10-Q 1 eq-10q_20200331.htm 10-Q eq-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 March 31, 2020

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: 001-38692

 

EQUILLIUM, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

82-1554746

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

2223 Avenida de la Playa, Suite 105, La Jolla, CA

92037

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (858) 412-5302

 

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

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

EQ

 

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 filer

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 May 8, 2020, the registrant had 17,683,965 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 


EQUILLIUM, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

 

FINANCIAL INFORMATION

 

1

ITEM 1.

 

FINANCIAL STATEMENTS

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

2

 

 

Condensed Consolidated Statements of Stockholders' Equity

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Notes to Condensed Consolidated Financial Statements

 

5

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

14

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

21

ITEM 4.

 

CONTROLS AND PROCEDURES

 

21

PART II

 

OTHER INFORMATION

 

22

ITEM 1.

 

LEGAL PROCEEDINGS

 

22

ITEM 1A.

 

RISK FACTORS

 

22

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

70

ITEM 6.

 

EXHIBITS

 

71

SIGNATURES

 

72

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Equillium, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,614

 

 

$

13,219

 

Short-term investments

 

 

27,061

 

 

 

39,924

 

Prepaid expenses and other current assets

 

 

2,147

 

 

 

2,288

 

Total current assets

 

 

49,822

 

 

 

55,431

 

Property and equipment, net

 

 

89

 

 

 

93

 

Other assets

 

 

-

 

 

 

15

 

Total assets

 

$

49,911

 

 

$

55,539

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,801

 

 

$

1,873

 

Accrued expenses

 

 

1,910

 

 

 

2,010

 

Total current liabilities

 

 

3,711

 

 

 

3,883

 

Long-term notes payable

 

 

9,746

 

 

 

9,681

 

Other non-current liabilities

 

 

108

 

 

 

127

 

Total liabilities

 

 

13,565

 

 

 

13,691

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized;

   17,683,965 and 17,425,654 shares issued and outstanding as of

   March 31, 2020 and December 31, 2019, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

84,820

 

 

 

82,938

 

Accumulated other comprehensive income

 

 

474

 

 

 

21

 

Accumulated deficit

 

 

(48,949

)

 

 

(41,112

)

Total stockholders' equity

 

 

36,346

 

 

 

41,848

 

Total liabilities and stockholders' equity

 

$

49,911

 

 

$

55,539

 

 

See accompanying notes.

1


Equillium, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

4,706

 

 

$

3,759

 

General and administrative

 

 

2,746

 

 

 

2,589

 

Total operating expenses

 

 

7,452

 

 

 

6,348

 

Loss from operations

 

 

(7,452

)

 

 

(6,348

)

Other (expense) income, net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(273

)

 

 

-

 

Interest income

 

 

220

 

 

 

398

 

Other expense, net

 

 

(332

)

 

 

-

 

Total other (expense) income, net

 

 

(385

)

 

 

398

 

Net loss

 

$

(7,837

)

 

$

(5,950

)

Other comprehensive income, net:

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities, net

 

 

138

 

 

 

44

 

Foreign currency translation gain

 

 

315

 

 

 

-

 

Total other comprehensive income, net

 

 

453

 

 

 

44

 

Comprehensive loss

 

$

(7,384

)

 

$

(5,906

)

Net loss per share, basic and diluted

 

$

(0.45

)

 

$

(0.34

)

Weighted-average common shares outstanding,

   basic and diluted

 

 

17,562,551

 

 

 

17,376,236

 

 

See accompanying notes.

2


Equillium, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

17,376,236

 

 

$

1

 

 

$

80,441

 

 

$

5

 

 

$

(15,512

)

 

$

64,935

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

19

 

 

 

-

 

 

 

-

 

 

 

19

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

446

 

 

 

-

 

 

 

-

 

 

 

446

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

44

 

 

 

-

 

 

 

44

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,950

)

 

 

(5,950

)

Balance at March 31, 2019

 

 

17,376,236

 

 

$

1

 

 

$

80,906

 

 

$

49

 

 

$

(21,462

)

 

$

59,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

17,425,654

 

 

$

1

 

 

$

82,938

 

 

$

21

 

 

$

(41,112

)

 

$

41,848

 

Issuance of common stock under ATM facility,

net of issuance costs

 

 

174,649

 

 

 

-

 

 

 

825

 

 

 

-

 

 

 

-

 

 

 

825

 

Issuance of common stock

 

 

83,662

 

 

 

-

 

 

 

252

 

 

 

-

 

 

 

-

 

 

 

252

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

787

 

 

 

-

 

 

 

-

 

 

 

787

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

453

 

 

 

-

 

 

 

453

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,837

)

 

 

(7,837

)

Balance at March 31, 2020

 

 

17,683,965

 

 

$

1

 

 

$

84,820

 

 

$

474

 

 

$

(48,949

)

 

$

36,346

 

 

See accompanying notes.

