2018, the Company entered into a license and collaboration agreement with Zai Lab, pursuant to which Zai Lab licensed exclusive rights to ETX2514 and ETX2514SUL in the Asia‑Pacific region (the “Zai Agreement”). Under the terms of the Zai Agreement, Zai Lab will fund most of the Company’s clinical trial costs in China for ETX2514SUL, including all costs in China for the Company’s Phase 3 clinical trial of ETX2514SUL, with the exception of patient drug supply. Zai Lab will conduct development activities, plan and obtain regulatory approval in a specified number of countries in the Asia‑Pacific region beyond China after regulatory approval of a licensed product in China. Zai Lab is also solely responsible for commercializing licensed products in the Asia‑Pacific region and will commercialize licensed products for which it has obtained regulatory approval. The Company is obligated to conduct specified development activities for the Asia‑Pacific region. The Company is also obligated to supply Zai Lab with the licensed products for clinical development, although Zai Lab may take over manufacturing responsibilities for its own commercialization activities within a specified time period following the effective date of the Zai Agreement. Both parties are prohibited from developing and commercializing products in the Asia‑Pacific region that would compete with the licensed products.
In addition, under the Zai Agreement, either party may propose that Zai Lab pursue a combination of imipenem together with ETX2514SUL in the territory. If the parties decide to pursue an imipenem combination, Zai Lab would provide the Company with limited research and development support for the combination.
The Company received an upfront, non‑refundable payment of $5.0 million, less applicable taxes of $0.8 million, and $0.3 million of research support funding, less applicable taxes from Zai Lab in 2018. The Company is eligible to receive up to an aggregate of $98.3 million in additional research and development support payments and development, regulatory and sales milestone payments related to ETX2514SUL, imipenem and other combinations with the licensed products. In the event the China Food and Drug Administration requires a modification or supplement to the trial protocol, and the Company delays Zai Lab from proceeding with such modified protocol and subsequently obtaining regulatory approval for the pivotal study of ETX2514SUL in China, then the sales‑based milestone payments that become due to the Company will be reduced by an agreed upon amount that increases with the length of the delay. Zai Lab will pay the Company a tiered royalty equal to a high‑single digit to low‑double digit percentage based on annual net sales of licensed products in the territory, subject to specified reductions for the market entry of competing products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory.
The Company evaluated the Zai Agreement under Topic 606 and identified two material promises: (1) an exclusive license to develop, manufacture and commercialize products containing ETX2514 or ETX2514SUL in the territory and (2) the initial technology transfer of licensed know‑how. The Company determined that the exclusive license and initial technology transfer were not distinct from one another, as the license has limited value without the transfer of the Company’s technology and Zai Lab would incur additional costs to recreate the Company’s know‑how. Therefore, the license and initial technology transfer were combined as a single performance obligation.
The Company determined the $5.0 million non‑refundable upfront payment is the entire transaction price at the outset of the Zai Agreement. All other future potential milestone payments were excluded from the transaction price as they are fully constrained as the risk of significant reversal has not yet been resolved. The achievement of the future potential milestones is not within the Company’s control and is subject to certain research and development success, regulatory approvals or commercial success and therefore carry significant uncertainty. The Company will reevaluate the likelihood of achieving future milestones at the end of each reporting period. Future development milestone revenue from the arrangement will be recognized as revenue in the period when it is no longer probable that revenue attributable to the milestone will result in a significant reversal of cumulative revenue.
Through March 31, 2019, the Company had recognized revenue of $5.0 million in the Company’s consolidated statements of operations and comprehensive loss under the Zai Agreement. During the three months ended March 31, 2019 and March 31, 2018, the Company recognized no revenue under the Zai Agreement.
9. Stock‑Based Compensation Expense
Stock Incentive Plan
In connection with the Reorganization, Entasis Therapeutics Holdings Inc. assumed the Entasis Limited amended and restated stock incentive plan, and each outstanding share option to purchase ordinary shares of Entasis Limited was assumed by Entasis Therapeutics Holdings Inc. and converted into an option to purchase the same number of shares of common stock of Entasis Therapeutics Holdings Inc. at the same exercise price per share and on the same vesting schedule. Each new option has and is subject to the same terms and conditions as were in effect immediately prior to the assumption and conversion. No share options of Entasis Limited are outstanding following the assumption and conversion.
