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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 June 30, 2021

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 Global Market

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 August 9, 2021, the registrant had 47,310,254 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 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

24

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

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

37

2

Table of Contents

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,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative or plural of those terms, and similar expressions. 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. 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.

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

the severity and duration of the impact of the COVID-19 pandemic on our business, development programs and access to capital;
our plans to develop and commercialize our product candidates;
the timing of execution of planned clinical trials and availability of data from our clinical trials;
our expectation that the efficacy and safety data from our ongoing and planned Phase 3 registration trials, if positive, will be sufficient to support submission of a new drug application, or NDA, to the U.S. Food and Drug Administration, or 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 and our ability to file, obtain and maintain regulatory filings 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;
our estimates regarding anticipated operating losses, needs for additional funds and capital requirements;
political, social and economic instability, natural disasters or public health epidemics in countries where we or our collaborators do business;
the substantial influence and control that Innoviva, Inc. may exert on actions requiring stockholder approval; and
our estimated needs for, and ability to raise additional financing, and our ability to continue as a going concern.

3

Table of Contents

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this document, including, 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. The trademarks, trade names and service marks appearing in this Quarterly Report are the property of their respective owners.

4

Table of Contents

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)

June 30, 

December 31,

    

2021

    

2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

56,406

$

53,247

Grants receivable

 

2,657

 

1,890

Prepaid expenses

2,471

4,160

Other current assets

 

888

 

835

Total current assets

 

62,422

 

60,132

Property and equipment, net

 

200

 

222

Operating lease right-of-use assets

 

880

 

1,141

Other assets

 

63

 

63

Total assets

$

63,565

$

61,558

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

1,045

$

660

Accrued expenses and other current liabilities

 

9,099

 

7,905

Total current liabilities

 

10,144

 

8,565

Operating lease liabilities, net of current portion

361

704

Total liabilities

 

10,505

 

9,269

Commitments (Notes 4 and 10)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock, par value $0.001; 125,000,000 shares authorized and 47,310,254 and 36,637,357 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

 

48

 

37

Additional paid-in capital

 

260,198

 

236,707

Accumulated deficit

 

(207,186)

 

(184,455)

Total stockholders’ equity

 

53,060

 

52,289

Total liabilities and stockholders’ equity

$

63,565

$

61,558

See accompanying notes to these unaudited consolidated financial statements.

5

Table of Contents

ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

UNAUDITED

(in thousands, except share and per share data)

 

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

$

9,986

$

10,239

$

19,356

$

21,862

General and administrative

 

3,311

 

3,241

 

6,618

 

7,021

Total operating expenses

 

13,297

 

13,480

 

25,974

 

28,883

Loss from operations

 

(13,297)

 

(13,480)

 

(25,974)

 

(28,883)

Other income:

 

  

 

  

 

 

  

Grant income

 

1,264

 

48

 

3,236

 

62

Interest income

 

3

 

36

 

7

 

159

Total other income

 

1,267

 

84

 

3,243

 

221

Net loss

$

(12,030)

$

(13,396)

$

(22,731)

$

(28,662)

Net loss per share —basic and diluted

$

(0.29)

$

(0.78)

$

(0.58)

$

(1.89)

Weighted average common stock outstanding—basic and diluted

 

41,107,067

 

17,095,140

 

39,103,901

 

15,193,351

Three Months Ended June 30, 

Six Months Ended June 30, 

2021

    

2020

    

2021

    

2020

Other comprehensive loss:

Net loss

$

(12,030)

 

$

(13,396)

$

(22,731)

 

$

(28,662)

Net unrealized loss on investments held

 

 

(28)

 

 

Comprehensive loss

$

(12,030)

$

(13,424)

$

(22,731)

$

(28,662)

See accompanying notes to these unaudited consolidated financial statements.

6

Table of Contents

ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

UNAUDITED

(in thousands, except share data)

Three Months Ended June 30, 2021

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances as of March 31, 2021

37,310,254

$

38

$

239,375

$

(195,156)

$

44,257

Stock-based compensation expense

 

 

 

882

 

 

882

Issuance of common stock in Private Placement, net of issuance costs

10,000,000

10

19,941

19,951

Net loss

 

 

 

 

(12,030)

 

(12,030)

Balances as of June 30, 2021

 

47,310,254

$

48

$

260,198

$

(207,186)

$

53,060

Six Months Ended June 30, 2021

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances as of December 31, 2020

36,637,357

$

37

$

236,707

$

(184,455)

$

52,289

Stock-based compensation expense

 

 

 

1,751

 

 

1,751

Issuance of common stock in Private Placement, net of issuance costs

10,000,000

10

19,941

19,951

Exercise of warrants

672,897

1

1,799

1,800

Net loss

 

 

 

 

(22,731)

 

(22,731)

Balances as of June 30, 2021

 

47,310,254

$

48

$

260,198

$

(207,186)

$

53,060

See accompanying notes to these unaudited consolidated financial statements.

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ENTASIS THERAPEUTICS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

UNAUDITED

(in thousands, except share data)

Three Months Ended June 30, 2020

 

Additional

Accumulated Other

Total

 

Common Stock

 

Paid-in

 

Comprehensive

Accumulated

Stockholders’

  

Shares

    

 Amount

    

Capital

    

Income

Deficit

    

Equity

Balances as of March 31, 2020

 

13,291,563

$

13

$

176,888

$

28

$

(149,225)

$

27,704

Stock-based compensation expense

 

 

 

750

 

 

750

Issuance of common stock in Private Placement, net of issuance costs

14,000,000

14

34,243

34,257

Unrealized loss on investments held

(28)

(28)

Net loss

 

 

 

(13,396)

 

(13,396)

Balances as of June 30, 2020

 

27,291,563

 

$

27

 

$

211,881

 

$

$

(162,621)

$

49,287

Six Months Ended June 30, 2020

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balances as of December 31, 2019

13,291,563

$

13

$

176,103

$

(133,959)

$

42,157

Stock-based compensation expense

 

 

 

1,535

 

 

1,535

Issuance of common stock in Private Placement, net of issuance costs

14,000,000

14

34,243

34,257

Net loss

 

 

 

 

(28,662)

 

