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.
During 2018, Entasis Limited completed a corporate reorganization (the “Reorganization”). As part of the Reorganization, in March 2018 Entasis Limited formed Entasis Therapeutics Holdings Inc., a Delaware corporation, with nominal assets and liabilities for the purpose of consummating 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.
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 these consolidated financial statements and related notes have been retroactively adjusted to give effect to the reverse stock split.
Risks and Uncertainties
As of June 30, 2019, the Company had $59.5 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $116.4 million. Since its inception through June 30, 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, equity financing, strategic collaborations, or partnerships. 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.
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, 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 or achieve profitability.
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 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 and six months ended June 30, 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.
7. Funding Arrangements
In December 2016, the Company entered into a funding arrangement with the U.S. Army Medical Research Acquisition Activity (the “USAMRAA grant”) that covers up to $1.1 million of specified research expenditures of the Company incurred from December 2016 through June 2019 (the “performance period”). The Company has until 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 no grant income during the three months ended June 30, 2019, and $0.2 million during the three months ended June 30, 2018, and $37,000 and $0.3 million during the six months ended June 30, 2019 and 2018, respectively, in connection with the USAMRAA grant. The Company received $0.2 million and $0.6 million of payments under the grant during the six months ended June 30, 2019 and 2018, respectively. The Company recorded a receivable to reflect unreimbursed, eligible costs incurred under the grant in the amount of $0.2 million as of December 31, 2018. The Company received the final reimbursement payment under this grant in May 2019, therefore no receivable for unreimbursed costs was required as of June 30, 2019.
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,
in support of our ETX0282 and NBP programs
. These funding arrangements could 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 $0.4 million and $1.5 million during the three months ended June 30, 2019 and 2018, respectively and $1.2 million and $2.5 million during the six months ended June 30, 2019 and 2018, respectively. The Company received $1.5 million and $0.7 million of payments under the grants during the six months ended June 30, 2019 and 2018, respectively. The Company recorded a receivable to reflect unreimbursed, eligible costs incurred under the CARB-X agreements in the amount of $1.2 million and $1.5 million as of June 30, 2019 and December 31, 2018, respectively.
8. License and Collaboration Agreements
GARDP
In July 2017, the Company entered into a collaboration agreement with the Global Antibiotic Research and Development Partnership, or 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 June 30, 2019.
NIAID
The Company has ongoing 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.
Zai Lab
In April 2018, the Company 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 durlobactam (formerly ETX2514) and sulbactam-durlobactam, or SUL-DUR (formerly 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 SUL-
9. Stock‑Based Compensation Expense
Stock Incentive Plans
In connection with the Reorganization, Entasis Therapeutics Holdings Inc. assumed the Entasis Therapeutics Limited amended and restated stock incentive plan, and each outstanding share option to purchase ordinary shares of Entasis Therapeutics 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 Therapeutics 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 June 30, 2019, options to purchase an aggregate of 1,053,806 shares had been granted and 742,068 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 director, 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.
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, durlobactam (formerly 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.
SUL-DUR (formerly ETX2514SUL) is a fixed-dose combination of sulbactam, an intravenous β-lactam antibiotic, with durlobactam, a novel broad-spectrum intravenous β-lactamase inhibitor, or BLI, that we are developing for the treatment of a variety of serious multidrug-resistant infections caused by
Acinetobacter baumannii
, or
Acinetobacter
. 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, targeting
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. The Phase 3 clinical trial will be funded and initiated by our nonprofit collaborator, the Global Antibiotic Research and Development Partnership, or GARDP, in 2019 with data expected in 2021.
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 reported initial preliminary results in June 2019. Additional Phase 1 work is ongoing with efforts to formulate ETX0282 for further clinical development.
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 June 30, 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. We have also 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 $26.3 million and $33.0 million for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively. As of June 30, 2019, we had an accumulated deficit of $116.4 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;
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maintain, expand and protect our intellectual property portfolio;
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hire additional clinical, scientific, manufacturing, administrative, compliance, and commercial personnel; and
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add additional operational, financial and management information systems.
