ettx_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from                     to                     

Commission File Number: 001-38670

Entasis Therapeutics Holdings Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

82-4592913

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

35 Gatehouse Drive

Waltham, MA 02451

(781) 810-0120

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

 

 

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

ETTX

The Nasdaq Stock Market, LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of November 11, 2019, the registrant had 13,291,563 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

ENTASIS THERAPEUTICS HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q

 

Table of Contents

 

 

 

 

 

    

Page

PART I. 

FINANCIAL INFORMATION

 

 

Item 1. 

Consolidated Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets

 

5

 

Consolidated Statements of Operations and Comprehensive Loss

 

6

 

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity

 

7

 

Consolidated Statements of Cash Flows

 

9

 

Notes to Consolidated Financial Statements

 

10

Item 2. 

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

 

23

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

34

Item 4. 

Controls and Procedures

 

35

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

Item 1. 

Legal Proceedings

 

36

Item 1A. 

Risk Factors

 

36

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 3. 

Defaults Upon Senior Securities

 

37

Item 4. 

Mine Safety Disclosures

 

37

Item 5. 

Other Information

 

37

Item 6. 

Exhibits

 

38

 

 

 

 

2

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative or plural of those terms, and similar expressions.

Forward-looking statements include, but are not limited to, statements about:

·

our plans to develop and commercialize our product candidates;

·

our planned clinical trials for our product candidates;

·

the timing of the availability of data from our clinical trials;

·

the timing of our selection of an initial clinical candidate from our NBP program;

·

our expectation that the efficacy and safety data from our planned and ongoing Phase 3 trials, if positive, will be sufficient to support submission of an NDA to the FDA;

·

our ability to obtain grants or other government funding to develop our product candidates;

·

our ability to take advantage of benefits offered by current and pending legislation related to the development of products addressing antimicrobial resistance;

·

the timing of our planned regulatory filings;

·

the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

·

the clinical utility of our product candidates and their potential advantages compared to other treatments;

·

our commercialization, marketing and distribution capabilities and strategy;

·

our ability to establish and maintain arrangements for the manufacture of our product candidates;

·

our ability to establish and maintain collaborations and to recognize the potential benefits of such collaborations;

·

our estimates regarding the market opportunities for our product candidates;

·

our intellectual property position and the duration of our patent rights; and

·

our estimates regarding future expenses, capital requirements and needs for additional financing.

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Factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part I, Item 1A, “Risk Factors,” in our most recent Annual Report on Form 10-K and those set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Given these uncertainties, you should not rely on these forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

In this Quarterly Report on Form 10‑Q, unless otherwise stated or as the context otherwise requires, references to “Entasis,” “the Company,” “we,” “us,” “our” and similar references refer to Entasis Therapeutics Holdings Inc. and its wholly owned subsidiaries. This Quarterly Report on Form 10‑Q also contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to, including logos, artwork and other visual displays, may appear without the ® or symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

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PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

UNAUDITED

(in thousands, except share and per‑share data)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

15,301

 

$

49,360

Short-term investments

 

 

33,509

 

 

35,732

Accounts receivable

 

 

7,000

 

 

 —

Grants receivable

 

 

1,320

 

 

1,706

Prepaid expenses and other current assets

 

 

3,992

 

 

1,994

Total current assets

 

 

61,122

 

 

88,792

Property and equipment, net

 

 

370

 

 

419

Operating lease right-of-use assets

 

 

1,732

 

 

 —

Other assets

 

 

63

 

 

63

Total assets

 

$

63,287

 

$

89,274

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

948

 

$

1,370

Accrued expenses and other current liabilities

 

 

5,985

 

 

4,846

Total current liabilities

 

 

6,933

 

 

6,216

Operating lease liabilities, net of current portion

 

 

1,460

 

 

 —

Deferred rent

 

 

 —

 

 

175

Total liabilities

 

 

8,393

 

 

6,391

Commitments (Notes 5 and 11)

 

 

  

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

Common stock, par value $0.001; 125,000,000 shares authorized and 13,134,538 and 13,124,842 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively

 

 

13

 

 

13

Additional paid-in capital

 

 

174,776

 

 

172,988

Accumulated other comprehensive income (loss)

 

 

22

 

 

(9)

Accumulated deficit

 

 

(119,917)

 

 

(90,109)

Total stockholders’ equity

 

 

54,894

 

 

82,883

Total liabilities and stockholders’ equity

 

$

63,287

 

$

89,274

 

See accompanying notes to these unaudited consolidated financial statements.