In September 2018, the Company’s board of directors adopted, and its stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”), which became effective on September 25, 2018, at which point no further grants will be made under the 2015 Stock Incentive Plan (the “2015 Plan”). Under the 2018 Plan, the Company may grant incentive stock options (“ISOs”), non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock
units and other stock-based awards. As of March 31, 2019, options to purchase an aggregate of 844,306 shares had been granted and 878,850 shares were available for future issuance under the 2018 Plan.
Initially, subject to adjustment as provided in the 2018 Plan, the aggregate number of shares of the Company’s common stock available for issuance under the 2018 Plan was 1,181,972. The number of shares of the Company’s common stock reserved for issuance under the 2018 Plan will automatically increase on January 1 of each year, for a period of 10 years, from January 1, 2019 continuing through January 1, 2028, by 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. Accordingly, on January 1, 2019, 524,993 shares were added to the number of available shares. The maximum number of shares that may be issued pursuant to the exercise of ISOs under the 2018 Plan is 7,500,000.
The maximum number of shares of the Company’s common stock subject to awards granted under the 2018 Plan or otherwise during a single calendar year to any nonemployee directors, taken together with any cash fees paid by the Company to such nonemployee director during the calendar year for serving on the Company’s board of directors, will not exceed $500,000 in total value, or, with respect to the calendar year in which a nonemployee director is first appointed or elected to the Company’s board of directors, $800,000.
All options and awards granted under the 2015 Plan consisted of the Company’s common stock. As of September 25, 2018, no additional stock awards have been or will be granted under the 2015 plan. Although the 2015 Plan was terminated as to future awards in September 2018, it continues to govern the terms of options that remain outstanding under the 2015 Plan.
Stock Option Activity
Stock option activity under both plans for the three months ended March 31, 2019 is summarized as follows:
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Weighted-
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Weighted-
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Average
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Average
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Remaining
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Aggregate
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Number of
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Exercise
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Contractual
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Intrinsic
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Options
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Price
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Term (Years)
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Value (in thousands)
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Outstanding as of December 31, 2018
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1,375,730
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$
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6.54
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8.66
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$
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426
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Granted
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601,200
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5.67
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Exercised
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(2,286)
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4.55
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Cancelled or forfeited
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(7,668)
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7.19
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Outstanding as of March 31, 2019
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1,966,976
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$
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6.28
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8.84
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$
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2,973
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Vested or expected to vest as of March 31, 2019
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1,966,976
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$
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6.28
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8.84
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$
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2,973
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Exercisable as of March 31, 2019
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563,190
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$
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4.57
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7.69
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$
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1,243
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The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock.
During the three months ended March 31, 2019, the weighted-average grant date fair value per granted option was $3.89. There were no stock option awards granted in the three months ended March 31, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q.
This discussion contains certain forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward- looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1A of Part I under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (SEC) on March 29, 2019. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and except as required by law, we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
Overview
We are a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel antibacterial products to treat serious infections caused by multidrug-resistant Gram-negative bacteria. Leveraging our targeted-design platform, we have engineered and developed product candidates that target clinically validated mechanisms to address antibiotic resistance. Our lead product candidate, ETX2514, as well as one of our other product candidates, ETX0282, inhibit one of the most prevalent forms of bacterial resistance, β-lactamase enzymes, so-named because of their ability to inactivate β-lactam antibiotics, one of the most commonly used classes of antibiotics. By blocking this resistance mechanism, these product candidates, when administered in combination with β-lactam antibiotics, are designed to restore the efficacy of those antibiotics. Our other product candidate, zoliflodacin, targets the validated mechanism of action of the fluoroquinolone class of antibiotics, but does so in a novel manner to avoid existing fluoroquinolone resistance.
ETX2514SUL is a fixed-dose combination of ETX2514, a novel broad-spectrum intravenous, or IV, β-lactamase inhibitor, or BLI, with sulbactam, an IV β-lactam antibiotic, that we are developing for the treatment of a variety of serious multidrug-resistant infections caused by
Acinetobacter baumannii
, or
Acinetobacter
. We have completed three separate Phase 1 clinical trials, including one evaluating the penetration of ETX2514SUL into the lung and one in renally impaired patients. In addition, we have completed a Phase 2 clinical trial in patients with complicated urinary tract infections, or UTIs. Based on a series of discussions with the U.S. Food and Drug Administration, or FDA, including an end-of-Phase-2 meeting, we initiated the single Phase 3 clinical trial in April 2019, with data expected in the second half of 2020.