(28,662)

Balances as of June 30, 2020

27,291,563

$

27

$

211,881

$

(162,621)

$

49,287

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)

Six Months Ended

June 30, 

    

2021

    

2020

Cash flows from operating activities:

  

Net loss

$

(22,731)

$

(28,662)

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

 

 

  

Depreciation expense

 

55

 

76

Stock-based compensation expense

 

1,751

 

1,535

Amortization and accretion of investments

(38)

Changes in operating assets and liabilities:

 

 

  

Grants receivable

 

(767)

 

991

Prepaid expenses

 

1,689

 

1,949

Other assets

208

1,347

Accounts payable

 

385

 

230

Accrued expenses and other liabilities

 

828

 

(1,992)

Net cash used in operating activities

 

(18,582)

 

(24,564)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(33)

 

Proceeds from maturities of short-term investments

25,000

Net cash (used in) provided by investing activities

 

(33)

 

25,000

Cash flows from financing activities:

 

  

 

  

Proceeds from the issuance of common stock in Private Placement, net

19,974

34,301

Proceeds from the exercise of warrants

1,800

Net cash provided by financing activities

 

21,774

 

34,301

Net increase in cash and cash equivalents

 

3,159

 

34,737

Cash and cash equivalents at beginning of the year

 

53,247

 

16,034

Cash and cash equivalents at end of the year

$

56,406

$

50,771

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

Financing costs included in accrued expenses and current liabilities

$

23

$

61

See accompanying notes to these unaudited consolidated financial statements.

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. Organization and Description of Business

Entasis Therapeutics Holdings Inc., or Entasis, or the Company, is an advanced, clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of targeted antibacterial products that address high unmet medical needs to treat serious infections caused by multidrug-resistant pathogens. The Company has four subsidiaries: Entasis Therapeutics Limited; Entasis Therapeutics Inc.; Entasis Therapeutics Security Corporation; and Entasis Therapeutics (Ireland) Limited.

On April 12, 2020, the Company entered into a securities purchase agreement, or the First Securities Purchase Agreement, with Innoviva, Inc., or Innoviva, pursuant to which the Company issued and sold to Innoviva, in a private placement, 14,000,000 newly issued shares of common stock of the Company at $2.50 per share, and warrants to purchase up to 14,000,000 shares of common stock with an exercise price per share of $2.50, resulting in an aggregate gross purchase price of approximately $35.0 million, collectively, the First Private Placement. As a result of the transaction, Innoviva acquired control of the Company, owning approximately 51.3% of the Company’s common stock without giving effect to the potential exercise of its warrants.

On August 27, 2020, the Company entered into a securities purchase agreement, or the Second Securities Purchase Agreement, with the purchasers named therein, or the Investors, which included existing stockholder Innoviva. Pursuant to the Second Securities Purchase Agreement, the Company issued and sold to the Investors in a private placement (i) 8,183,878 newly issued shares of common stock of the Company at $2.675 per share, (ii) warrants to purchase an aggregate of 9,345,794 shares of common stock with an exercise price of $2.675, and (iii) pre-funded warrants, in lieu of common stock, to purchase an aggregate of 1,161,916 shares of common stock with an exercise price of $0.001 per share, resulting in aggregate gross proceeds of approximately $25.0 million, collectively, the Second Private Placement. The closing of the Second Private Placement occurred on September 1, 2020. As a result of the transaction, Innoviva owned approximately 52.6% of the Company’s common stock without giving effect to the potential exercise of its warrants.

On May 3, 2021, the Company entered into a securities purchase agreement, or the Third Securities Purchase Agreement, with a subsidiary of Innoviva, pursuant to which the Company agreed to issue and sell to Innoviva, in a private placement up to 10,000,000 newly issued shares of common stock of the Company at $2.00 per share and warrants to purchase up to 10,000,000 shares of common stock with an exercise price per share of $2.00, collectively, the Third Private Placement. The warrants will be exercisable immediately and will have a five-year term.

 

The Third Private Placement occurred in two tranches. At the closing of the first tranche, or the First Closing, which occurred on May 3, 2021, Innoviva purchased 3,731,025 shares of common stock and warrants to purchase up to 3,731,025 shares of common stock, for an aggregate purchase price of approximately $7.5 million. At the closing of the second tranche, or the Second Closing, which occurred on June 11, 2021, Innoviva purchased the remaining 6,268,975 shares of common stock and warrants to purchase up to 6,268,975 shares of common stock, for an aggregate purchase price of approximately $12.5 million. At the effective time of the Second Closing, Innoviva owned approximately 60.6% of the Company’s common stock without giving effect to the potential exercise of the warrants. If Innoviva were to exercise of all of the warrants, as of such date Innoviva would have held approximately 75.5% of the Company’s outstanding common stock.

Going Concern

Since its inception, the Company has incurred recurring net losses and negative cash flows from its operations. The Company has financed its operations primarily with proceeds from the sale of redeemable convertible preferred stock and the sale of its common stock. As of June 30, 2021, the Company had cash and cash equivalents of $56.4 million.

 

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The Company follows the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 205-40, Presentation of Financial Statements — Going Concern, or ASC 205-40, which requires management to assess the Company’s ability to continue as a going concern for one year after the date the consolidated financial statements are issued. 

Based on the Company’s available cash resources, management expects that its existing cash and cash equivalents as of June 30, 2021 will be sufficient to enable the Company to fund its operating expenses and capital expenditure requirements through the second quarter of 2022. However, management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. A failure to raise the additional funding or to effectively implement cost reductions could harm the Company’s business, results of operations and future prospects. The Company expects to seek additional funding to sustain its future operations and while the Company has successfully raised capital in the past, the ability to raise capital in future periods is not assured. If the Company is not able to secure adequate additional funding in future periods, the Company may make reductions in certain expenditures. This may include suspending or curtailing planned activities. The Company may also have to delay, reduce the scope of, suspend or eliminate one or more research and development programs or its commercialization efforts.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Risks and Uncertainties

As a clinical-stage company, Entasis is subject to a number of risks common to other life science companies, including, but not limited to, raising additional capital, development by its competitors of new technological innovations, risk of failure in preclinical and clinical studies, safety and efficacy of its product candidates in clinical trials, the risk of relying on external parties such as contract research organizations and contract manufacturing organizations, 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-stage development and will require additional research and development efforts, including the completion of Phase 3 registration trials and regulatory approval, prior to commercialization of any product candidates. These efforts require significant amounts of additional capital, adequate personnel, infrastructure, and extensive compliance-reporting capabilities. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate revenue from product sales. The Company may never achieve profitability, and unless and until it does, it will continue to need to raise additional capital or obtain financing from other sources, such as strategic collaborations or partnerships.