3


Equillium, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,837

)

 

$

(5,950

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8

 

 

 

5

 

Stock-based compensation

 

 

787

 

 

 

446

 

Net unrealized loss on foreign currency transactions

 

 

336

 

 

 

-

 

Non-cash consulting expense

 

 

81

 

 

 

-

 

Amortization of term loan discount and issuance costs

 

 

65

 

 

 

-

 

Realized gain on investments

 

 

(13

)

 

 

-

 

Accretion of discount on investments, net

 

 

(7

)

 

 

(124

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

299

 

 

 

149

 

Accounts payable

 

 

(39

)

 

 

455

 

Accrued expenses

 

 

(50

)

 

 

555

 

Net cash used in operating activities

 

 

(6,370

)

 

 

(4,464

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(15

)

 

 

(11

)

Purchases of short-term investments

 

 

(2,225

)

 

 

(14,215

)

Maturities of short-term investments

 

 

15,245

 

 

 

11,575

 

Net cash provided by (used in) investing activities

 

 

13,005

 

 

 

(2,651

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock under ATM facility, net of issuance costs

 

 

775

 

 

 

-

 

Net cash provided by financing activities

 

 

775

 

 

 

-

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(15

)

 

 

-

 

Net increase (decrease) in cash and cash equivalents

 

 

7,395

 

 

 

(7,115

)

Cash and cash equivalents at beginning of period

 

 

13,219

 

 

 

28,509

 

Cash and cash equivalents at end of period

 

$

20,614

 

 

$

21,394

 

Supplemental disclosures of non-cash activities:

 

 

 

 

 

 

 

 

Issuance of commitment shares to Lincoln Park pursuant to agreement

 

$

171

 

 

$

-

 

Amounts included in accounts payable for purchases of property and equipment

 

$

-

 

 

$

13

 

 

See accompanying notes.

 

4


Notes to Condensed Consolidated Financial Statements

1. Organization and Accounting Pronouncements

Description of Business

Equillium, Inc. (the Company) was incorporated in the state of Delaware on March 16, 2017. The Company is engaged in the research and development of products for severe autoimmune and inflammatory disorders with high unmet medical need.

From inception through March 31, 2020, the Company has devoted substantially all of its efforts to organizing and staffing the Company, business planning, raising capital, in-licensing rights to itolizumab (EQ001), conducting preclinical research, filing two initial Investigational New Drug applications (INDs), commencing clinical development of the Company’s initial product candidate, itolizumab (EQ001), conducting business development activities, and the general and administrative activities associated with operating as a public company. In addition, the Company has a limited operating history, has not generated revenues from its principal operations, and the sales and income potential of its business is unproven.

Liquidity and Business Risks

As of March 31, 2020, the Company had $47.7 million in cash, cash equivalents and short-term investments. The Company has incurred significant operating losses and negative cash flows from operations. The Company expects to use its cash, cash equivalents and short-term investments to fund research and development of itolizumab (EQ001) and for working capital and other general corporate purposes. The Company does not expect to generate any revenues from product sales unless and until the Company successfully completes development and obtains regulatory approval of itolizumab (EQ001) or any future product candidate, which will not be for at least the next several years, if ever. Accordingly, until such time as the Company can generate significant revenue from sales of its product candidates, if ever, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, and collaboration and license agreements. However, the Company may not be able to secure additional financing or enter into such other arrangements in a timely manner or on favorable terms, if at all. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. The Company’s failure to raise capital or enter into such other arrangements when needed would have a negative impact on the Company’s financial condition and could force the Company to delay, reduce or terminate its research and development programs or other operations, or grant rights to develop and market product candidates that the Company would otherwise prefer to develop and market itself. Management believes that the Company’s cash, cash equivalents and short-term investments as of March 31, 2020 will be sufficient to fund operations for at least the next 12 months from the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission (SEC).

In March 2020, as a result of impacts and risks associated with the COVID-19 pandemic, the Company decided to pause enrollment in our Phase 1b clinical trials of itolizumab (EQ001) in uncontrolled asthma and lupus nephritis. This decision was not based on any observed safety issues associated with itolizumab (EQ001) but rather out of an abundance of caution related to the COVID-19 pandemic and the Company’s concern for the well-being of patients and their caregivers. The Company is continuing efforts to enroll patients in the Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of acute graft-versus-host disease (aGVHD) given the acute life-threatening severity of the disease as the Company believes itolizumab (EQ001) represents a potentially life-saving treatment for these severely ill patients. However, there remains a risk that enrollment of that trial may also be adversely impacted by the COVID-19 pandemic.

The COVID-19 outbreak in the United States and the rest of the world has caused disruptions to the Company’s business which may delay results of the Company’s clinical trials and adversely impact the Company’s business. The Company cannot predict how legal and regulatory responses to concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Additionally, the Company’s workforce and outside consultants may also be affected, which could result in an adverse impact on the Company’s ability to conduct business. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.

5


Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) promulgated by the Financial Accounting Standards Board (FASB). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2020.

Principles of Consolidation

In January 2019, the Company created a new wholly-owned subsidiary in Australia with the Company serving as the sole shareholder through the subscription of shares. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.

Foreign Currency Translation

The Company’s wholly-owned subsidiary in Australia uses their local currency to be their functional currency. Assets and liabilities are translated into U.S. dollars at quarter-end exchange rates and revenues and expenses are translated at average exchange rates during the quarter and year-to-date period. Foreign currency translation adjustments for the reported periods are included in accumulated other comprehensive income in the Company’s condensed consolidated statements of comprehensive loss, and the cumulative effect is included in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. Realized and unrealized gains and losses denominated in foreign currencies are recorded in operating expenses in the Company’s condensed consolidated statements of operations. For the three months ended March 31, 2020, net realized and unrealized losses totaled $0.3 million. There were no material realized and unrealized gains and losses for the three months ended March 31, 2019.