Zoliflodacin is a novel orally administered molecule that inhibits bacterial gyrase, an essential enzyme in bacterial reproduction, for the treatment of drug-resistant
Neisseria gonorrhoeae
, the bacterial pathogen responsible for gonorrhea. Intramuscular ceftriaxone now represents the last-resort treatment option for gonorrhea, although resistant strains are beginning to emerge. We believe that there is a growing unmet need for an oral antibiotic, that will reliably treat patients with gonorrhea, including multidrug-resistant gonorrhea. We have completed several Phase 1 clinical trials and a Phase 2 clinical trial of zoliflodacin in patients with uncomplicated gonorrhea. The results of the Phase 2 clinical trial were published in the New England Journal of Medicine in November 2018. We intend to initiate a Phase 3 clinical trial in mid-2019 with data expected in 2021. The Phase 3 clinical trial will be funded by our nonprofit collaborator, the Global Antibiotic Research and Development Partnership, or GARDP.
We are also developing ETX0282CPDP for the treatment of complicated UTIs, including those caused by extended-spectrum β-lactamase, or ESBL, producing bacterial strains or carbapenem-resistant
Enterobacteriaceae
, or CRE. ETX0282CPDP is an oral, fixed dose combination of ETX0282, a novel oral BLI, with cefpodoxime proxetil, an oral β-lactam antibiotic. We believe there is a significant unmet need for new oral antibiotics that reliably treat patients with multidrug-resistant Gram-negative infections. We initiated a multi-part Phase 1 clinical trial of ETX0282CPDP in Australia in the second quarter of 2018 and expect to receive data from the Phase 1 trial in mid-2019.
We are using our targeted-design platform in an attempt to develop a novel class of antibiotics, non β-lactam inhibitors of the penicillin binding proteins, or NBPs. Penicillin binding proteins, or PBPs, are clinically validated targets of β-lactam antibiotics, such as penicillins and carbapenems. Due to their differentiated chemical structure, our NBPs are not subject to inactivation by β-lactamases, unlike β-lactam antibiotics. Accordingly, we believe our NBPs constitute a potential new class of Gram-negative antibacterial agents with no pre-existing resistance that are designed to target a broad spectrum of pathogens, including
Pseudomonas aeruginosa,
or
Pseudomonas
. We expect to select an initial clinical candidate from our NBP program in 2019.
Since our inception in May 2015, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights, conducting discovery and development activities for our programs and planning for potential commercialization. We do not have any products approved for sale and therefore have not generated any revenue from product sales. As of March 31, 2019, we have funded our operations primarily with net cash proceeds of $104.2 million from the sale of our preferred stock and net cash proceeds of approximately $65.6 million from the sale of common stock in our initial public offering, or IPO. We have also either directly received funding or financial commitments from, or have had our program activities conducted and funded by, the U.S. government through our arrangements with the U.S. National Institute of Allergy and Infectious Diseases, or NIAID, the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator program, or CARB-X, and the U.S. Department of Defense, and have received non-profit awards from GARDP, and an upfront payment from our license and collaboration agreement with Zai Lab (Shanghai), Co., Ltd., or Zai Lab.
Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates and programs. Our net losses were $12.9 million and $33.0 million for the three months ended March 31, 2019 and the year ended December 31, 2018, respectively. As of March 31, 2019, we had an accumulated deficit of $103.1 million. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the necessary development, obtaining regulatory approval and preparing for potential commercialization of our product candidates.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on other research and development activities. We expect our expenses will increase substantially over time as we:
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continue our ongoing and planned preclinical and clinical development of our product candidates;
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initiate preclinical studies and clinical trials for any additional product candidates that we may pursue in the future;
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seek to discover and develop additional product candidates;
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seek regulatory approvals for any product candidates that successfully complete clinical trials;
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ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any product candidate for which we may obtain regulatory approval and intend to commercialize on our own;
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maintain, expand and protect our intellectual property portfolio;
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hire additional clinical, scientific and chemistry, manufacturing and controls personnel; and
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add additional operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.