The COVID-19 pandemic has, and will likely continue to have, a significant impact on the U.S. economy and businesses. The pandemic also has taxed healthcare systems both in the U.S. and around the world, resulting in disruption to or temporary suspension of certain clinical trials. The nature, extent and duration of the COVID-19 pandemic remains uncertain. Although vaccines are now being administered around the world, the time needed for businesses and healthcare systems to recover from the disruptions caused, and changes needed by businesses to adopt new working conditions remains unknown. The full impact of the pandemic on the economy, including the capital markets, remains uncertain. The prolonged adverse economic conditions could limit the Company’s access to financial resources from the capital markets and other sources. It is not possible to predict the full impact of the COVID-19 pandemic on the Company’s business and access to capital in the future. Despite these conditions, the Company was

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

able to complete enrollment of patients in the SUL-DUR phase 3 registration trial, or ATTACK trial in July 2021. However, COVID-19 resurgence could continue to impact study related site activities necessary for final study data collection and close out. The zoliflodacin Phase 3 registration trial continues to be negatively impacted by the continued resurgences of the pandemic at the ex-U.S. trial sites.

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, 2020 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.

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, or U.S. GAAP, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. The December 31, 2020 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, 2020, filed with the Securities and Exchange Commission, or SEC, on March 23, 2021. 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 six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or any other 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 and the recognition of certain development costs. 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.

Recently Adopted Accounting Pronouncements

Effective January 1, 2021, the Company adopted the provisions of FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. The adoption of the new guidance did not affect the Company’s consolidated financial statements.

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

3. 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:

June 30, 2021

Fair Value Measurement Using

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Cash equivalents:

Money market funds

$

49,131

$

$

$

49,131

Total

$

49,131

$

$

$

49,131

December 31, 2020

Fair Value Measurement Using

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Cash equivalents:

Money market funds

$

49,125

$

$

$

49,125

Total

$

49,125

$

$

$

49,125

The Company classifies its money market funds as Level 1 assets under the fair value hierarchy, as these assets have been valued using quoted market prices in active markets without any valuation adjustment.

The carrying amounts of the Company’s cash equivalents, grants receivable, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these amounts.

4. Leases

The Company holds one significant operating lease consisting of 20,062 square feet of office and laboratory space in Waltham, Massachusetts that expires in December 2022 pursuant to a May 2015 lease with AstraZeneca, or the AZ lease, as amended in February 2018. During the three months ended June 30, 2021 and 2020, the Company recorded lease expense of $0.2 million related to the lease. During the six months ended June 30, 2021 and 2020, the Company recorded lease expense of $0.3 million related to the lease. See Note 11, Related Party Transactions, to these notes to consolidated financial statements for additional information.

In calculating the present value of future lease payments, the Company utilized its incremental borrowing rate based on the remaining lease term at the date of adoption. One lease contains a renewal option that can extend the lease for three years. Because the Company is not reasonably certain to exercise this renewal option, the option is not considered in determining the lease term, and associated potential additional payments are excluded from lease payments. The Company elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all of the contract consideration across lease components only. The Company has existing net leases in which the non-lease components (e.g., common area maintenance) are paid separately from rent based on actual costs incurred and therefore are not included in the operating lease right-of-use assets and lease liabilities and are reflected as an expense in the period incurred.

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The following table summarizes the presentation of the Company’s operating leases in its consolidated balance sheets (in thousands):

As of

As of

June 30, 2021

December 31, 2020

Assets

Operating lease right-of-use assets

$

880

$

1,141

 

Liabilities

Operating lease liabilities, current

$

659

$

617

Operating lease liabilities, net of current portion

361

704

Total operating lease liabilities

$

1,020

$

1,321

Future minimum lease payments under non-cancelable leases were as detailed below (in thousands):

Fiscal Year

As of June 30, 2021

2021 (remaining 6 months)

$

358

2022

 

737

2023

 

1

Total undiscounted lease payments

1,096

Less: imputed interest

(76)

Total operating lease liabilities

$

1,020

As of June 30, 2021, the weighted average remaining lease term was 1.5 years and the weighted-average incremental borrowing rate used to determine the operating lease right-of-use assets was 9.1%.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

As of
June 30, 2021

As of
December 31, 2020

Accrued contract manufacturing

$

5,058

$

2,959

Accrued compensation and benefits

 

2,292

 

2,935

Current portion of operating lease liabilities

 

659

 

617

Accrued professional services

 

343

 

435

Accrued clinical

332

504

Accrued research

327

349

Other

 

88

 

106

Total accrued expenses and other current liabilities

$

9,099

$

7,905

6. Funding Arrangements

NIH

In June 2020, the Company entered into a contract with the National Institute of Allergy and Infectious Diseases, or NIAID, part of the National Institutes of Health, or NIH, the NIH Contract, which was effective beginning July 1, 2020 and provides the Company with reimbursement of certain qualified expenses incurred. The initial award

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

consists of approximately $3.0 million, with the potential to increase up to $15.5 million, and will be used to develop novel molecules from the Company’s non-β-lactam inhibitor, or NBP, platform. Funding from the contract will support research towards developing molecules with expanded Gram-negative spectrum against antibiotic resistant bacterial pathogens including E. coli, Acinetobacter, Pseudomonas and Klebsiella. In July 2021, the Company successfully completed the first milestones for the program associated with the initial award and has been awarded the Option 1 Period of the program to proceed with further optimization, beginning August 1, 2021. This option consists of an additional $2.9 million, bringing the total award to $5.9 million. The contract will be accounted for in a way that is consistent with the Company’s Government Contracts and Grant Agreements accounting policy. See Note 2, Summary of Significant Accounting Policies - Government Contracts and Grant Agreements, to the notes to consolidated financial statements in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2021 for additional information.