Recently Issued Accounting Pronouncements

 

In February 2015, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the FASB ASC 840 and creates Topic 842, Leases. The new topic supersedes Topic 840, Leases, and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. For companies that are not emerging growth companies (EGCs), ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU was to be effective for fiscal years beginning after December 15, 2019. However, in November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), Effective Dates (ASU 2019-10), which included a one-year deferral of the effective date of ASU 2016-02 for certain entities. As a result, the ASU is now effective for EGCs for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company expects to adopt the new standard in the fourth quarter of 2021 using the modified retrospective method, under which the Company will apply Topic 842 to existing and new leases as of January 1, 2021, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company anticipates that the adoption will not have a material impact on its condensed consolidated statements of operations and condensed consolidated comprehensive loss or its condensed consolidated statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

6


2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. Significant estimates in the Company’s condensed consolidated financial statements relate to clinical trial accruals and the valuation of equity awards. Management evaluates its estimates on an ongoing basis. Although estimates are based on the Company’s historical experience, knowledge of current events, and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Accrued Research and Development Expense

The Company is required to estimate its expenses resulting from its obligations under contracts with vendors, consultants and contract research organizations, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company reflects research and development expenses in its condensed consolidated financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. The Company determines accrual estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel as to the progress of studies, or other services being conducted. During the course of a study, the Company adjusts its rate of expense recognition if actual results differ from its estimates. The Company classifies its estimates for accrued research and development expenses as accrued expenses on the accompanying condensed consolidated balance sheet.

Stock-Based Compensation

The Company measures employee and non-employee stock-based awards, including stock options and stock purchase rights, at grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the award. The Company uses the Black-Scholes option pricing model to value its stock option awards. Estimating the fair value of stock option awards requires management to apply judgment and make estimates of certain assumptions, including the volatility of the Company’s common stock, the expected term of the Company’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the measurement date. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities include outstanding options under the Company’s equity incentive plan and outstanding warrants to purchase common stock, each of which have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Common stock options

 

 

2,014,093

 

 

 

1,150,483

 

Common stock warrants

 

 

80,428

 

 

 

-

 

Total

 

 

2,094,521

 

 

 

1,150,483

 

 

7


3. Fair Value of Financial Instruments

The following tables summarize the Company’s assets that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Unobservable

 

 

 

March 31,

 

 

for Identical

 

 

Observable

 

 

Inputs

 

 

 

2020

 

 

Assets (Level 1)

 

 

Inputs (Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

18,686

 

 

$

18,686

 

 

$

-

 

 

$

-

 

Agency securities

 

 

2,005

 

 

 

-

 

 

 

2,005

 

 

 

-

 

Certificates of deposit

 

 

6,370

 

 

 

6,370

 

 

 

-

 

 

 

-

 

Total

 

$

27,061

 

 

$

25,056

 

 

$

2,005

 

 

$

-

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Unobservable

 

 

 

December 31,

 

 

for Identical

 

 

Observable

 

 

Inputs

 

 

 

2019

 

 

Assets (Level 1)

 

 

Inputs (Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

28,549

 

 

$

28,549

 

 

$

-

 

 

$

-

 

Agency securities

 

 

5,994

 

 

 

-

 

 

 

5,994

 

 

 

-

 

Certificates of deposit

 

 

5,381

 

 

 

5,381

 

 

 

-

 

 

 

-

 

Total

 

$

39,924

 

 

$

33,930

 

 

$

5,994

 

 

$

-

 

 

U.S. treasury securities and certificates of deposit are valued using Level 1 inputs. Level 1 securities are valued at unadjusted quoted prices in active markets that are observable at the measurement date for identical, unrestricted assets or liabilities. Fair values determined by Level 2 inputs, which utilize data points that are observable such as quoted prices, interest rates and yield curves, require the exercise of judgment and use of estimates, that if changed, could significantly affect the Company’s financial position and results of operations. Investments in agency securities are valued using Level 2 inputs. Level 2 securities are initially valued at the transaction price and subsequently valued and reported utilizing inputs other than quoted prices that are observable either directly or indirectly, such as quotes from third-party pricing vendors.

The carrying amounts of the Company’s financial instruments, including cash, prepaid and other current assets, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. The carrying amount of the Company’s notes payable of $9.7 million at March 31, 2020 approximated their fair value as the terms of the notes are consistent with the market terms of transactions with similar profiles (Level 2 inputs). None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis.

At March 31, 2020 and December 31, 2019, the Company had investments in money market funds of $16.5 million and $10.3 million, respectively, that were measured at fair value using the net asset value per share (or its equivalent) that have not been classified in the fair value hierarchy. The funds invest primarily in U.S. government securities. 

 

The Company did not hold any Level 1, 2 or 3 financial liabilities that are recorded at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

 

8


4. Certain Financial Statement Caption Information

Short-Term Investments

The following table summarizes the Company’s short-term investments (in thousands):

 

 

 

Maturity

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

(in years)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

1 or less

 

$

18,543

 

 

$

143

 

 

$

-

 

 

$

18,686

 

Agency securities

 

1 or less

 

 

2,000

 

 

 

5

 

 

 

-

 

 

 

2,005

 

Certificates of deposit

 

1 or less

 

 

5,840

 

 

 

36

 

 

 

-

 

 

 

5,876

 

Certificates of deposit

 

>1 and <5

 

 

490

 

 

 

4

 

 

 

-

 

 

 

494

 

Total

 

 

 

$

26,873

 

 

$

188

 

 

$

-

 

 

$

27,061

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

1 or less

 

$

23,513

 

 

$

6

 

 

$

(4

)

 

$

23,515

 

U.S. treasury securities

 

>1 and <5

 

 

5,035

 

 

 

-

 

 

 

(1

)

 

 

5,034

 

Agency securities

 

1 or less

 

 

5,976

 

 

 

19

 

 

 

(1

)

 

 

5,994

 

Certificates of deposit

 

1 or less

 

 

4,131

 

 

 

22

 

 

 

-

 

 

 

4,153

 

Certificates of deposit

 

>1 and <5

 

 

1,220

 

 

 

8

 

 

 

-

 

 

 

1,228

 

Total

 

 

 

$

39,875

 

 

$

55

 

 

$

(6

)

 

$

39,924

 

 

All of the Company’s available-for-sale securities are available to the Company for use in its current operations. As a result, the Company categorizes all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date. All of the Company’s securities have a maturity within two years of the balance sheet date.

