AN2 THERAPEUTICS, INC. The following discussion and analysis of our financial condition as of
This discussion and analysis and other parts of this Form 10-K contain
forward-looking statements based upon current beliefs, plans and expectations
related to future events and our future financial performance that involve
risks, uncertainties and assumptions, such as statements regarding our
intentions, plans, objectives and expectations for our business. Our actual
results and the timing of selected events could differ materially from those
described in or implied by these forward-looking statements as a result of
several factors, including those set forth under "Risk Factors" in Part II, Item
1A of this Form 10-
Overview
We are a clinical-stage biopharmaceutical company developing treatments for
rare, chronic, and serious infectious diseases with high unmet needs. Our
initial product candidate is epetraborole, a once-daily, oral treatment for
patients with non-tuberculous mycobacterial ("NTM") lung disease, a rare,
chronic and progressive infectious disease caused by bacteria known as
mycobacteria that leads to irreversible lung damage and can be fatal.
Epetraborole has broad spectrum antimycobacterial activity through inhibition of
an essential and universal step in bacterial protein synthesis. Its novel
mechanism of action is enabled by boron chemistry, our core technology approach.
We have initiated patient enrollment in a pivotal Phase 2/3 clinical trial in
treatment-refractory mycobacterium avium complex ("MAC") lung disease, which is
the most common type of NTM lung disease. The Company expects to complete
enrollment in the Phase 2 portion of the pivotal Phase 2/3 clinical trial in
mid-2023 and plans to seamlessly begin enrollment of the Phase 3 portion of the
trial immediately thereafter. We expect to announce top-line data for each of
the Phase 2 and Phase 3 portions of the trial approximately nine months after
the completion of enrollment in each respective portion of the trial. We've
selected a 500 mg once-daily dose for our pivotal Phase 2/3 clinical trial in
treatment-refractory MAC lung disease patients based on data from our completed
Phase 1b dose-ranging study of epetraborole administered orally for 28 days in
healthy volunteers in
Since launching operations in
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We do not have any products approved for sale and have not generated any revenue
since inception. Our net losses were
As of
Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates. Until such time as we can generate revenue from our product sales, if ever, we expect to finance our operations through private or public equity or debt financings, collaborative or other arrangements with corporate sources, non-dilutive financing, or through other sources of financing. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our product candidates.
We plan to continue to use third-party service providers, including outside research laboratories, clinical research organizations ("CROs"), and contract manufacturing organizations ("CMOs"), to carry out our preclinical, nonclinical, and clinical development, and to manufacture and supply the materials to be used during the development and commercialization of our product candidates. We do not currently have a sales force. If epetraborole is approved for the treatment of NTM lung disease, we intend to hire and deploy a specialty sales force, which will increase our operating costs.
We are continuing to monitor the impact of the evolving effects of the COVID-19 pandemic on our ability to develop our product candidates. The evolving effects of the COVID-19 pandemic appear to have negatively affected enrollment at our clinical sites. Some of the sites participating in our clinical trials are affected by reduced capacity, staffing shortages, or other effects of the COVID-19 pandemic. At some sites, we are experiencing impacts to our ability to activate sites, screen and enroll patients. The extent of the impact on our clinical trials depends on the current stage of activities at a given site, for example study start up versus post-enrollment, and the number of impacted sites participating in that trial. Impacts on diagnosis rates associated with the COVID-19 pandemic may also negatively impact enrollment. There may continue to be adverse impacts to our clinical study timelines, which, depending upon the duration and severity of the evolving effects of the COVID-19 pandemic, could ultimately delay data availability.
The extent to which the evolving effects of the COVID-19 pandemic (or any future
pandemic) impact our business will depend on future developments that are highly
uncertain, such as virus variants that may prove to be especially contagious or
virulent, the ultimate duration and severity of the pandemic, government
actions, such as travel restrictions, quarantines and social distancing
requirements in
Additionally, other recent macroeconomic events including elevated inflation,
the
Because of the above and other factors, our results of operations may vary substantially from year to year and from quarter to quarter and, as a result, we believe that period to period comparisons of our operating results may not be meaningful and should not be relied upon as being indicative of our future performance.
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Components of Our Operating Results
Operating Expenses
Research and Development Expenses
Substantially all of our research and development expenses consist of expenses incurred in connection with the development of our initial product candidate. These expenses include fees incurred under arrangements with third parties, including CROs, CMOs, preclinical and nonclinical testing organizations, and academic and non-profit institutions. Research and development expenses also include consulting fees, license fees, payroll, and personnel-related expenses, including salaries and bonuses, payroll taxes, employee benefit costs, and non-cash stock-based compensation for our research and development employees. We expense both internal and external research and development expenses as they are incurred. Costs are not tracked on a project-by-project basis, because substantially all of our research and development resources to date are focused primarily on our lead drug product candidate, epetraborole.