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Furthermore, we now incur additional costs associated with operating as a public company that we did not previously incur or previously incurred at lower rates, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
Initial Public Offering; Reverse Stock Split
On September 28, 2018, we completed our IPO, in which we issued and sold 5,000,000 shares of common stock at a price to the public of $15.00 per share. The aggregate net proceeds to us from the IPO were approximately $65.6 million after deducting underwriting discounts and commissions and offering expenses payable by us. The shares began trading on The Nasdaq Global Market on September 26, 2018. Upon the completion of the IPO, all of our outstanding shares of redeemable convertible preferred stock, including accrued dividends, automatically converted into 8,084,414 shares of our common stock. In September 2018, we also effected a 1-for-20.728 reverse stock split of our issued and outstanding common stock. All of our historical share and per share information shown in the accompanying consolidated financial statements and related notes have been retroactively adjusted to give effect to the reverse stock split.
The Corporate Reorganization
We completed a corporate reorganization on April 23, 2018. As part of the corporate reorganization, we formed Entasis Therapeutics Holdings Inc., a Delaware corporation, in March 2018 with nominal assets and liabilities for the purpose of consummating the corporate reorganization described herein. In connection with the corporate reorganization, the existing shareholders of Entasis Therapeutics Limited exchanged their shares for the same number and classes of newly issued shares in Entasis Therapeutics Holdings Inc. As a result, Entasis Therapeutics Limited became a wholly owned subsidiary of Entasis Therapeutics Holdings Inc.
Upon completion of the corporate reorganization on April 23, 2018, the historical consolidated financial statements of Entasis Therapeutics Limited became the historical consolidated financial statements of Entasis Therapeutics Holdings Inc.
Funding Arrangements
In December 2016, we entered into a funding arrangement with the U.S. Army Medical Research Acquisition Activity, or USAMRAA, a division of the U.S. Department of Defense, through which we received a grant. This grant covered funding for up to $1.1 million of specified research expenditures incurred from December 2016 through June 2019, or the performance period. Specified research expenditures are the reimbursable expenses associated with agreed upon activities needed to advance the research project supported by the grant. These expenditures can include internal labor, laboratory supplies and equipment, travel, consulting and third-party vendor research and development support costs. We have until September 30, 2022 to obtain reimbursements from USAMRAA for the fully paid, specified research expenditures incurred during the performance period. As of March 31, 2019, we had recorded $1.1 million of grant income and we had received $1.0 million in payments under this grant.
In March 2017 and October 2017, we entered into funding arrangements with the Trustees of Boston University to utilize funds from the U.S. government, through the CARB-X program, for support of our ETX0282 and NBP programs. These funding arrangements will cover up to $16.4 million of our specified research expenditures from April 2017 through September 2021. As of March 31, 2019, we had recorded $6.5 million of grant income and we had received $5.1 million in payments under this grant.
In July 2017, we entered into a collaboration agreement with GARDP for the development and commercialization of the product candidate zoliflodacin in certain countries. Under the terms of the collaboration agreement, GARDP will fully fund the Phase 3 clinical trial, including the manufacture and supply of zoliflodacin, in uncomplicated gonorrhea.
In April 2018, we entered into a license and collaboration agreement with Zai Lab (Shanghai) Co., Ltd., or Zai Lab, pursuant to which Zai Lab licensed exclusive rights to ETX2514 and ETX2514SUL in the Asia-Pacific region. Under the terms of the agreement, Zai Lab will fund most of our clinical trial costs in China for ETX2514SUL, including all costs in China for our Phase 3 clinical trial of ETX2514SUL, with the exception of patient drug supply. As of March 31, 2019, we had received net payments of $4.5 million, representing the $5.0 million upfront payment and $0.3 million of research support payments, less applicable taxes, from Zai Lab and we had recognized revenue of $5.0 million under the agreement.
Components of Results of Operations
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our preclinical and clinical product candidates. These expenses include:
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employee-related expenses, including salaries and benefits, travel and stock-based compensation expense for employees engaged in research and development functions;
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fees paid to consultants for services directly related to our product development and regulatory efforts;
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expenses incurred under agreements with contract research organizations, or CROs, as well as contract manufacturing organizations, or CMOs, and consultants that conduct and provide supplies for our preclinical studies and clinical trials;
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costs associated with preclinical activities and development activities;
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costs associated with our technology and our intellectual property portfolio;
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costs related to compliance with regulatory requirements; and
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facilities-related expenses, which include allocated rent and maintenance of facilities and other operating costs.