There were no impairments considered other-than-temporary during the periods presented, as it is management’s intention and ability to hold the securities until a recovery of the cost basis or recovery of fair value. For the three months ended March 31, 2020, there were gross realized gains and gross realized losses on short-term investments totaling $13,000 and $0, respectively. There were no gross realized gains and losses on sales of short-term investments for the three months ended March 31, 2019. Unrealized gains and losses are included in accumulated other comprehensive income.

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Accrued payroll and other employee benefits

$

703

 

 

$

1,215

 

Clinical studies

 

934

 

 

 

442

 

Other accruals

 

153

 

 

 

267

 

Preclinical studies

 

49

 

 

 

15

 

Accrued interest

 

71

 

 

 

71

 

Total accrued expenses

$

1,910

 

 

$

2,010

 

 

5. Notes Payable

On September 30, 2019 (the Effective Date), the Company entered into a Loan and Security Agreement (the Loan Agreement) with two lenders (the Lenders) whereby the Company can borrow up to $20.0 million in a series of term loans. Upon entering into the Loan Agreement, the Company borrowed $10.0 million from the Lenders (Term A Loan).

9


Under the terms of the Loan Agreement, the Company may, at its sole discretion, borrow from the Lenders (i) up to an additional $5.0 million (Term B Loan) upon the Company’s achievement of positive topline data in either the Company’s (a) Phase 1b aGVHD trial of itolizumab (EQ001) or (b) Phase 1b asthma trial of itolizumab (EQ001), supporting a formal decision to advance into Phase 2 development, and as confirmed by the Company’s Board of Directors (the Term B Milestone) and (ii) up to an additional $5.0 million (Term C Loan and together with Term A Loan and Term B Loan, the Term Loans) upon the Company’s achievement of positive topline data in both the Company’s Phase 1b aGVHD trial of itolizumab (EQ001) and the Company’s Phase 1b asthma trial of itolizumab (EQ001), supporting a formal decision to advance into Phase 2 development, and as confirmed by the Company’s Board of Directors (the Term C Milestone).  The Company may draw the Term B Loan during the period commencing on the date of the occurrence of the Term B Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term B Milestone, and (iii) the occurrence of an event of default and may draw the Term C Loan during the period commencing on the date of the occurrence of the Term C Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term C Milestone, and (iii) the occurrence of an event of default.

All of the Term Loans mature on June 1, 2024 (the Maturity Date) and will be interest-only payments through June 30, 2021, followed by 36 equal monthly payments of principal and interest; provided that if the Company draws the Term B Loan, the Term Loans will be interest-only payments through December 31, 2021, followed by 30 equal monthly payments of principal and interest. The Term Loans bear interest at a floating per annum rate equal to the greater of (i) 8.25% and (ii) the sum of (a) the prime rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 3.00%.  

The Company will be required to make a final payment of 4.50% of the original principal amount of the Term Loans drawn payable on the earlier of (i) the Maturity Date, (ii) the acceleration of any Term Loans, or (iii) the prepayment of the Term Loans (the Final Payment).  The Company may prepay all, but not less than all, of the Term Loans upon 30 days’ advance written notice to the lender, provided that the Company will be obligated to pay a prepayment fee equal to (i) 3.00% of the principal amount of the applicable Term Loan prepaid on or before the first anniversary of the applicable funding date, (ii) 2.00% of the principal amount of the applicable Term Loan prepaid between the first and second anniversary of the applicable funding date, and (iii) 1.00% of the principal amount of the applicable Term Loan prepaid thereafter, and prior to the Maturity Date (each, a Prepayment Fee).

In connection with entering into the Loan Agreement, the Company issued to the Lenders warrants exercisable for 80,428 shares of the Company’s common stock (the Warrants). The Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $3.73, which was the closing price of the Company’s common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The Warrants will terminate on the earlier of September 30, 2029 or the closing of certain merger or consolidation transactions. If the Company borrows under Term B Loan and/or Term C Loan, upon the funding of Term B Loan and/or Term C Loan, as applicable, the Company will issue to the Lenders additional warrants to purchase shares of the Company’s common stock equal to 3.00% of each Term Loan amount divided by the lower of (i) the ten day average closing price of the Company’s common stock reported on the Nasdaq Global Market prior to funding or (ii) the closing price of the Company’s common stock reported on the Nasdaq Global Market on the day prior to funding.  Such lower amount of (i) and (ii) above shall also be the exercise price per share for such warrants. The terms of such warrants would be substantially the same as those contained in the Warrants.

The Company recorded the Warrants as a debt discount, which is classified as a contra-liability against long-term notes payable on the condensed consolidated balance sheet, and is amortizing the balance over the life of the underlying debt. The offset to the contra-liability is recorded in additional paid in capital in the Company’s condensed consolidated balance sheet as the Warrants were determined to be an equity instrument. The Company determined the fair value of the Warrants at the date of issuance was $0.3 million using the Black-Scholes option pricing model based on significant unobservable inputs (Level 3) with an expected term of 10 years, volatility of 92.78%, risk free rate of 1.68% and expected dividend of 0%.

 

The costs incurred to issue the Term Loans of $0.1 million were deferred and are included in the discount to the carrying value of the Term Loans in the accompanying condensed consolidated balance sheet. The deferred costs and the Final Payment fee are amortized to interest expense over the expected term of the Term Loans using the effective interest method with an effective interest rate of 10.97%.