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ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

UNAUDITED 

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Revenue

 

$

7,000

 

$

 —

 

$

7,000

 

$

5,000

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Research and development

 

 

7,606

 

 

8,086

 

 

29,286

 

 

26,115

General and administrative

 

 

3,521

 

 

2,075

 

 

10,130

 

 

7,840

Total operating expenses

 

 

11,127

 

 

10,161

 

 

39,416

 

 

33,955

Loss from operations

 

 

(4,127)

 

 

(10,161)

 

 

(32,416)

 

 

(28,955)

Other income:

 

 

  

 

 

  

 

 

  

 

 

  

Grant income

 

 

634

 

 

1,669

 

 

1,835

 

 

4,507

Interest income

 

 

332

 

 

19

 

 

1,240

 

 

47

Total other income

 

 

966

 

 

1,688

 

 

3,075

 

 

4,554

Loss before income taxes

 

 

(3,161)

 

 

(8,473)

 

 

(29,341)

 

 

(24,401)

Provision for income taxes

 

 

324

 

 

 —

 

 

467

 

 

472

Net loss

 

 

(3,485)

 

 

(8,473)

 

 

(29,808)

 

 

(24,873)

Dividends declared

 

 

 —

 

 

(9,142)

 

 

 —

 

 

(9,142)

Net loss attributable to common stockholders—basic and diluted

 

$

(3,485)

 

$

(17,615)

 

$

(29,808)

 

$

(34,015)

Net loss per share —basic and diluted

 

$

(0.27)

 

$

(20.33)

 

$

(2.27)

 

$

(113.22)

Weighted average common stock outstanding—basic and diluted

 

 

13,134,538

 

 

866,641

 

 

13,130,837

 

 

300,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2019

    

2018

    

2019

    

2018

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,485)

 

$

(17,615)

 

$

(29,808)

 

$

(34,015)

Net unrealized (loss) gain on investments held

 

 

(32)

 

 

 —

 

 

31

 

 

 —

Comprehensive loss

 

$

(3,517)

 

$

(17,615)

 

$

(29,777)

 

$

(34,015)

 

See accompanying notes to these unaudited consolidated financial statements.

 

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ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

UNAUDITED

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balances as of June 30, 2019

 

13,134,538

 

$

13

 

$

174,205

 

$

54

 

$

(116,432)

 

$

57,840

Stock-based compensation expense

 

 —

 

 

 —

 

 

571

 

 

 —

 

 

 —

 

 

571

Unrealized loss on investments held

 

 —

 

 

 —

 

 

 —

 

 

(32)

 

 

 —

 

 

(32)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,485)

 

 

(3,485)

Balances as of September 30, 2019

 

13,134,538

 

$

13

 

$

174,776

 

$

22

 

$

(119,917)

 

$

54,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balances as of December 31, 2018

 

13,124,842

 

$

13

 

$

172,988

 

$

(9)

 

$

(90,109)

 

$

82,883

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,748

 

 

 —

 

 

 —

 

 

1,748

Exercise of stock options

 

9,696

 

 

 —

 

 

40

 

 

 —

 

 

 —

 

 

40

Unrealized gain on investments held

 

 —

 

 

 —

 

 

 —

 

 

31

 

 

 —

 

 

31

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(29,808)

 

 

(29,808)

Balances as of September 30, 2019

 

13,134,538

 

$

13

 

$

174,776

 

$

22

 

$

(119,917)

 

$

54,894

 

 

See accompanying notes to these unaudited consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

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ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY 

UNAUDITED

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Redeemable Convertible Preferred Stock

 

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

A

 

B

 

B-1 A

 

B-1 B

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

    

Shares

    

 Amount

    

Shares

    

 Amount

    

Shares

    

 Amount

 

Shares

    

 Amount

  

  

Shares

    

 Amount

    

Capital

    

Deficit

    

Equity

Balances as of June 30, 2018

 

33,499,900

 

$

23,866

 

25,000,000

 

$

24,550

 