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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 as a private company, including significant legal, accounting, insurance, investor relations and other expenses.
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. In March 2018, we formed Entasis Therapeutics Holdings Inc., a Delaware corporation, 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. The Company received the final reimbursement payment for this grant in May 2019. Through June 30, 2019, we have recorded $1.1 million of grant income and we have received $1.1 million of 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, in support of our ETX0282 and NBP programs. These funding arrangements could cover up to $16.4 million of our specified research expenditures from April 2017 through September 2021. Through June 30, 2019, we have recorded $6.9 million of grant income and we have received $5.9 million of 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, pursuant to which Zai Lab licensed exclusive rights to durlobactam and SUL-DUR in the Asia-Pacific region. Under the terms of the agreement, Zai Lab will fund most of our clinical trial costs in China for SUL-DUR, including all costs in China for our Phase 3 clinical trial of SUL-DUR, with the exception of patient drug supply. Through June 30, 2019, we have received net payments of $5.0 million, representing the $5.0 million upfront payment, $0.6 million of research support payments and $0.3 million of certain other reimbursable clinical trial costs, 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, bonus 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:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2019
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2018
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2019
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2018
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(in thousands)
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Direct research and development expenses by program:
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Durlobactam
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$
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7,259
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$
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4,558
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$
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14,175
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$
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8,593
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ETX0282
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153
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1,948
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856
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3,516
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Zoliflodacin
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28
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6
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43
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34
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Other preclinical programs
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456
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515
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1,057
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972
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Unallocated research and development expenses:
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Personnel related (including stock-based compensation)
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2,108
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1,773
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4,372
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3,646
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Facilities, supplies and other
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673
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679
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1,176
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1,268
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Total research and development expenses
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$
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10,677
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$
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9,479
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$
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21,679
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$
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18,029
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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;
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per-patient trial costs;
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the number of patients that participate in the trials;
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the number of sites included in the trials;
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the countries in which the trials are conducted;
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the length of time required to enroll eligible patients;
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the number of doses that patients receive;
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the drop-out or discontinuation rates of patients;
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potential additional safety monitoring or other studies requested by regulatory agencies;
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the duration of patient follow-up; and
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the efficacy and safety profiles of the product candidates.
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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, bonus 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 as well as professional fees for legal, patent, consulting, accounting, insurance 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.
Provision for 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 June 30, 2019 and 2018
The following table summarizes our results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
|
|
(in thousands)
|
Revenue
|
|
$
|
—
|
|
$
|
5,000
|
|
$
|
(5,000)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,677
|
|
|
9,479
|
|
|
1,198
|
General and administrative
|
|
|
3,421
|
|
|
2,548
|
|
|
873
|
Total operating expenses
|
|
|
14,098
|
|
|
12,027
|
|
|
2,071
|
Loss from operations
|
|
|
(14,098)
|
|
|
(7,027)
|
|
|
(7,071)
|
Other income:
|
|
|
|
|
|
|
|
|
|
Grant income
|
|
|
372
|
|
|
1,750
|
|
|
(1,378)
|
Interest income
|
|
|
417
|
|
|
16
|
|
|
401
|
Total other income
|
|
|
789
|
|
|
1,766
|
|
|
(977)
|
Loss before income taxes
|
|
|
(13,309)
|
|
|
(5,261)
|
|
|
(8,048)
|
Provision for income taxes
|
|
|
73
|
|
|
472
|
|
|
(399)
|
Net loss
|
|
$
|
(13,382)
|
|
$
|
(5,733)
|
|
$
|
(7,649)
|
Revenue
We recognized no revenue during the three months ended June 30, 2019 and $5.0 million during the three months ended June 30, 2018 associated with delivery of the exclusive license and the initial technology transfer of licensed know-how pursuant to the collaboration agreement with Zai Lab, which we entered into in April 2018.