 

The aggregate carrying amounts of the Term Loans are comprised of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Principal

 

$

10,000

 

 

$

10,000

 

Add: accreted liability for Final Payment fee

 

 

71

 

 

 

35

 

Less: unamortized discount

 

 

(325

)

 

 

(354

)

Total

 

$

9,746

 

 

$

9,681

 

 

10


Upon the occurrence of certain events, including but not limited to the Company’s failure to satisfy its payment obligations under the Loan Agreement, the breach of certain of its other covenants under the Loan Agreement, or the occurrence of a material adverse change, cross defaults to other indebtedness or material agreements, judgment defaults and defaults related to failure to maintain governmental approvals failure of which to maintain could result in a material adverse effect, the Lenders will have the right, among other remedies, to declare all principal and interest immediately due and payable, to exercise secured party remedies, to receive the Final Payment and, if the payment of principal and interest is due prior to the Maturity Date, to receive the applicable Prepayment Fee. At March 31, 2020, the Company was in compliance with the covenants contained in the Loan Agreement.

 

Future maturities of the Term Loans, including the Final Payment fee, as of March 31, 2020 are as follows (in thousands):

 

 

 

March 31,

 

 

 

2020

 

Remainder of 2020

 

$

-

 

Year ending December 31, 2021

 

 

1,667

 

Year ending December 31, 2022

 

 

3,333

 

Year ending December 31, 2023

 

 

3,333

 

Year ending December 31, 2024

 

 

2,117

 

 

 

 

10,450

 

Unaccreted balance for Final Payment fee on Term Loans

 

 

(379

)

Unamortized discounts

 

 

(325

)

 

 

 

9,746

 

Less current portion

 

 

-

 

Noncurrent portion

 

$

9,746

 

 

6. Collaboration and License Agreement

In May 2017, the Company entered into a collaboration and license agreement (which was amended in September 2018, April 2019 and December 2019), clinical supply agreement, investor rights agreement, and common stock purchase agreement (collectively License Agreements) with Biocon SA (together with Biocon Limited, Biocon). Pursuant to the License Agreements, Biocon granted the Company an exclusive license to develop, make, have made, use, sell, have sold, offer for sale, import and otherwise exploit itolizumab and any pharmaceutical composition or preparation containing or comprising itolizumab that uses Biocon technology or Biocon know-how (collectively a Biocon Product) in the United States, Canada, Australia and New Zealand (collectively Company Territory). However, unless the Company achieves certain regulatory and development milestones within a specific time period, the licensed rights, other than development rights, are limited to the fields of orphan indications and the treatment of conditions related to asthma and lupus. The Company also has the right to sublicense through multiple tiers to third parties, provided such sublicenses comply with the terms of the License Agreements and the Company provides Biocon a copy of each sublicense agreement within 30 days of execution. If the Company grants a third party a sublicense of its rights to develop and commercialize Biocon Products in Australia or New Zealand, the Company will be required to pay Biocon a high double-digit percentage of any upfront payment the Company receives from such sublicensee for such sublicense, as well as a high double-digit percentage of any additional payments the Company receives from such sublicensee for such sublicense, including but not limited to royalty payments on net sales of Biocon Products by such sublicensee. Under the License Agreements, the Company granted back to Biocon a license to use its technology and know-how related to itolizumab and Biocon Products in certain countries outside of the Equillium Territory. Pursuant to the License Agreements, Biocon agreed to be the Company’s exclusive supplier of itolizumab clinical drug product. Biocon will provide clinical drug product at no cost for up to three concurrent orphan indications until the Company’s first U.S. regulatory approval and all other clinical drug product at Biocon’s cost.

In consideration of the rights granted to the Company by Biocon, the Company issued Biocon a total of 2,316,134 shares of common stock.

11


In addition, the Company is obligated to pay Biocon up to an aggregate of $30 million in regulatory milestone payments upon the achievement of certain regulatory approvals and up to an aggregate of $565 million in sales milestone payments upon the achievement of first commercial sale of product and specified levels of product sales. The Company is also required to pay royalties on tiers of aggregate annual net sales of Biocon Products by the Company, the Company’s affiliates and the Company’s sublicensees in the United States and Canada at percentages from the mid-single digits to sub-teen double-digits and on tiers of aggregate annual net sales of Biocon Products by the Company and the Company’s affiliates (but not the Company’s sublicensees) in Australia and New Zealand, in each case, subject to adjustments in certain circumstances. Biocon is also required to pay the Company royalties at comparable percentages for sales of itolizumab (EQ001) outside of the Company Territory if the approvals in such geographies included or referenced the Company’s data including data from certain of the Company’s clinical trials, subject to adjustments in certain circumstances. Under the License Agreements, net sales are calculated on a country-by-country basis and are subject to adjustments, including whether the Biocon Product is sold in the form of a combination product. As of March 31, 2020, the Company has not made or received payments in connection with the milestones or royalties within the agreement.

 

7. Stockholders’ Equity

As of March 31, 2020, the Company’s authorized capital stock consisted of 200,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.

The Company had 17,683,965 shares and 17,425,654 shares of common stock outstanding as of March 31, 2020 and December 31, 2019, respectively.

In November 2019, the Company entered into an Open Market Sales AgreementSM with Jefferies LLC (Jefferies) under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $8.45 million from time to time through Jefferies acting as its sales agent (ATM facility). The Company sold an aggregate of 174,649 shares of its common stock under the ATM facility resulting in net proceeds of $0.8 million during the three months ended March 31, 2020.