We expect our research and development expenses to increase substantially in the future, as we advance epetraborole and any future products into and through additional clinical trials and pursue regulatory approval. The process of conducting the necessary clinical studies to obtain regulatory approval is costly and time-consuming. Clinical studies generally become larger and more costly to conduct as they advance into later stages and we are required to make estimates for expense accruals related to clinical study expenses, which involve a degree of estimation. The successful development of our product candidates is highly uncertain. The actual probability of success for our product candidates may be affected by a variety of risks and uncertainties associated with drug development, including those set forth in the section of this Form 10-K titled "Risk Factors." At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of our current or any future product candidates. As a result of these uncertainties, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates.
General and Administrative Expenses
Our general and administrative expenses consist primarily of payroll and
personnel-related expenses, including salaries and bonuses, payroll taxes,
employee benefit costs, and non-cash stock-based compensation. Other general and
administrative expenses include legal costs of pursuing patent protection of our
intellectual property, and professional service fees for auditing, tax, general
legal services, and other external consulting and vendor services. We expect our
general and administrative expenses to continue to increase in the future as we
increase our headcount, expand our operating activities, prepare for potential
commercialization of our current and future product candidates, and support our
operations as a public company, including increased expenses related to legal,
accounting, regulatory, and tax-related services associated with maintaining
compliance with requirements of
Interest Income
Interest income consists of interest income and investment income earned on our cash, cash equivalents and investments.
Other Expense
Other expense consists of expense associated with foreign currency fluctuations.
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Results of Operations
Comparison of the Years Ended
The following table sets forth the significant components of our results of
operations:
Year Ended
December 31,
2022 2021 Change % Change
(in thousands, except percentages)
Operating Expenses:
Research and development $ 28,511 $ 16,156 $ 12,355 76 %
Research and development-related party 1,000 750 250 33 %
General and administrative 12,751 4,668 8,083 173 %
Total operating expenses 42,262 21,574 20,688 96 %
Loss from operations (42,262 ) (21,574 ) (20,688 ) 96 %
Interest income 1,351 69 1,282 *
Other income (expense) (45 ) (38 ) (7 ) 18 %
Net loss $ (40,956 ) $ (21,543 ) $ (19,413 ) 90 %
*Change not meaningful
Research and Development Expenses
Research and development expenses, including related-party research and
development expenses, were
The following table shows our research and development expenses by type of
activity:
Year Ended
December 31,
2022 2021 Change
(in thousands)
Clinical trials $ 9,563 $ 4,031 $ 5,532 Chemistry manufacturing and controls expenses 3,749 3,061 688 Research and preclinical studies
3,368 3,867 (499 )
Research and development-related party 1,000 750 250
Other expenses 656 419 237
Personnel related expenses 8,266 3,761 4,505
Consulting and outside services 2,909 1,017 1,892
Total research and development expenses
General and Administrative Expenses
General and administrative expenses were
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Liquidity and Capital Resources
Sources of Liquidity
From our inception through
In
In January and
In
In
In
In
Future Funding Requirements
We have incurred net losses since our inception. For the years ended
We do not have any products approved for sale, and we have never generated any revenue from contracts with customers. We do not expect to generate any meaningful revenue unless and until we obtain regulatory approval for and commercialize any of our current and future product candidates and we do not know when, or if, those events will occur. Historically, we have incurred operating losses and negative cash flows as a result of ongoing efforts to develop our lead drug product candidate, epetraborole, including conducting ongoing preclinical and nonclinical studies, clinical trials, clinical trial materials manufacturing, and providing general and administrative support for these operations. We expect our negative cash flows to increase significantly over the next several years as we advance epetraborole and any future product candidates through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization, and continue our research and development efforts. We are subject to all the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our business. Moreover, we expect to continue to incur costs associated with operating as a public company. We anticipate that we will need substantial additional funding in connection with our continuing operations, as we do not expect positive cash flows from operations in the foreseeable future.