The Company recognized grant income in connection with the NIH contract of $0.6 million and $1.3 million during the three and six months ended June 30, 2021, respectively, and no grant income during the three and six months ended June 30, 2020. As of June 30, 2021, the Company’s receivables for unreimbursed, eligible costs incurred under the NIH contract totaled $0.6 million, including both billed and unbilled amounts.

CARB-X

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, or CARB-X, program, in support of the Company’s ETX0282CPDP and ETX0462 programs. The amount of specified research expenditures of the Company that could be covered is $18.5 million from April 2017 through May 2023. Through June 30, 2021, the Company has received $10.6 million in payments and recorded $12.2 million of grant income under these funding arrangements. The remaining $6.3 million that could be received is related to the Company’s ETX0462 program.

The Company recognized grant income in connection with the CARB-X agreements of $0.6 million and $1.9 million during the three and six months ended June 30, 2021, respectively, and $48,000 and $0.1 million during the three and six months ended June 30, 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company’s receivables for unreimbursed, eligible costs incurred under the CARB-X agreements totaled $2.0 million and $1.1 million, respectively, including both billed and unbilled amounts.

7. 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. Under the terms of the collaboration agreement, GARDP will use commercially reasonable endeavors to perform and fully fund the Phase 3 registration trial, including the manufacture and supply of the product candidate containing zoliflodacin, in uncomplicated gonorrhea. The Phase 3 registration trial was initiated in September 2019 with activation of U.S. sites. The trial was negatively impacted by the COVID-19 pandemic, resulting in a 4-month pause in enrollment in mid-2020. Although GARDP resumed patient enrollment into the Phase 3 registration trial after the pause, enrollment continues to be negatively impacted by the continued resurgences of the pandemic at the ex-U.S. trial sites.

In addition, under the collaboration agreement, the Company has granted GARDP a worldwide, fully paid, exclusive and royalty-free license, with the right to sublicense, to use its zoliflodacin technology in connection with GARDP’s development, manufacture and commercialization of zoliflodacin in low-income and specified middle-income

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

countries. The Company has retained commercial rights in all other countries worldwide, including the major markets in North America, Europe and Asia-Pacific. The Company has also retained the right to use and grant licenses to its zoliflodacin technology to perform its obligations under the collaboration agreement and for any purpose other than gonorrhea or community-acquired indications. If the Company believes that the results of the Phase 3 registration trial of zoliflodacin would be supportive of an application for marketing approval, it is obligated to use its best efforts to file an application for marketing approval with the FDA within six months of the completion of the trial and to use commercially reasonable endeavors to file an application for marketing approval with the EMA. Each party is responsible for using commercially reasonable efforts to obtain marketing authorizations for the product candidate in their respective territories.

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 and sulbactam-durlobactam, or SUL-DUR, in the Asia-Pacific region, or 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-DUR, including all costs in China for the Company’s Phase 3 registration trial of SUL-DUR, with the exception of Phase 3 patient drug supply. Zai Lab will conduct development activities and plan and obtain regulatory approval in a specified number of countries in the Asia-Pacific region beyond China after receipt of regulatory approval of a licensed product in China. Zai Lab is also solely responsible for commercializing licensed products in the Asia-Pacific region and will commercialize licensed products for which it has obtained regulatory approval. The Company is obligated to supply Zai Lab with the licensed products for clinical development, although Zai Lab may take over manufacturing responsibilities for its own commercialization activities within a specified time period following the effective date of the Zai Agreement.

The Company received an upfront, non-refundable payment of $5.0 million, milestone payments of $7.0 million, research support funding of $0.6 million and certain other reimbursable registration trial costs of $5.0 million, less applicable taxes of $2.2 million, from Zai Lab through June 30, 2021. During the six months ended June 30, 2021 and 2020, the Company recognized no revenue under the Zai Agreement. The Company is eligible to receive up to an aggregate of $91.0 million in additional research and development support payments and development, regulatory and sales milestone payments related to SUL-DUR, imipenem and other combinations with the licensed products. Zai Lab will pay the Company a tiered royalty equal from a high-single digit to low-double digit percentage based on annual net sales of licensed products in the territory, subject to specified reductions for the market entry of competing products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory. Payments received for research support and reimbursable clinical trial costs are recorded as an offset to research and development expense during the period in which the qualifying expenses are incurred.

The Company determined the $5.0 million non-refundable upfront payment was the entire transaction price at the outset of the Zai Agreement. All other future potential milestone payments were excluded from the transaction price as they were fully constrained as the risk of significant reversal of revenue had not yet been resolved. At the outset of the Zai Agreement, the achievement of the future potential milestones was not within the Company’s control and was subject to certain research and development success, regulatory approvals or commercial success and therefore carried significant uncertainty. The Company reevaluates the likelihood of achieving the future milestones at the end of each reporting period. Future development milestone revenue from the arrangement will be recognized as revenue in the period when it is no longer probable that revenue attributable to the milestone will result in a significant reversal of cumulative revenue. Payments received for research support and reimbursable clinical trial costs are recorded as an offset to research and development expense during the period in which the qualifying expenses are incurred.

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

8. Stockholders’ Equity and Stock-Based Compensation Expense

Third Private Placement

On May 3, 2021, the Company entered into the Third Securities Purchase Agreement, with a subsidiary of Innoviva, pursuant to which the Company agreed to issue and sell to Innoviva up to 10,000,000 newly issued shares of common stock of the Company at $2.00 per share and warrants to purchase up to 10,000,000 shares of common stock, each with an exercise price per share of $2.00.

 

Third Private Placement occurred in two tranches. At the First Closing, which occurred on May 3, 2021, Innoviva purchased 3,731,025 shares of common stock and warrants to purchase 3,731,025 shares of common stock, for aggregate gross proceeds of $7.5 million. At the Second Closing, which occurred on June 11, 2021, Innoviva purchased the remaining 6,268,975 shares of common stock and warrants to purchase 6,268,975 shares of common stock, for aggregate gross proceeds of $12.5 million.