In March 2020, the Company entered into a purchase agreement (Purchase Agreement), with Lincoln Park Capital Fund, LLC (Lincoln Park), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $15.0 million of shares of its common stock from time to time over the 36‑month term of the Purchase Agreement.  Upon execution of the Purchase Agreement, the Company issued 65,374 shares of its common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement.  As of March 31, 2020, the Company has not sold any shares of its common stock to Lincoln Park under the Purchase Agreement. The commitment shares were valued using the closing price of the Company’s common stock on the effective date of the Purchase Agreement resulting in a fair market value of approximately $0.2 million. The fair market value of the commitment shares as well as other issuance costs associated with the Purchase Agreement totaled $0.4 million. These issuance costs are classified as prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet. As shares of common stock are sold to Lincoln Park in accordance with the Purchase Agreement, the issuance costs, including the fair value of the commitment shares, will be reclassified to additional paid-in capital on the Company’s condensed consolidated balance sheet.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance at March 31, 2020 is as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Stock options issued and outstanding

 

 

2,014,093

 

 

 

1,821,093

 

Warrants for common stock

 

 

80,428

 

 

 

80,428

 

Awards available under the 2018 Equity Incentive Plan

 

 

1,491,755

 

 

 

813,473

 

Employee stock purchase plan

 

 

677,972

 

 

 

503,716

 

Total

 

 

4,264,248

 

 

 

3,218,710

 

 

12


Stock-Based Compensation Expense

 

The non-cash stock-based compensation expense for all stock awards, net of forfeitures recognized as they occur, that was recognized in the condensed consolidated statements of operations is as follows (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

414

 

 

$

255

 

General and administrative

 

 

373

 

 

 

191

 

Total

 

$

787

 

 

$

446

 

 

8. Subsequent Events

 

Repricing of Outstanding Options

 

Effective as of April 22, 2020, the Board of Directors of the Company (the Board) approved a repricing of outstanding options to purchase 1,475,093 shares of the Company’s common stock held by employees of the Company, including executive officers (but excluding any employees who serve on the Board) that had exercise prices in excess of the closing stock price on April 22, 2020 and were granted under the Company’s 2017 Equity Incentive Plan or 2018 Equity Incentive Plan. As a result of the repricing, the exercise price of such options was lowered to $2.45 per share, the closing price of the Company’s common stock on April 22, 2020.

 

The Board effectuated the repricing to realign the value of such options with their intended purpose, which is to retain and motivate the holders of such options to continue to work in the best interests of the Company and its stockholders. Prior to the repricing, many of the options had exercise prices well above the recent market prices of the Company’s common stock, including prior to the recent market volatility that has generally been associated with the COVID-19 pandemic.

 

The Company is in the process of evaluating the total incremental cost of the repricing on the Company’s condensed consolidated financial statements.

13


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 26, 2020. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” refer to Equillium, Inc.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are a clinical-stage biotechnology company leveraging deep understanding of immunobiology to develop products to treat severe autoimmune and inflammatory, or immuno-inflammatory, disorders with high unmet medical need. Our initial product candidate, itolizumab (EQ001), is a clinical-stage, first-in-class monoclonal antibody that selectively targets the novel immune checkpoint receptor CD6. CD6 plays a central role in the modulation of effector T cell, or Teff cell, activity and trafficking. Activated Teff cells drive a number of immuno-inflammatory diseases across therapeutic areas including transplant science, systemic autoimmunity, pulmonary, neurologic, gastrointestinal, renal, vascular, ophthalmic and dermatologic disorders. Therefore, we believe itolizumab (EQ001) may have broad therapeutic utility in treating a large and diverse set of severe immuno-inflammatory diseases.

Our pipeline is focused on developing itolizumab (EQ001) as a potential best-in-class, disease modifying treatment for multiple severe immuno-inflammatory disorders. Our Investigational New Drug application, or IND, with the U.S. Food and Drug Administration, or FDA, for acute graft-versus-host disease, or aGVHD, was accepted in July 2018. The FDA granted itolizumab (EQ001) Fast Track designation for the treatment of aGVHD in December 2018 and Orphan Drug designations for both the prevention and treatment of aGVHD in February 2019. In March 2019, we initiated a Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of aGVHD and expect top-line data from the Phase 1b part of this trial in the second half of 2020. In June 2019, we initiated a Phase 1b proof-of-concept clinical trial in Australia for the treatment of uncontrolled asthma. Our IND for lupus nephritis was accepted by the FDA in July 2019, and we initiated a Phase 1b proof-of-concept clinical trial for the treatment of lupus nephritis in September 2019. The FDA granted itolizumab (EQ001) Fast Track designation for the treatment of lupus nephritis in December 2019. In March 2020, as a result of impacts and risks associated with the COVID-19 pandemic, we decided to pause enrollment in our Phase 1b clinical trials of itolizumab (EQ001) in uncontrolled asthma and lupus nephritis. This decision was not based on any observed safety issues associated with itolizumab (EQ001) but rather out of an abundance of caution related to the COVID-19 pandemic and our concern for the well-being of patients and their caregivers. We are continuing efforts to enroll patients in the Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of aGVHD given the acute life-threatening severity of the disease as we believe itolizumab (EQ001) represents a potentially life-saving treatment for these severely ill patients. However, there remains a risk that enrollment of that trial may also be adversely impacted by the COVID-19 pandemic.

14


We have ongoing translational biology programs to assess the therapeutic utility of itolizumab (EQ001) in additional indications where CD6 and its ligand, activated leukocyte cell adhesion molecule (ALCAM), play an important role in the pathogenesis of T cell mediated diseases. Our selection of current and future indications is driven by our analysis of the scientific, translational, clinical and commercial rationale for advancing itolizumab (EQ001) into further development.

We acquired rights to itolizumab (EQ001) for the territories of the United States and Canada in May 2017 pursuant to a collaboration and license agreement with Biocon SA (subsequently assigned to Biocon Limited, or together, Biocon), and the territories of Australia and New Zealand in December 2019, pursuant to an amendment to that agreement. Following completion of a Phase 3 clinical trial conducted by Biocon outside of North America, itolizumab (EQ001) was approved in India for the treatment of moderate to severe plaque psoriasis and is marketed by Biocon in India as ALZUMAb. Today, India is the only jurisdiction where ALZUMAb is approved or marketed. Our partnership with Biocon includes an exclusive supply agreement for clinical and commercial drug product of itolizumab (EQ001). Biocon currently manufactures itolizumab (EQ001) at commercial scale in a facility in India regulated by the FDA. In August 2019, we entered into a letter agreement with Biocon that grants us exclusive rights to negotiate licensing rights with third parties to develop and commercialize itolizumab (EQ001) in select major markets outside of North America. This letter agreement allows us to represent itolizumab (EQ001) more broadly commercially and participate in value that may be created with strategic partners across geographies.