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Costs associated with research and development activities are expensed as incurred. 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 other information provided to us by our vendors. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered.
Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and preclinical program and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also
include fees incurred under service, license or option agreements. We do not allocate employee costs or facility expenses to specific programs because these costs are deployed across multiple programs and, accordingly, are not separately classified. We primarily use internal resources and our own employees to conduct our research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities.
To date, substantially all of our research and development expenses have been related to the preclinical and clinical development of our product candidates and preclinical program. The following table shows our research and development expenses by development program and type of activity (in thousands):
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Direct research and development expenses by program:
|
|
|
|
|
|
|
|
ETX2514
|
|
$
|
6,916
|
|
$
|
4,035
|
|
ETX0282
|
|
|
703
|
|
|
1,568
|
|
Zoliflodacin
|
|
|
15
|
|
|
28
|
|
Other preclinical programs
|
|
|
601
|
|
|
457
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
Personnel related (including stock-based compensation)
|
|
|
2,264
|
|
|
1,873
|
|
Facility related and other
|
|
|
503
|
|
|
589
|
|
Total research and development expenses
|
|
$
|
11,002
|
|
$
|
8,550
|
|
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. We expect our research and development expenses to increase over the next several years as we progress our product candidates through clinical development. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates.
The duration, costs and timing of clinical trials and development of our product candidates and preclinical program will depend on a variety of factors that include, but are not limited to, the following:
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·
|
|
the number of trials required for approval and any requirement for extension trials;
|
|
·
|
|
per-patient trial costs;
|
|
·
|
|
the number of patients that participate in the trials;
|
|
·
|
|
the number of sites included in the trials;
|
|
·
|
|
the countries in which the trials are conducted;
|
|
·
|
|
the length of time required to enroll eligible patients;
|
|
·
|
|
the number of doses that patients receive;
|
|
·
|
|
the drop-out or discontinuation rates of patients;
|
|
·
|
|
potential additional safety monitoring or other studies requested by regulatory agencies;
|
|
·
|
|
the duration of patient follow-up; and
|
|
·
|
|
the efficacy and safety profiles of the product candidates.
|
Any changes in the outcome of any of these factors with respect to the development of our product candidates could mean a significant change in the costs and timing associated with the development of these product candidates. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing and supply, and commercial viability. We will determine which programs to pursue and how much to fund each program based on the scientific and clinical success of each product candidate, as well as an assessment of each candidate’s commercial potential.
General and Administrative Expenses
General and administrative expenses consist of salaries and benefits, travel and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative costs also include facilities-related costs not otherwise included in research and development expenses and professional fees for legal, patent, consulting, accounting and audit services.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company. Additionally, as we now have an ongoing Phase 3 trial and are in the early stages of planning for potential product commercialization, we also anticipate incurring additional expenses related to increased headcount, for example, our recent hire of a Chief Commercial Officer. When we believe regulatory approval of a product candidate appears more likely, we anticipate further increases in payroll and other employee-related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing functions for that product candidate.
Other Income
Grant Income
Grant income consists of income recognized in connection with grants we received under our funding arrangements with USAMRAA and the Trustees of Boston University through the CARB-X program. Grant income is recognized in the period during which the related specified expenses are incurred.
Interest Income
Interest income consists of interest earned on our cash and investment balances.
Income Taxes
The provision for income taxes primarily consists of provisions for foreign withholding income taxes on payments related to our agreement with Zai Lab.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” disclosed in our most recent Annual Report on Form 10-K.