   

Second Private Placement

Under the Second Securities Purchase Agreement, the Company issued and sold to the investors, including Innoviva, in a private placement (i) 8,183,878 newly issued shares of common stock of the Company at $2.675 per share, (ii) warrants to purchase an aggregate of 9,345,794 shares of common stock with an exercise price of $2.675, and (iii) pre-funded warrants, in lieu of common stock, to purchase an aggregate of 1,161,916 shares of common stock, with an exercise price of $0.001 per share, resulting in aggregate gross proceeds of approximately $25.0 million. The closing of the Second Private Placement occurred on September 1, 2020.

 

The exercise price and the number of shares of common stock issuable upon exercise of each warrant is subject to appropriate adjustments in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. Each warrant is exercisable from the date of issuance and has a term of five years.

   

First Private Placement

 

Under the First Securities Purchase Agreement, the Company issued and sold to Innoviva 14,000,000 shares of common stock of the Company at $2.50 per share, and warrants to purchase up to 14,000,000 shares of common stock with an exercise price per share of $2.50.  

Under the First Securities Purchase Agreement, the First Private Placement occurred in two tranches. At the closing of the first tranche, which occurred on April 22, 2020, Innoviva purchased 1,322,510 shares of common stock and warrants to purchase 1,322,510 shares of common stock, for aggregate gross proceeds of approximately $3.3 million. At the closing of the second tranche, which occurred on June 11, 2020, Innoviva purchased the remaining 12,677,490 shares of common stock and warrants to purchase 12,677,490 shares of the common stock for aggregate gross proceeds of approximately $31.7 million.

 

At the closing of the first tranche, Innoviva and the Company entered into an investors rights agreement, or the Investor Rights Agreement, which provides that for so long as Innoviva and its affiliates hold at least 15% of the outstanding shares of the Company’s common stock on a fully-diluted basis, Innoviva shall have the right to designate two directors to the board of directors of the Company, or the Board; and for so long as Innoviva and its affiliates hold at least 8% of the outstanding shares of the Company’s common stock on a fully-diluted basis, Innoviva shall have the right to designate one director to the Board, subject to certain qualifications and conditions in the Investor Rights Agreement. The Investor Rights Agreement also provides for participation rights for Innoviva to participate pro rata in future offerings of securities by the Company.

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

As a result of the closings of the three private placements, Innoviva owns approximately 60.6% of the Company’s outstanding common stock without the exercise of the warrants.

  

Warrants

As of June 30, 2021, outstanding warrants to purchase shares of the Company’s common stock are as follows:

Shares Underlying Outstanding Warrants

    

Exercise Price

    

Expiration Date

1,322,510

$

2.50

 

April 22, 2025

12,677,490

$

2.50

 

June 11, 2025

8,672,897

$

2.675

September 1, 2025

10,000,000

$

2.00

May 3, 2026

32,672,897

Aspire Common Stock Purchase Agreement

In October 2019, the Company entered into a common stock purchase agreement, or CSPA, with Aspire Capital Fund, LLC, or Aspire, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire is committed to purchase up to an aggregate of $20.0 million of shares of the Company’s common stock over the 30-month term of the CSPA. Under the CSPA, on any trading day selected by the Company on which the closing price of its common stock is equal to or greater than $0.25 per share, the Company has the right, in its sole discretion, to present Aspire with a purchase notice directing Aspire to purchase up to 50,000 shares of common stock per business day, at a purchase price equal to the lesser of the lowest sale price of common stock on the purchase date, or the arithmetic average of the three lowest closing sale prices during the 10 consecutive business days ending on the trading day immediately preceding the purchase date. The Company and Aspire also may mutually agree to increase the number of shares that may be sold to as much as 2,000,000 shares per business day.

In addition, on any date on which the Company submits a purchase notice to Aspire in an amount equal to 50,000 shares, the Company also has the right, in its sole discretion, to present Aspire with a volume-weighted average price purchase notice, or the VWAP Purchase Notice, directing Aspire to purchase an amount of stock equal to up to 30% of the aggregate shares of the Company’s common stock traded on its principal market on the next trading day, or the VWAP Purchase Date, subject to a maximum number of shares the Company may determine. The purchase price per share pursuant to such VWAP Purchase Notice is generally 97% of the volume-weighted average price for the Company’s common stock traded on its principal market on the VWAP Purchase Date.

 

Under the CSPA, the Company controls the timing and amount of any sales to Aspire, and is not limited with respect to use of proceeds or by any financial or business covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the CSPA. The CSPA may be terminated by the Company at any time, at its discretion, without any cost to the Company. Aspire has no trading volume requirements or restrictions and has no right to require any sales by the Company but is obligated to make purchases as directed by the Company in accordance with the CSPA. Aspire has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of common stock during any time prior to the termination of the CSPA.

 

The CSPA further provides that the number of shares that may be sold pursuant to the CSPA will be limited to 2,626,165 shares, including 104,167 shares of common stock issued to Aspire as a commitment fee, which represented 19.99% of the Company’s outstanding shares of common stock as of October 21, 2019, unless stockholder approval is obtained to issue more than 19.99%. This limitation will not apply under certain circumstances specified in the CSPA. We have not sold any shares to Aspire pursuant to the CSPA during the quarter ended June 30, 2021 and there is $19.7 million remaining available under the arrangement.

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Stock Incentive Plans

In September 2018, the Company’s board of directors adopted, and its stockholders approved the 2018 Equity Incentive Plan, or 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, or the 2015 Plan. In June 2020, the Board adopted, and its stockholders approved an amendment to the 2018 Plan, to increase the number of shares available for stock-based awards by 500,000. Under the 2018 Plan, the Company may grant incentive stock options, or ISOs, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. As of June 30, 2021, stock options to purchase an aggregate of 3,767,259 shares had been granted, restricted stock units, or RSUs, of 992,600 had been awarded, and 1,313,027 shares were available for future issuance under the 2018 Plan, as amended. The options issued under the 2018 Plan expire after 10 years from the grant date.

At its inception, the aggregate number of shares of the Company’s common stock available for issuance under the 2018 Plan was 2,350,000. The number of shares of the Company’s common stock reserved for issuance under the 2018 Plan automatically increases 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 Board. Accordingly, on January 1, 2021 and 2020, 1,465,494 and 531,662 shares were added to the number of available shares, respectively. 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 Board, 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.