Since our inception, substantially all of our efforts have been focused on organizing and staffing our company, business planning, raising capital, in-licensing rights to itolizumab (EQ001), conducting preclinical research, filing two initial INDs, commencing clinical development of itolizumab (EQ001) and the general and administrative activities associated with operating as a public company. We have not generated any revenue from product sales or otherwise. Since inception, we have primarily financed our operations through our initial public offering, or IPO, private placements of convertible promissory notes, term loans and our Open Market Sales AgreementSM with Jefferies LLC, or ATM facility. We have incurred losses since our inception. Our net losses were $7.8 million for the three months ended March 31, 2020 and $25.6 million for the year ended December 31, 2019. As of March 31, 2020, we had an accumulated deficit of $48.9 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development activities, preclinical and clinical activities and general and administrative costs associated with our operations.

We expect to continue to incur significant expenses and increasing losses into the foreseeable future. We anticipate our expenses will increase substantially as we continue our research and development activities, including the ongoing and future clinical development of itolizumab (EQ001), potentially acquire additional products and/or product candidates, seek regulatory approval for and potentially commercialize any approved product candidates, hire additional personnel, protect our intellectual property, incur increasing expense associated with our outstanding debt, and incur general corporate costs. We expect that our existing cash, cash equivalents and short-term investments as of March 31, 2020, will enable us to fund our currently planned operations for at least the next 12 months.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for itolizumab (EQ001) or any future product candidate, which will not be for at least the next several years, if ever. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, and collaboration and license agreements. However, we may not be able to secure additional financing or enter into such other arrangements in a timely manner or on favorable terms, if at all. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. In addition, subject to limited exceptions, our loan and security agreement with Oxford Finance LLC and Silicon Valley Bank also prohibits us from incurring indebtedness without the prior written consent of the lenders. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, reduce or terminate our research and development programs or other operations, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

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Financial Overview

Revenue

We currently have no products approved for sale, and we have not generated any revenues to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our product candidates, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenues will depend on the successful development and eventual commercialization of itolizumab (EQ001) and any future product candidates. If we fail to complete the development of itolizumab (EQ001) or any future product candidates in a timely manner, or to obtain regulatory approval for our product candidates, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.

Research and Development Expenses

Research and development expenses primarily consist of costs associated with our research and development activities, preclinical activities, and clinical development of itolizumab (EQ001). Our research and development expenses include:

 

salaries and other related costs, including stock-based compensation and benefits, for personnel in research and development functions;

 

external research and development expenses incurred under arrangements with third parties, such as consultants and advisors for research and development;

 

costs of services performed by third parties, such as contract research organizations, or CROs, that conduct research and development and preclinical activities on our behalf;  

 

costs related to preparing and filing two INDs with the FDA; and

 

costs related to general overhead expenses such as travel, insurance and rent expenses associated with our research and development activities.

We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

Our direct research and development expenses consist principally of external costs, such as fees paid to CROs and consultants in connection with our preclinical and clinical development.

We plan to substantially increase our research and development expenses for the foreseeable future as we continue to advance the development of itolizumab (EQ001) and potentially expand the number of indications for which we are developing itolizumab (EQ001). The successful development of itolizumab (EQ001) is highly uncertain. At this time, due to the inherently unpredictable nature of preclinical and clinical development, which has been further exacerbated by the uncertain magnitude, extent and duration of impacts associated with the COVID-19 pandemic, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of itolizumab (EQ001) or the period, if any, in which material net cash inflows from itolizumab (EQ001) may commence. Clinical development timelines, the probability of success, and development costs can differ materially from expectations.

Completion of clinical trials may take several years or more, and the length of time generally varies according to the type, complexity, novelty, and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

managing the impact of COVID-19 pandemic and related precautions on the operation of our clinical trials;

 

per patient clinical trial costs;

 

the number of clinical trials required for approval;

 

the number of sites included in our clinical trials;

 

the length of time required to enroll suitable patients;

 

the inefficiencies and additional costs related to any delays and potential restarts of clinical trials;

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the number of doses that patients receive;

 

the number of patients that participate in our clinical trials;

 

the drop-out or discontinuation rates of patients in our clinical trials;

 

the duration of patient follow-up;

 

potential additional safety monitoring or other studies requested by regulatory agencies;

 

the number and complexity of procedures, analyses and tests performed during our clinical trials;

 

the costs of procuring drug product for our clinical trials;

 

the phase of development of the product candidate; and

 

the efficacy and safety profile of the product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation and benefits, and consulting fees for executive, human resources, investor relations, finance, and accounting functions. Other significant costs include legal fees relating to patent and corporate matters, insurance, travel, board expenses, facility costs and taxes.

We anticipate that our general and administrative expenses will increase in future periods, reflecting an expanding infrastructure, increased legal, audit, tax and other professional fees associated with being a public company and maintaining compliance with stock exchange listing and SEC requirements, director and officer insurance premiums associated with being a public company, and accounting and investor relations costs. In addition, if we obtain regulatory approval for any product candidate, we expect to incur expenses associated with building the infrastructure to commercialize such product. However, we do not expect to receive any such regulatory approval for at least the next several years, if ever.

Interest Expense

Interest expense consists of interest on our term loans payable.