42,372,882

 

$

24,423

 

54,067,796

 

$

31,874

  

 

12,639

 

$

 —

 

$

1,840

 

$

(73,557)

 

$

(71,717)

Stock-based compensation expense

 

 —

 

 

 —

 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

333

 

 

 —

 

 

333

Conversion of preferred stock into common stock upon initial public offering

 

(33,499,900)

 

 

(23,866)

 

(25,000,000)

 

 

(24,550)

 

(42,372,882)

 

 

(24,423)

 

(54,067,796)

 

 

(31,874)

 

 

8,084,414

 

 

 8

 

 

104,705

 

 

 —

 

 

104,713

Issuance of common stock upon initial public offering, net of issuance costs of $9,376

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,000,000

 

 

 5

 

 

65,619

 

 

 —

 

 

65,624

Exercise of stock options

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

908

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

 —

 

 

(8,473)

 

 

(8,473)

Balances as of September 30, 2018

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

  

 

13,097,961

 

$

13

 

$

172,500

 

$

(82,030)

 

$

90,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

Redeemable Convertible Preferred Stock

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

A

 

B

 

B-1 A

 

B-1 B

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

    

Shares

    

 Amount

    

Shares

    

 Amount

    

Shares

    

 Amount

 

Shares

    

 Amount

  

  

Shares

    

 Amount

    

Capital

    

Deficit

    

Equity

Balances as of December 31, 2017

 

33,499,900

 

$

23,866

 

25,000,000

 

$

24,550

 

42,372,882

 

$

24,423

 

54,067,796

 

$

31,874

 

 

12,639

 

$

 3

 

$

1,377

 

$

(57,170)

 

$

(55,790)

ASU 2018-07 modified retrospective adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13)

 

 

13

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

806

 

 

 —

 

 

806

Reorganization adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3)

 

 

 3

 

 

 —

 

 

 —

Conversion of preferred stock into common stock upon initial public offering

 

(33,499,900)

 

 

(23,866)

 

(25,000,000)

 

 

(24,550)

 

(42,372,882)

 

 

(24,423)

 

(54,067,796)

 

 

(31,874)

 

 

8,084,414

 

 

 8

 

 

104,705

 

 

 —

 

 

104,713

Issuance of common stock upon initial public offering, net of issuance costs of $9,376

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,000,000

 

 

 5

 

 

65,619

 

 

 —

 

 

65,624

Exercise of stock options

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

908

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Net loss

 

 —

 

 

 —

 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

 —

 

 

(24,873)

 

 

(24,873)

Balances as of September 30, 2018

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

 

 —

 

$

 —

  

 

13,097,961

 

$

13

 

$

172,500

 

$

(82,030)

 

$

90,483

 

See accompanying notes to these unaudited consolidated financial statements.

 

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ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

 

 

 

  

Net loss

 

$

(29,808)

 

$

(24,873)

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

 

 

 

 

 

  

Depreciation and amortization expense

 

 

110

 

 

125

Stock-based compensation expense

 

 

1,748

 

 

806

Amortization and accretion of investments

 

 

(596)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

  

Accounts receivable

 

 

(7,000)

 

 

 —

Grants receivable

 

 

386

 

 

(2,208)

Prepaid expenses and other assets

 

 

(3,731)

 

 

(1,896)

Accounts payable

 

 

(385)

 

 

536

Accrued expenses and other current liabilities

 

 

2,750

 

 

(386)

Deferred rent

 

 

(175)

 

 

109

Net cash used in operating activities

 

 

(36,701)

 

 

(27,787)

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of property and equipment

 

 

(98)

 

 

(322)

Proceeds from maturities of short-term investments

 

 

37,820

 

 

 —

Purchases of short-term investments

 

 

(34,970)

 

 

 —

Net cash provided by (used in) investing activities

 

 

2,752

 

 

(322)

Cash flows from financing activities:

 

 

  

 

 

  

Proceeds from exercise of stock options

 

 

40

 

 

 3

Proceeds from initial public offering, net of issuance costs paid in the period

 

 

 —

 

 

67,026

Payments of initial public offering costs

 

 

(150)

 

 

 —

Net cash (used in) provided by financing activities

 

 

(110)

 

 

67,029

Net (decrease) increase in cash and cash equivalents

 

 

(34,059)

 

 

38,920

Cash and cash equivalents at beginning of the period

 

 

49,360

 

 

55,101

Cash and cash equivalents at end of the period

 

$

15,301

 

$

94,021

Supplemental disclosure of non-cash investing and financing activities:

 

 

  

 

 

  

Deferred offering costs included in accounts payable and accrued expenses

 

$

 —

 

$

1,105

Conversion of preferred stock to common stock upon initial public offering

 

$

 —

 

$

104,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these unaudited consolidated financial statements.