Research and Development Expenses
Research and development expenses were $10.7 million during the three months ended June 30, 2019, compared to $9.5 million during the three months ended June 30, 2018. The increase of $1.2 million was primarily due to an increase of $2.7 million related to the advancement of our SUL-DUR product candidate and an increase of $0.3 million in personnel expenses associated with higher headcount, higher salaries and higher stock-based compensation expense resulting from options granted during the year ended December 31, 2018 and the six months ended June 30, 2019, offset in part by a decrease of $1.8 million in expenses related to the advancement of our ETX0282CPDP product candidate. The increase in expenses of $2.7 million associated with the advancement of our SUL-DUR product candidate was primarily due to an increase of $2.0 million in clinical development costs and an increase of $1.0 million in drug manufacturing costs, offset by a decrease of $0.3 million in preclinical expenses. The decrease of $1.8 million in expenses related to the advancement of our ETX0282CPDP product candidate was primarily due to decreases of $1.2 million in drug manufacturing costs, $0.4 million in clinical development costs and $0.1 million in preclinical expenses.
General and Administrative Expenses
General and administrative expenses were $3.4 million during the three months ended June 30, 2019, compared to $2.5 million during the three months ended June 30, 2018. The increase of $0.9 million is driven by an increase of $1.0 million in personnel expenses associated with higher headcount, higher salaries and higher stock-based compensation expense resulting from options granted during the year ended December 31, 2018 and the six months ended June 30, 2019.
Other Income
Other income was $0.8 million during the three months ended June 30, 2019, compared to $1.8 million during the three months ended June 30, 2018. The decrease of $1.0 million was due to a decrease of $1.4 million in grant income associated with our grant agreements with the CARB-X and USAMRAA programs, offset by an increase in interest income of $0.4 million.
Provision for Income Taxes
Provision for income taxes was $0.1 million during the three months ended June 30, 2019, compared to $0.5 million during the three months ended June 30, 2018. The $0.4 million decrease was due to the timing of payments received from Zai Lab during 2018 in connection with our ongoing license and collaboration agreement. Our losses before income taxes were generated in the United States.
Six Months Ended June 30, 2019 and 2018
The following table summarizes our results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
|
|
(in thousands)
|
Revenue
|
|
$
|
—
|
|
$
|
5,000
|
|
$
|
(5,000)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
21,679
|
|
|
18,029
|
|
|
3,650
|
General and administrative
|
|
|
6,609
|
|
|
5,766
|
|
|
843
|
Total operating expenses
|
|
|
28,288
|
|
|
23,795
|
|
|
4,493
|
Loss from operations
|
|
|
(28,288)
|
|
|
(18,795)
|
|
|
(9,493)
|
Other income:
|
|
|
|
|
|
|
|
|
|
Grant income
|
|
|
1,201
|
|
|
2,839
|
|
|
(1,638)
|
Interest income
|
|
|
908
|
|
|
28
|
|
|
880
|
Total other income
|
|
|
2,109
|
|
|
2,867
|
|
|
(758)
|
Loss before income taxes
|
|
|
(26,179)
|
|
|
(15,928)
|
|
|
(10,251)
|
Provision for income taxes
|
|
|
144
|
|
|
472
|
|
|
(328)
|
Net loss
|
|
$
|
(26,323)
|
|
$
|
(16,400)
|
|
$
|
(9,923)
|
Revenue
We recognized no revenue during the six months ended June 30, 2019 and $5.0 million during the six months ended June 30, 2018 associated with the delivery of the exclusive license and the initial technology transfer of licensed know-how pursuant to the collaboration agreement with Zai Lab, which we entered into in April 2018.
Research and Development Expenses
Research and development expenses were $21.7 million during the six months ended June 30, 2019, compared to $18.0 million during the six months ended June 30, 2018. The increase of $3.7 million was primarily due to an increase of $5.6 million related to the advancement of our SUL-DUR product candidate and an increase of $0.7 million in personnel expenses associated with higher headcount, higher salaries and higher stock-based compensation expense resulting from options granted during the year ended December 31, 2018 and the six months ended June 30, 2019, offset in part by a decrease of $2.7 million related to the advancement of our ETX0282CPDP product candidate. The increase of $5.6 million associated with the advancement of our SUL-DUR product candidate was primarily due to an increase of $3.8 million in clinical development costs and an increase of $1.9 million in drug manufacturing costs. The decrease of $2.7 million of expenses related to the advancement of our ETX0282CPDP product candidate was primarily due to a decrease of $2.4 million in drug manufacturing costs and a decrease of $0.2 million in preclinical expenses.