Interest Income

Interest income consists primarily of interest income earned on cash, cash equivalents and short-term investments.

Other Expense, net

Other expense, net consists of net foreign currency transaction losses related to our Australian subsidiary.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

 

The following table sets forth our results of operations for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

4,706

 

 

$

3,759

 

General and administrative

 

 

2,746

 

 

 

2,589

 

Interest expense

 

 

(273

)

 

 

-

 

Interest income

 

 

220

 

 

 

398

 

Other expense, net

 

 

(332

)

 

 

-

 

 

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Research and Development Expenses

Research and development expenses were $4.7 million and $3.8 million for three months ended March 31, 2020 and 2019, respectively.

The increase of $0.9 million in research and development expenses for the three months ended March 31, 2020 compared to the same period in 2019 includes the following changes:

 

$0.6 million increase in clinical development activities, primarily related to outside expenses with CROs

 

$0.6 million increase in employee compensation and benefits, primarily related to increased headcount

 

$0.2 million decrease in preclinical research activities

 

$0.1 million decrease in overhead expenses primarily related to decreased spending on conferences and recruiting expenses associated with our research and development activities

General and Administrative Expenses

General and administrative expenses were $2.7 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively.

The increase of approximately $0.1 million in general and administrative expenses for the three months ended March 31, 2020 compared to the same period in 2019 primarily includes the following changes:

 

$0.2 million increase in employee compensation and benefits, primarily related to increased non-cash stock-based compensation expense and consulting expenses

 

$0.1 million decrease related to legal and professional fees

 

Interest Expense

Interest expense was $0.3 million for the three months ended March 31, 2020 compared to no interest expense in the same period in 2019. The increase consists of interest on our term notes payable.

Interest Income

Interest income was $0.2 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively. The decrease in interest income was primarily due to both lower average cash, cash equivalents and short-term investment balances and lower interest rates during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Other Expense, net

Other expense, net was $0.3 million for the three months ended March 31, 2020 compared to no other expense, net in the same period in 2019. The increase relates primarily to net foreign currency transaction unrealized losses during the three months ended March 31, 2020.

Liquidity and Capital Resources

Sources of Liquidity

From inception through March 31, 2020, we have raised an aggregate of approximately $92.0 million in gross proceeds pursuant to our IPO, private placements of convertible promissory notes, proceeds from term loans and proceeds from equity issuances under our ATM facility. As of March 31, 2020, we had $20.6 million in cash and cash equivalents and $27.1 million in short-term investments.

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In September 2019, we entered into a loan and security agreement, or Loan Agreement, with Oxford Finance LLC and Silicon Valley Bank, or together the Lenders, pursuant to which we can borrow up to $20.0 million in a series of term loans. Upon entering into the Loan Agreement, we borrowed $10.0 million, or Term A Loan. Under the terms of the Loan Agreement, we may, at our sole discretion, borrow from the Lenders (i) up to an additional $5.0 million, or Term B Loan, upon our achievement of positive topline data in either our (a) itolizumab (EQ001) Phase 1b aGVHD trial or (b) itolizumab (EQ001) Phase 1b asthma trial, supporting a formal decision to advance into Phase 2 development, and as confirmed by our Board of Directors, or the Term B Milestone, and (ii) up to an additional $5.0 million, or Term C Loan and together with Term A Loan and Term B Loan, the Term Loans, upon our achievement of positive topline data in both our EQ001 Phase 1b aGVHD trial and our itolizumab (EQ001) Phase 1b asthma trial, supporting a formal decision to advance into Phase 2 development, and as confirmed by our Board of Directors, or the Term C Milestone.  We may draw the Term B Loan during the period commencing on the date of the occurrence of the Term B Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term B Milestone, and (iii) the occurrence of an event of default and may draw the Term C Loan during the period commencing on the date of the occurrence of the Term C Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term C Milestone, and (iii) the occurrence of an event of default.

In November 2019, we entered into the ATM facility with Jefferies LLC, or Jefferies, under which we may offer and sell shares of our common stock having an aggregate offering price of up to $8.45 million from time to time through Jefferies acting as our sales agent. As of March 31, 2020, we have sold an aggregate of 192,899 shares of our common stock under the ATM facility for gross proceeds of $0.9 million.

In March 2020, we entered into a purchase agreement, or the Purchase Agreement, with Lincoln Park Capital Fund, LLC, or Lincoln Park, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park up to $15.0 million of shares of our common stock from time to time over the 36‑month term of the Purchase Agreement.  Upon execution of the Purchase Agreement, we issued 65,374 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement.  As of March 31, 2020, we have not sold any shares of our common stock to Lincoln Park under the Purchase Agreement.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing and future activities, particularly as we advance and expand our clinical development of itolizumab (EQ001). We expect that our primary uses of capital will be for clinical research and development services, preclinical research, manufacturing, legal and other regulatory compliance expenses, compensation and related expenses, risk management, and general overhead costs.

We expect that our existing cash, cash equivalents and short-term investments as of March 31, 2020, will enable us to fund our currently planned operations for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Furthermore, our operating plans may change, and we may need additional funds sooner than planned. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress in these trials is uncertain. Because the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of itolizumab (EQ001) or whether, or when, we may achieve profitability.

Our future capital requirements will depend on many factors, including:

 

the initiation, progress, timing, costs and results of our ongoing and future clinical trials for itolizumab (EQ001), including as such activities may be adversely impacted by the COVID-19 pandemic;

 

the number and scope of indications we decide to pursue for itolizumab (EQ001) development;

 

the cost, timing and outcome of regulatory review of any Biologics License Application, or BLA, we may submit for itolizumab (EQ001);

 

the costs and timing of manufacturing for itolizumab (EQ001), if approved;