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Until we can generate a sufficient amount of revenue from the commercialization of our product candidates, if ever, we expect to finance our future cash needs through public or private equity offerings or debt financings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our current or future product candidates. If we raise additional funds by issuing equity or convertible debt securities, it could result in dilution to our existing stockholders and increased fixed payment obligations. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Additionally, any future collaborations we enter into with third parties may provide capital in the near term but we may have to relinquish valuable rights to our product candidates or grant licenses on terms that are not favorable to us. Any of the foregoing could significantly harm our business, financial condition and prospects.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements depend on many factors, including:
•
the scope, timing, rate of progress, results, and costs of our preclinical and nonclinical development activities and clinical trials for our current and future product candidates;
•
the timing of, and the costs involved in, obtaining regulatory approvals for our drug product candidates;
•
the timing of enrollment of our current and any future clinical trials, including our pivotal Phase 2/3 clinical trial of epetraborole;
•
the scope and costs of development and commercial manufacturing activities;
•
the number and characteristics of any additional product candidates we develop or acquire;
•
the cost of manufacturing our product candidates that we successfully commercialize;
•
the cost of building a specialty sales force in anticipation of product commercialization;
•
the cost of commercialization activities, including building a commercial infrastructure, marketing, sales, and distribution costs;
•
our ability to maintain existing, and establish new strategic collaborations, licensing, or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty, or other payments due under any such agreement;
•
any product liability or other lawsuits related to our products;
•
the expenses needed to attract, hire, and retain skilled personnel;
•
our implementation of operational, financial, and management systems;
•
the ongoing costs associated with being a public company;
•
the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio; and
•
the timing, receipt, and amount of sales of any future approved products, if any.
A change in the outcome of any of these or other variables with respect to the development of any of our current and future product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitation on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.
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Adequate funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and ability to pursue our business strategies. If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials or we may also be required to terminate rights to our current and future product candidates. If we are required to enter into collaborations and other arrangements to supplement our funds, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially affect our business and financial condition.
See the section of this Form 10-K titled "Risk Factors" for additional risks associated with our substantial capital requirements.
Summary Statements of Cash Flows
The following table sets forth a summary of the primary sources and uses of
cash:
Year Ended
December 31,
2022 2021
(in thousands)
Cash used in operating activities
$ 15,122 $ 8,027
Cash Used in Operating Activities
Net cash used in operating activities was
Net cash used in operating activities was
Cash Used in Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was
Cash Provided by Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was
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Contractual Obligations and Commitments
In
We enter into contracts in the normal course of business with third-party contract organizations for preclinical and nonclinical studies and clinical trials, manufacture and supply of our preclinical, nonclinical and clinical trial materials, and other services and products used for operating purposes. These contracts generally provide for termination following a certain period after notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.
Critical Accounting Policies, Significant Judgements, and Use of Estimates
Our financial statements have been prepared in accordance with
Research and Development
We have entered into various agreements with CMOs and CROs. We record research and development expenses to operations as incurred. Research and development expenses represent costs incurred by us for the discovery and development of our product candidates and the development of our technology and include: internal research and development expense, including employee-related expenses (such as salaries, bonus, benefits, travel and non-cash stock-based compensation expense); external research and development expenses incurred under arrangements with third parties, such as CROs, preclinical testing organizations, CMOs, academic and non-profit institutions and consultants; related-party milestone payments; license fees; and other expenses. Costs to develop our technologies are recorded as research and development expense as incurred.
As part of the process of preparing financial statements, we are required to estimate and accrue expenses. We record the estimated expenses of research and development activities conducted by third-party service providers based upon the estimated level of services performed, progress of the studies, including the receipt of deliverables or completion of agreed-upon events, and contracted costs, within research and development expense in the statements of operations and comprehensive loss. These services include the conduct of clinical and preclinical studies, contract manufacturing activities and consulting services.
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Payments made to CMOs and CROs under these arrangements in advance of the performance of the related services are deferred and recognized as expense in the period in which the related goods are received or services are realized or utilized. If the costs have been prepaid, this expense reduces the prepaid expenses in the balance sheets, and if not yet invoiced, the costs are included in accrued liabilities in the balance sheets. These costs are a significant component of our research and development expenses. We record amortization of prepaid expenses or accrued expenses for these costs based on the estimated amount of work completed and in accordance with agreements established with these third parties. Such payments are evaluated for current or long-term classification based on when they will be realized. If the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. To date, our estimated accruals have not differed materially from the actual costs.
Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from external CROs, CMOs, and other third-party service providers. To date, we have not experienced material differences between our accrued expenses and actual expenses.
Stock-Based Compensation
We use a fair value-based method to account for all stock-based compensation
arrangements with employees and non-employees, which include stock options. The
fair value of the option granted is recognized on a straight-line basis over the
period during which an optionee is required to provide services in exchange for
the option award, known as the requisite service period, which usually is the
vesting period. We account for forfeitures as they occur. In determining fair
value of the stock options granted, we use the Black-Scholes option pricing
model, which requires the input of subjective assumptions. These assumptions
include: estimating the length of time employees will retain their vested stock
options before exercising them (expected term), the estimated volatility of our
common stock price over the expected term (expected volatility), risk-free
interest rate, and expected dividends. See Note 10-Equity Incentive Plan and
Stock-Based Compensation to our audited financial statements included elsewhere
in this Form 10-K for information concerning certain of the specific assumptions
we used in applying the Black-Scholes option pricing model to determine the
estimated fair value of our stock options granted in the years ended
•
Fair Value of Common Stock-See the subsection titled "Common Stock Valuations" below.