General and Administrative Expenses
General and administrative expenses were $6.6 million during the six months ended June 30, 2019, compared to $5.8 million during the six months ended June 30, 2018. The $0.8 million increase is driven by an increase of $1.3 million in personnel expenses associated with higher headcount, higher salaries and higher stock-based compensation expense resulting from options granted during the year ended December 31, 2018 and the six months ended June 30, 2019, and an increase of $0.3 million related to insurance costs associated with operating as a public company. These increases are offset by a decrease of $1.0 million in legal and professional fees primarily associated with the April 2018 corporate reorganization.
Other Income
Other income was $2.1 million during the six months ended June 30, 2019, compared to $2.9 million during the six months ended June 30, 2018. The $0.8 million decrease was due to a $1.6 million decrease in grant income associated with the CARB-X and USAMRAA programs, offset by an increase of $0.9 million in interest income.
Income Taxes
Provision for income taxes was $0.1 million during the six months ended June 30, 2019, compared to $0.5 million during the six months ended June 30, 2018. The $0.3 million decrease was due to the timing of payments received from Zai Lab during 2018 in connection with our ongoing license and collaboration agreement. Our losses before income taxes were generated in the United States.
Liquidity and Capital Resources
Overview
As of June 30, 2019, we had raised 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, USAMRAA, and the U.S. Department of Defense. We have received non-profit awards from GARDP as well as upfront and ongoing research support payments from Zai Lab. As of June 30, 2019, we had cash, cash equivalents and short-term investments of $59.5 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 $26.3 million during the six months ended June 30, 2019. As of June 30, 2019, we had an accumulated deficit of $116.4 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, 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, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. 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):
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2019
|
|
2018
|
Net cash used in operating activities
|
|
$
|
(25,966)
|
|
$
|
(19,166)
|
Net cash used in investing activities
|
|
|
(18,087)
|
|
|
(253)
|
Net cash used in financing activities
|
|
|
(110)
|
|
|
(2,039)
|
Net decrease in cash and cash equivalents
|
|
$
|
(44,163)
|
|
$
|
(21,458)
|
Operating Activities
During the six months ended June 30, 2019, operating activities used $26.0 million of cash, resulting from our net loss of $26.3 million and net cash used by changes in operating assets and liabilities of $0.5 million, offset by non-cash charges of $0.8 million. Net cash used by changes in operating assets and liabilities for the six months ended June 30, 2019 consisted of a $3.4 million increase in prepaid expenses and a $0.6 million decrease in accounts payable. These uses of cash were partially offset by a $3.3 million increase in accrued expenses and other current liabilities.
During the six months ended June 30, 2018, operating activities used $19.2 million of cash, resulting from our net loss of $16.4 million and net cash used for changes in operating assets and liabilities of $3.3 million, partially offset by non-cash charges of $0.6 million. Net cash used for changes in operating assets and liabilities for the six months ended June 30, 2018 consisted of
a $1.8 million increase in grants receivable, a $1.4 million increase in prepaid expenses and other assets and a $0.8 million decrease in accrued expenses and other current liabilities. These were partially offset by a $0.7 million increase in accounts payable.
Investing Activities
During the six months ended June 30, 2019, net cash used in investing activities was $18.1 million, consisting of $25.1 million used to purchase short-term investments, offset by $7.0 million provided by proceeds from maturities of short-term investments.
During the six months ended June 30, 2018, net cash used in investing activities was $0.3 million, consisting of purchases of property and equipment.
Financing Activities
During the six months ended June 30, 2019, net cash used by financing activities was $0.1 million, which consisted primarily of payments of initial public offering costs.
During the six months ended June 30, 2018, net cash used in financing activities was $2.0 million,
which consisted of payments of 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 June 30, 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.