As of September 25, 2018, no additional stock awards have been or will be granted under the 2015 Plan. Although the 2015 Plan was terminated as to future awards in September 2018, it continues to govern the terms of options that remain outstanding under the 2015 Plan.

Stock Option Activity

Stock option activity under both plans during the six months ended June 30, 2021 is summarized as follows:

Weighted-

Weighted-

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

    

Options

    

Price

    

Term (Years)

    

Value (in thousands)

Outstanding as of December 31, 2020

3,112,704

$

5.58

 

7.76

$

44

Granted

46,750

 

2.23

 

  

Forfeited

(89,467)

 

3.52

 

  

Outstanding as of June 30, 2021

3,069,987

$

5.58

7.45

$

84

Exercisable as of June 30, 2021

1,918,594

$

5.73

6.92

$

2

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. During the six months ended June 30, 2021, the weighted-average grant date fair value per granted option was $1.55. As described below, on July 16, 2016, the Company completed a stock option exchange program that resulted in the termination of options to purchase 1,562,752 shares of the Company’s common stock with a

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

weighted-average exercise price of $7.17 per share and in exchange issued stock options to purchase 1,148,572 shares of the Company’s common stock with an exercise price of $2.44 per share.

Restricted Stock Unit Activity

During the six months ended June 30, 2021, the Company granted 597,500 RSUs to executives and directors, of which 254,750 contained a performance condition. As of June 30, 2021, the performance condition was not probable of being met. Restricted stock unit activity for the six months ended June 30, 2021 is summarized as follows:

Weighted-

Average

Number of

Grant Date

    

Units

    

Fair Value

Outstanding as of December 31, 2020

395,100

$

1.65

Granted

597,500

 

2.57

Forfeited

(42,900)

 

1.65

Outstanding as of June 30, 2021

949,700

$

2.23

Employee Stock Purchase Plan

In September 2018, the Company’s board of directors and its stockholders approved the 2018 Employee Stock Purchase Plan, or the ESPP, which became effective as of September 25, 2018. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the U.S. Internal Revenue Code of 1986, as amended. The number of shares of common stock initially reserved for issuance under the ESPP was 140,000 shares. The ESPP provides for an annual increase on the first day of each year beginning in 2019 and ending in 2028, in each case subject to the approval of the board of directors, equal to the lesser of (i) 1% of the shares of common stock outstanding on the last day of the prior fiscal year or (ii) 250,000 shares; provided, that prior to the date of any such increase, the board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). Pursuant to the terms of the 2018 Employee Stock Purchase Plan, an additional 250,000 and 132,915 shares were added to the number of available shares effective January 1, 2021 and 2020, respectively. As of June 30, 2021, no shares of common stock had been issued under the ESPP and 654,163 shares remained available for future issuance under the ESPP. No offering period under the ESPP has been set by the Company’s board of directors.

Stock-Based Compensation

Stock-based compensation expense was classified in the consolidated statement of operations as follows (in thousands):

Three Months Ended

 

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Research and development

$

423

$

349

$

844

$

698

General and administrative

 

459

 

401

 

907

 

837

Total stock-based compensation expense

$

882

$

750

$

1,751

$

1,535

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

The following table summarizes stock-based compensation by type of award (in thousands):

Three Months Ended

 

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Stock options

$

678

$

750

$

1,345

$

1,535

Restricted stock units

 

204

 

 

406

 

Total stock-based compensation expense

$

882

$

750

$

1,751

$

1,535

For the six months ended June 30, 2021, the restricted stock units performance obligation was not probable of being met, and as such no expense was recognized.

The following table summarizes unrecognized stock-based compensation expense as of June 30, 2021, by type of awards, and the weighted-average period over which that expense is expected to be recognized. The total unrecognized stock-based compensation expense will be adjusted for actual forfeitures as they occur.

 

As of June 30, 2021

Unrecognized Expense

Weighted-average Recognition Period

    

(in thousands)

    

(in years)

Stock options

$

3,943

2.13

Restricted stock units

$

985

 

1.26

Stock Option Exchange

On June 17, 2021, the Company commenced a voluntary stock option exchange program, or the Exchange Program, to permit the Company’s eligible employees, directors and certain consultants to exchange some or all of their eligible outstanding options, or the Original Options, to purchase the Company’s common stock with an exercise price greater than or equal to $4.98 per share, whether vested or unvested, for a lesser number of new stock options, or the New Options. The New Options will be granted under the 2018 Plan on the date on which the Original Options accepted for exchange are cancelled. Participants must remain continuously employed by the Company or in continuous service to the Company through the New Option grant date. New Options will have a per share exercise price equal to the per share closing price of the Company’s common stock on the New Option grant date. The New Options will have the same vesting schedule as the Original Options for options with a remaining vesting period exceeding 12 months. For Original Options with a remaining vesting period of 12 months or less, including full vesting options, the replacement options will vest in full 12 months from the New Option grant date. In accordance with the terms and conditions of the Exchange Program, the Company closed the exchange program and accepted all exchanged outstanding options on July 16, 2021, at which time the Company’s common stock price per share was $2.44. The stock option exchange program was approved at the Company’s annual shareholder meeting on June 10, 2021.

Pursuant to the Exchange Program, 44 eligible participants elected to exchange, and the Company accepted for cancellation Original Options to purchase an aggregate of 1,562,752 shares of the Company’s common stock, representing approximately 97% of the total shares of common stock underlying the eligible Original Options. On July 16, 2021, immediately following the expiration of the exchange offer, the Company granted New Options to purchase 1,148,572 shares of common stock, pursuant to the terms of the exchange offer and the Company’s 2018 Plan. 

9. Net Loss per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. The Company’s potentially

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

dilutive shares, which include outstanding stock options and warrants, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following outstanding securities have been excluded from the computation of diluted weighted average shares outstanding for the three and six months ended June 30, 2021 and 2020, as they would have been anti-dilutive:

As of June 30, 

    

2021

    

2020

Options to purchase shares of common stock

3,069,987

3,256,537

Warrants to purchase shares of common stock

32,672,897

14,000,000

Unvested restricted stock units

949,700

 

36,692,584

 

17,256,537

10. Commitments

Lease Commitments

The Company has an operating lease agreement for its office and laboratory space with AstraZeneca. See Note 4, Leases, to these notes to consolidated financial statements for additional information.