Results of Operations
Three Months Ended March 31, 2019 and 2018
The following table summarizes our results of operations for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
|
|
(in thousands)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
11,002
|
|
$
|
8,550
|
|
$
|
2,452
|
General and administrative
|
|
|
3,189
|
|
|
3,218
|
|
|
(29)
|
Total operating expenses
|
|
|
14,191
|
|
|
11,768
|
|
|
2,423
|
Loss from operations
|
|
|
(14,191)
|
|
|
(11,768)
|
|
|
(2,423)
|
Other income:
|
|
|
|
|
|
|
|
|
|
Grant income
|
|
|
829
|
|
|
1,089
|
|
|
(260)
|
Interest income
|
|
|
492
|
|
|
12
|
|
|
480
|
Total other income
|
|
|
1,321
|
|
|
1,101
|
|
|
220
|
Loss before income taxes
|
|
|
(12,870)
|
|
|
(10,667)
|
|
|
(2,203)
|
Provision for income taxes
|
|
|
71
|
|
|
—
|
|
|
71
|
Net loss
|
|
$
|
(12,941)
|
|
$
|
(10,667)
|
|
$
|
(2,274)
|
Research and Development Expenses
Research and development expenses were $11.0 million for the three months ended March 31, 2019, compared to $8.6 million for the three months ended March 31, 2018. The increase of $2.5 million was primarily due to an increase of $2.9 million in preclinical and clinical development expenses related to the advancement of our ETX2514SUL product candidate and an increase of $0.3 million in personnel expenses associated with higher headcount and higher stock-based compensation expense resulting from options granted during the year ended December 31, 2018 and the three months ended March 31, 2019, offset in part by a decrease of $0.9 million in preclinical and clinical development expenses related to the advancement of our ETX0282CPDP product candidate. The increase in preclinical and clinical development expenses of $2.9 million associated with the advancement of ETX2514SUL was primarily due to an increase of $1.9 million in clinical development costs, an increase of $0.9 million in drug manufacturing costs and an increase of $0.1 million in preclinical expenses. The decrease of $0.9 million in preclinical and clinical development expenses related to the advancement of our ETX0282CPDP was primarily due to a decrease of $1.2 million in drug manufacturing costs and a decrease of $0.2 million in preclinical expenses, offset by an increase of $0.5 million in clinical development costs.
General and Administrative Expenses
General and administrative expenses were $3.2 million for both the three months ended March 31, 2019 and 2018. Included in general and administrative expenses is an increase of $0.4 million in outside services and an increase of $0.3 million in personnel expenses associated with higher headcount and higher stock-based compensation expense resulting from options granted during the year ended December 31, 2018 and the three months ended March 31, 2019. These increases are offset by a decrease of $0.6 million in legal and professional fees associated with the preparation, audit and review of our consolidated financial statements.
Other Income
Other income was $1.3 million for the three months ended March 31, 2019, compared to $1.1 million for the three months ended March 31, 2018. The increase of $0.2 million was due to an increase of $0.5 million in interest income offset by a decrease in grant income of $0.3 million primarily associated with our grant agreements with the CARB-X program.
Income Taxes
Provision for income taxes was $0.1 million for the three months ended March 31, 2019 compared to zero for the three months ended March 31, 2018. Our losses before income taxes were generated in the United States.
Liquidity and Capital Resources
Overview
As of March 31, 2019, we had raised aggregate net cash proceeds of $104.2 million from the sale of redeemable convertible preferred stock and approximately $65.6 million of net proceeds from the sale of common stock in our IPO, which we have used to fund our operations. In addition, we have also either directly received funding or financial commitments from, or have had our program activities conducted and funded by, the U.S. government through our arrangements with NIAID, CARB-X and the U.S. Department of Defense, and have received non-profit awards from GARDP and an upfront and research support payments from Zai Lab. As of March 31, 2019, we had cash, cash equivalents and short-term investments of $74.6 million.
We have incurred operating losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. Our net loss was $12.9 million for the three months ended March 31, 2019. As of March 31, 2019, we had an accumulated deficit of $103.1 million.
We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2020. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Funding Requirements
Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, laboratory and related supplies, manufacturing development costs, legal and other regulatory expenses and general administrative costs.