 

 

9

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

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 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”). 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. has 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, the Company also effected a 1-for-20.728 reverse stock split of its issued and outstanding common stock. All of the 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 September 30, 2019, the Company had $48.8 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $119.9 million. Since its inception through September 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, together with earned milestones from the Zai Lab partnership will enable it to fund its operating expenses and capital requirements through one year from the date of this filing.

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

10

Table of Contents

ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

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, apart from 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 nine months ended September 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 options 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.

11

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, the Company adopted the requirements under the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification 842,  Leases (“ASC 842”) using the cumulative effect adjustment transition option.  Comparative periods have not been restated. This standard requires entities that lease assets to recognize the assets and liabilities for the rights and obligations created by those leases on the balance sheet. The Company elected the available package of practical expedients which allows it to not reassess previous accounting conclusions around whether arrangements are or contain leases, the classification of its leases, and the treatment of initial direct costs. The Company has made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. ASC 842 was issued in order to increase transparency and comparability of financial reporting related to leasing arrangements. The main difference between previous U.S. GAAP (ASC 840) and ASC 842 is the recognition of right-of-use lease assets and lease liabilities by lessees for those leases that were classified as operating leases under ASC 840. At January 1, 2019, the Company recorded right-of-use assets of $2.1 million and operating lease liabilities of $2.2 million. Adoption of the standard did not have a material impact on the consolidated statements of operations.  For additional information regarding how the Company is accounting for leases under ASC  842, refer to Note 5, Leases.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company does not expect the adoption of the new guidance to have a material effect on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18 — Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This update clarifies the interaction between Topic 808, Collaborative  Arrangements, and Topic 606, Revenue from Contracts with Customers by providing guidance on whether certain transactions between collaborative participants should be accounted for as revenue under Topic 606.  The amendment improves comparability by allowing the presentation of the units of account in collaborative arrangements that are within the scope of ASC 606 together with revenue accounted for under ASC 606. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2019. The guidance is required to be applied retrospectively to the date of initial application of Topic 606. An entity should recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual period that includes the date of the entity’s initial application of Topic 606. The Company does not expect the adoption of the new guidance to have a material effect on its consolidated financial statements.

3. Short-Term Investments

The following table summarizes the amortized cost and estimated fair value of the Company’s marketable securities, which are considered to be available-for-sale investments and are included in short-term investments on the consolidated balance sheets:

 

 

 

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

 

(in thousands)

Balance as of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise securities

 

$

6,091

 

$

 3

 

$

 —

 

$

6,094

U.S. Treasury securities

 

 

27,396

 

 

19

 

 

 —

 

 

27,415

Total

 

$

33,487

 

$

22

 

$

 —

 

$

33,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

 

(in thousands)

Balance as of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise securities

 

$

6,059

 

$

 —

 

$

 —

 

$

6,059

U.S. Treasury securities

 

 

29,680

 

 

 —

 

 

(7)

 

 

29,673

Total

 

$

35,739

 

$

 —

 

$

(7)

 

$

35,732

 

Certain short-term debt securities with original maturities of less than 90 days are included in cash and cash equivalents on the consolidated balance sheets and are not included in the tables above. As of September 30, 2019 and December 31, 2018, all short-term investments have contractual maturities within one year.

4. Fair Value of Financial Instruments

The following tables set forth the Company’s assets that were accounted for at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Fair Value Measurement Using

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

13,146

 

$

 —

 

$

 —

 

$

13,146

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

 —

 

 

6,094

 

 

 —

 

 

6,094

U.S. Treasury securities

 

 

27,415

 

 

 —

 

 

 —

 

 

27,415

Total

 

$

40,561

 

$

6,094

 

$

 —

 

$

46,655