•
Expected Term-The expected term is calculated using the simplified method which is used when there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term.
•
Expected Volatility-We use an average historical stock price volatility of a peer group of comparable publicly traded companies in biotechnology and pharmaceutical-related industries to be representative of our expected future stock price volatility, as we have limited trading history for our common stock. For purposes of identifying these peer companies, we consider the industry, therapeutic area, stage of development, size and financial leverage of potential comparable companies. For each grant, we measure historical volatility over a period equivalent to the expected term.
•
Risk-Free Interest Rate-The risk-free interest rate is based on the implied
yield currently available on
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•
Expected Dividend Rate-We have not paid and do not anticipate paying any dividends in the near future. Accordingly, we estimate the dividend yield to be zero.
For the years ended
Common Stock Valuations
Prior to our IPO, in the absence of a public trading market for our common stock, the estimated fair value of the common stock underlying our stock options was determined at each grant date by our Board, with input from management. All options to purchase shares of our common stock are intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant.
On each grant date, we developed an estimate of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock, and valuations from an independent third-party valuation firm.
The valuations of our common stock were determined in accordance with the
guidelines outlined in the
The assumptions used to determine the estimated fair value of our common stock are based on numerous objective and subjective factors, combined with management judgment, including:
•
external market conditions affecting the pharmaceutical and biotechnology industry and trends within the industry;
•
our stage of development and business strategy;
•
the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;
•
the prices at which we sold shares of our redeemable convertible preferred stock;
•
our financial condition and operating results, including our levels of available capital resources;
•
equity market conditions affecting comparable public companies; and
•
general U.S. market conditions and the lack of marketability of our common stock.
The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods:
•
Option Pricing Method. Under the option pricing method, or OPM method, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The estimated fair values of the preferred and common stock are inferred by analyzing these options.
•
Current Value Method. Under the current value method, or CVM method, the Company's current value is allocated among various equity holders based on liquidation preferences and other rights under the assumption that all capital owners act to maximize their financial return.
•
Probability-Weighted Expected Return Method. The probability-weighted expected return method, or PWERM method, is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.
•
Hybrid Method. Under the Hybrid Method the Company's current value is estimated based on a combination of the OPM, PWERM, and CVM methods, whereby each valuation method is applied to a different scenario. The different scenarios are then weighted based on their probable outcomes.
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As we had recent arms-length financing transactions of our Series A and Series B
redeemable convertible preferred stock, we determined that the subject company
transaction method under the market approach was the most appropriate method for
determining enterprise value through
Through
Subsequent to
Subsequent to
In determining the estimated fair value of our common stock, our Board also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.
There are significant judgments and estimates inherent in the determination of our enterprise value and the fair value of our common stock, such as those regarding our discount rates, the selection of comparable companies, and the probability of possible future events. Such estimates involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. Changes in judgements could have a material impact on our results of operation. Following the completion of the IPO, the fair value of our common stock is based on the closing quoted market price of our common stock on the date of grant.
On
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Redeemable Convertible Preferred Stock
We recorded all shares of redeemable convertible preferred stock at their
respective fair values on the dates of issuance, net of issuance costs. The
redeemable convertible preferred stock was recorded outside of permanent equity
because while it is not mandatorily redeemable, in certain events considered not
solely within our control, such as a merger, acquisition, or sale of all or
substantially all of our assets (each, a deemed liquidation event), the
redeemable convertible preferred stock would have become redeemable at the
option of the holders of at least a majority of the then outstanding shares. In
addition, shares of preferred stock must be redeemed by the Company at a price
of
Indemnification Agreements
We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, including in connection with any trade secret, copyright, patent, or other intellectual property infringement claim by any third party with respect to its technology. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these arrangements is not determinable. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these agreements is minimal.
We have also agreed to indemnify our directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director's or officer's service. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not specified in the agreements; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.
Recent Accounting Pronouncements
See the section "Recently Adopted Accounting Pronouncements" in Note 2 to the Notes to Financial Statements in Part II Item 8 of this Annual Report on Form 10-K.
JOBS Act Accounting Election
The JOBS Act permits an "emerging growth company" or "EGC" such as us to delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, the information we provide may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
In addition, we intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
We will remain an EGC until the earliest to occur of: (1) the last day of our
first fiscal year in which we have total annual revenues of more than
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