The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the clinical development of our product candidates and obtain regulatory approvals. We are also unable to predict when, if ever, net cash inflows will commence from product sales. This is due to the numerous risks and uncertainties associated with developing drugs, including, among others, the uncertainty of:
|
·
|
|
successful enrollment in, and completion of clinical trials;
|
|
·
|
|
performing preclinical studies and clinical trials in compliance with the FDA, the EMA or any comparable regulatory authority requirements;
|
|
·
|
|
the ability of collaborators to manufacture sufficient quantity of product for development, clinical trials or potential commercialization;
|
|
·
|
|
obtaining marketing approvals with labeling for sufficiently broad patient populations and indications, without unduly restrictive distribution limitations or safety warnings, such as black box warnings or a Risk Evaluation and Mitigation Strategies program;
|
|
·
|
|
obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity for our product candidates;
|
|
·
|
|
making arrangements with third parties for manufacturing capabilities;
|
|
·
|
|
launching commercial sales of products, if and when approved, whether alone or in collaboration with others;
|
|
·
|
|
acceptance of the therapies, if and when approved, by physicians, patients and third-party payors;
|
|
·
|
|
competing effectively with other therapies;
|
|
·
|
|
obtaining and maintaining healthcare coverage and adequate reimbursement;
|
|
·
|
|
protecting our rights in our intellectual property portfolio; and
|
|
·
|
|
maintaining a continued acceptable safety profile of our drugs following approval.
|
A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate.
We will not generate revenue from product sales unless and until we or a collaborator successfully complete clinical development and obtain regulatory approval for our current and future product candidates. If we obtain regulatory approval for any of our product candidates that we intend to commercialize on our own, we will incur significant expenses related to commercialization, including developing our internal commercialization capability to support product sales, marketing and distribution.
As a result, we will need substantial additional funding to support our continuing operations and to pursue our growth strategy. Until such time, if ever, when we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaboration, license and development agreements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to a third party to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our failure to raise capital as and when needed would compromise our ability to pursue our business strategy.
We will also continue to incur costs as a public company that we did not previously incur or previously incurred at lower rates, including increased fees payable to the nonemployee members of our board of directors, increased personnel costs, increased director and officer insurance premiums, audit and legal fees, investor relations fees and expenses for compliance with public-company reporting requirements under the Exchange Act and rules implemented by the SEC and Nasdaq.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Net cash used in operating activities
|
|
$
|
(10,599)
|
|
$
|
(13,092)
|
Net cash used in investing activities
|
|
|
(25,087)
|
|
|
(137)
|
Net cash used in financing activities
|
|
|
(139)
|
|
|
(1,706)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
—
|
|
|
(44)
|
Net decrease in cash and cash equivalents
|
|
$
|
(35,825)
|
|
$
|
(14,979)
|
Operating Activities
During the three months ended March 31, 2019, operating activities used $10.6 million of cash, resulting primarily from our net loss of $12.9 million offset by net cash provided by changes in operating assets and liabilities of $1.9 million and non-cash charges of $0.4 million. Net cash provided by changes in operating assets and liabilities for the three months ended March 31, 2019 consisted primarily of a $2.7 million increase in accounts payable and a $1.9 million increase in accrued expenses and other current liabilities. These sources of cash were partially offset by a $2.5 million increase in prepaid expenses and other assets.
During the three months ended March 31, 2018, operating activities used $13.1 million of cash, resulting from our net loss of $10.7 million and net cash used for changes in operating assets and liabilities of $2.7 million, partially offset by non-cash charges of $0.3 million. Net cash used for changes in operating assets and liabilities for the three months ended March 31, 2018 consisted primarily of
a $2.3 million decrease in accrued expenses, mainly due to a decrease in contract manufacturing activities,
a $0.7 million increase in grants receivable and a $0.3 million increase in prepaid expenses and other assets. These were partially offset by a $0.6 million increase in accounts payable
related to an increase in clinical trial costs and associated drug manufacturing costs for the advancement of ETX2514 and ETX0282
.
Investing Activities
During the three months ended March 31, 2019, net cash used in investing activities was $25.1 million, consisting primarily of our purchase of short-term investments.
During the three months ended March 31, 2018, net cash used in investing activities was $0.1 million, consisting of our purchase of property and equipment.
Financing Activities
During the three months ended March 31, 2019, net cash used by financing activities was $0.1 million, which consisted primarily of payment of initial public offering costs.
During the three months ended March 31, 2018, net cash used in financing activities was $1.7 million,
which related to payments of deferred initial public offering costs
.
Contractual Obligations and Commitments
As a smaller reporting company, we are not required to provide the disclosure required by Item 303(a)(5) of Regulation S-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recent Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to our unaudited consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide disclosure for this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting.
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.