AstraZeneca Subscription Agreement

In connection with the Company’s 2015 spin-out from AstraZeneca, the Company entered into a business transfer and subscription agreement with AstraZeneca pursuant to which the Company agreed to pay AstraZeneca a one-time milestone payment of $5.0 million within three months of achieving a specified cumulative net sales milestone for durlobactam. This milestone payment will be automatically waived should the Company’s common stock trade on The Nasdaq Global Market at or above a specified price at any time prior to achieving such specified cumulative net sales milestone for durlobactam. The Company is also obligated to pay AstraZeneca a one-time milestone payment of $10.0 million within two years of achieving the first commercial sale of zoliflodacin. At the Company’s election, either milestone payment may be paid in cash, common stock, or a combination of cash and common stock. Additionally, the Company is obligated to pay AstraZeneca tiered, single-digit, per-country royalties on the annual worldwide net sales of durlobactam and zoliflodacin.

11. Related Party Transactions

AstraZeneca

The Company was formed in May 2015 as a wholly owned subsidiary of AstraZeneca. Prior to the closing of the initial public offering on September 28, 2018, AstraZeneca was the sole series A preferred stockholder. Upon the closing of the initial public offering, all shares of preferred stock were converted into shares of common stock of the Company. AstraZeneca continues to maintain an ownership interest in the Company. The Company has an operating lease agreement for its office and laboratory space with AstraZeneca. See Note 4, Leases, to these notes to consolidated financial statements for additional information.

Pharmaron Beijing Co., Ltd. (China)

The Company contracts with Pharmaron Beijing Co., Ltd. (China), or Pharmaron, to provide various medicinal chemistry research, manufacturing development and clinical services related to the Company’s ongoing product candidates. The Company began utilizing Pharmaron as a service provider prior to the spin-out in 2015 (see Note 1, Organization and Description of Business, to these notes to consolidated financial statements for additional information), and this relationship has continued into 2021. In 2019, the Senior Vice President of Strategic Partnerships at Pharmaron began sharing a household with the Company’s Chief Executive Officer, and as a result the Company considers the agreements between the Company and Pharmaron to be related-party transactions. The Company recorded

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ENTASIS THERAPEUTICS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

expense of $0.2 million and $0.5 million during the three months ended June 30, 2021 and 2020, respectively, and $1.5 million and $1.4 million during the six months ended June 30, 2021 and 2020, respectively, for services rendered pursuant to multiple Pharmaron agreements. Amounts due to Pharmaron were $3.5 million and $2.0 million as of June 30, 2021 and December 31, 2020, respectively.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the unaudited consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q and with our audited consolidated financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 23, 2021, or the Annual Report on Form 10-K. In addition, you should read the “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are an advanced, clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of targeted antibacterial products that address high unmet medical needs to treat serious infections caused by multidrug-resistant pathogens.

Our lead product candidate, SUL-DUR, is an intravenous, or IV, combination of sulbactam, an IV β-lactam antibiotic, and durlobactam, a novel broad-spectrum IV β-lactamase inhibitor, or BLI, that we are developing for the treatment of pneumonia and bloodstream infections caused by carbapenem-resistant Acinetobacter baumannii, or Acinetobacter. Based on current carbapenem resistance rates, we estimate there are in excess of 200,000 hospital-treated carbapenem-resistant Acinetobacter infections annually across the United States, Europe, the Middle East and China for which significant morbidity and mortality exists due to limited treatment options. We initiated ATTACK (Acinetobacter Treatment Trial Against Colistin), our single Phase 3 registration trial, in April 2019 with top-line data readout expected in the second half of 2021. ATTACK is a global, multi-center trial that will evaluate approximately 120 patients with confirmed carbapenem-resistant Acinetobacter hospital-acquired pneumonia, ventilator-acquired pneumonia, ventilated pneumonia or bloodstream infections, or a combination of these. During July 2021 we completed full enrollment of the trial with more than 120 evaluable patients with confirmed carbapenem-resistant Acinetobacter infections that meet the criteria for inclusion in the primary efficacy arm. Announcement of ATTACK top-line data is now estimated in early fourth quarter 2021. We believe that the data from the ATTACK trial, data from our other clinical trials of SUL-DUR and non-clinical data will be sufficient to submit an NDA to the FDA.

Our second late-stage product candidate, zoliflodacin, is a novel orally administered molecule being developed for the treatment of uncomplicated gonorrhea. The bacterial pathogen responsible for gonorrhea is Neisseria- gonorrhoeae, including multidrug-resistant strains. Intramuscular injection of ceftriaxone now represents the only U.S. Centers for Disease Control and Prevention, or CDC, recommended treatment option for the estimated 1.6 million annual cases of gonorrhea in the United States. We believe there is a growing unmet need for a single-dose oral antibiotic that will reliably treat patients with gonorrhea, including infections caused by multidrug-resistant strains of N. gonorrhoeae, which are emerging globally. The Phase 3 registration trial, initiated in September 2019, is a multi-center, open-label, noninferiority trial in approximately 1,000 enrolled patients with uncomplicated gonorrhea. Our nonprofit collaborator, GARDP, is the sponsor of the registration trial and is responsible for all trial expenses. Due to the unique challenges posed by the COVID-19 pandemic to this global clinical trial, we remain unable to provide guidance around the timeline for completion of this Phase 3 registration trial. We continue to actively assess the impact of the pandemic on the trial, in consultation with GARDP, and will provide an update when appropriate. We believe data from the Phase 3 registration trial, along with data from our other clinical trials of zoliflodacin and non-clinical data will be sufficient for submitting an NDA to the FDA.

We are also developing ETX0282CPDP for the treatment of complicated urinary tract infections, or cUTIs, including those caused by multidrug-resistant Enterobacteriaceae. ETX0282CPDP is an oral combination of ETX0282 with cefpodoxime proxetil. We believe there is a significant unmet need for new oral antibiotics to reliably treat the estimated 3 to 4 million patients diagnosed annually with cUTIs. We have reported preliminary Phase 1 trial results, and subsequently demonstrated that an extended release tablet formulation achieved preclinical proof-of-concept of the desired pharmacokinetic profile both in vitro and in non-human primates. Having successfully completed the initial Phase 1 studies and preclinical work to deliver a formulation with the desired extended release profile, we are currently

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prioritizing our resources on completing the ATTACK trial and supporting the ongoing Phase 3 registration trial for zoliflodacin, while we evaluate options for further clinical development of ETX0282CPDP.

Lastly, we are advancing development of a novel class of antibiotics, non-β-lactam inhibitors of penicillin binding proteins, or NBPs. We believe NBPs constitute a potential new class of Gram-negative antibacterial agents that are designed to target a broad spectrum of multidrug resistant bacterial pathogens that overcome the main source of β-lactam resistance which is driven by β-lactamase activity. This novel class of agents is designed to potentially target a broad spectrum of multidrug resistant bacterial pathogens that are part of the CDC/World Health Organization, or WHO, list of high unmet medical need or ESKAPE pathogens. We selected ETX0462 as the initial clinical candidate for this program, a novel diazabicyclooctane with antimicrobial activity against multiple Gram-negative pathogens including Pseudomonas aeruginosa as well as a number of high-priority biothreat pathogens. We are currently working to complete the required pre-clinical activities to enable the program to advance into a Phase 1 clinical trial. In June 2020, we were awarded a contract from the National Institute of Health to support research towards developing additional NBP molecules with expanded Gram-negative spectrum from this novel class. This research program, designated NBP2, is attempting to target Klebsiella, Pseudomonas and E. coli from the ESKAPE list of pathogens. In July 2021, we successfully completed the first milestones for the program and have been awarded the Option 1 Period of the program to proceed with further optimization, beginning August 1, 2021. Subject to achieving pre-defined milestones, the contract is expected to sufficiently fund activities to achieve submission of an Investigational New Drug, or IND, application to the FDA. To date, the COVID-19 pandemic has only impacted the status of our product candidates, SUL-DUR and zoliflodacin. It has not impacted the status of our other product candidates.

Since our inception in May 2015, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, 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 have not generated any revenue from product sales. As of June 30, 2021, we have funded our operations primarily with net cash proceeds of $104.2 million from the sale of our preferred stock, net cash proceeds of $65.6 million from the sale of common stock in our initial public offering, and net cash proceeds of $77.9 million from the sale of common stock, warrants and pre-funded warrants in private placements to certain investors in 2020 and 2021. We have also either directly received funding or financial commitments from, or have had our program activities conducted and funded by, the U.S. government through our arrangements with NIAID, CARB-X, and the U.S. Department of Defense, or DOD, and we have received non-profit awards from GARDP and upfront and milestone payments from our license and collaboration agreement with Zai Lab.

Funding Arrangements

NIH

In June 2020, we entered into a contract with NIAID, part of the NIH, with an effective date of July 1, 2020. The contract consists of an initial award of approximately $3.0 million, with the potential to increase it up to $15.5 million, that will be used to develop novel molecules from our NBP platform. In July 2021, we successfully completed the first milestones for the program associated with the initial award and have been awarded the Option 1 Period of the program to proceed with further optimization, beginning August 1, 2021. This option consists of any additional $2.9 million, bringing the total award to $5.9 million. Funding from the contract will support research towards developing molecules with expanded Gram-negative spectrum against antibiotic-resistant bacterial pathogens including E. coli, Acinetobacter, Pseudomonas and Klebsiella. Through June 30, 2021, we had received $2.0 million in payments and we have recorded $2.6 million of grant income under this funding arrangement.

CARB-X

In March 2017 and October 2017, we entered into funding arrangements with the Trustees of Boston University to utilize funds from the U.S. government, through the CARB-X program, for support of our ETX0282CPDP and ETX0462 programs. These funding arrangements could cover up to $18.5 million of our specified research expenditures from April 2017 through May 2023. Through June 30, 2021, we had received $10.6 million in payments and we have

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recorded $12.2 million of grant income under these funding arrangements. The remaining $6.3 million that could be received is related to our ETX0462 program.

License and Collaboration Agreements

GARDP

In July 2017, we entered into a collaboration agreement with GARDP for the development and commercialization of a product candidate containing zoliflodacin in certain countries. Under the terms of the collaboration agreement, GARDP will fully fund the ongoing Phase 3 registration trial, including the manufacture and supply of the product candidate containing zoliflodacin, in uncomplicated gonorrhea.

Zai Lab

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 registration trial costs in China for SUL-DUR, including all costs in China for our Phase 3 registration trial of SUL-DUR, with the exception of Phase 3 patient drug supply of licensed product. As of June 30, 2021, we have received net payments of $15.5 million, representing the $5.0 million upfront payment, $7.0 million of milestone payments, $0.6 million of research support payments and $5.0 million of certain other reimbursable registration trial costs, less applicable taxes of $2.2 million, from Zai Lab and we have recognized revenue of $12.0 million under this agreement.

Components of Results of Operations

Revenue

All of our revenue has been derived from our license and collaboration arrangement with Zai Lab. To date, we have not generated any revenue from product sales, and we do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates and preclinical program are successful and result in regulatory approval, we may generate revenue in the future from product sales.

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:

employee-related expenses, including salaries and benefits, bonus and stock-based compensation expense for employees engaged in research and development functions;
fees paid to consultants for services directly related to our product development and regulatory efforts;
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;
costs associated with preclinical activities and development activities;
costs associated with our technology and our intellectual property portfolio;

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costs related to compliance with regulatory requirements; and
facilities-related expenses, which include allocated rent and maintenance of facilities and other operating costs.

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 programs 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 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:

Three Months Ended

Six Months Ended

 

June 30, 

June 30, 

 

    

2021

    

2020

    

2021

    

2020

    

(in thousands)

(in thousands)

 

Direct research and development expenses by program:

 

  

 

  

 

  

 

  

SUL-DUR

$

5,051

$

6,156

$

9,081

$

13,564

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