Equillium, Inc. 10-Q

Item 2. Management’s Discussion and Analy sis 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, 2023 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 25, 2024. 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 a deep understanding of immunobiology to develop novel therapeutics to treat severe autoimmune and inflammatory, or immuno-inflammatory, disorders with high unmet medical need. Our strategy is focused on advancing the clinical development of our product candidates, including potentially pursuing additional indications and acquiring new product candidates and platforms to expand our pipeline. We intend to commercialize our product candidates either independently or through partnerships or otherwise monetize our pipeline through strategic transactions. Our current clinical-stage product candidates consist of EQ101 and itolizumab (EQ001). EQ101 is a clinical stage, first-in-class, selective, tri-specific inhibitor of IL-2, IL-9 and IL-15, key disease-driving, clinically validated cytokine targets aimed at addressing unmet needs across a range of immuno-inflammatory indications. Itolizumab (EQ001) is a clinical-stage, first-in-class anti-CD6 monoclonal antibody that selectively targets the CD6-ALCAM signaling pathway to downregulate pathogenic T effector cells while preserving T regulatory cells critical for maintaining a balanced immune response. This pathway plays a central role in modulating the activity and trafficking of T cells that drive a number of immuno-inflammatory diseases. We are also engaged in the discovery and optimization of additional peptide-based product candidates that selectively target multiple cytokines and are currently advancing the development of EQ302, a preclinical stage, first-in-class, selective, bi-specific inhibitor of IL-15 and IL-21 for oral delivery. Our novel and differentiated pipeline of first-in-class immunology assets has the potential to address unmet medical needs in numerous areas, including dermatology, gastroenterology, rheumatology, hematology, transplant science, oncology and pulmonology. We are focused on developing EQ101, EQ302 and itolizumab (EQ001) as potential best-in-class, disease modifying treatments for multiple severe immuno-inflammatory disorders. We acquired the exclusive worldwide rights to EQ101 and a proprietary platform for discovering additional, novel multi-cytokine targeting product candidates, including EQ302, through the acquisition of Bioniz Therapeutics, Inc., or Bioniz, in February 2022. EQ101 and EQ302 are synthetic peptides engineered to specifically inhibit key disease-driving, clinically validated cytokine targets aimed at addressing unmet needs in a number of immuno-inflammatory indications. In November 2022, we initiated a Phase 2 proof-of-concept clinical study of EQ101 administered intravenously, or IV, in subjects with moderate to severe alopecia areata, or AA, in Australia and New Zealand. Enrollment in that study has been completed, and we expect to announce topline data in the second quarter of 2024. We are currently conducting preclinical development of EQ302, including in vivo pharmacology and formulation development, to further characterize and optimize the product candidate. Pending positive findings, we expect to advance EQ302 into additional preclinical development to include GMP-manufacturing and toxicology studies capable of supporting a potential IND filing and advancement into a first-in-human clinical study. We recently completed a Phase 1 first-in-human clinical study of another multi-cytokine targeting peptide, EQ102, in healthy volunteers in Australia. EQ102 is a bi-specific inhibitor of IL-15 and IL-21, which was also acquired as part of the Bioniz acquisition. In that Phase 1 study, EQ102 was generally well tolerated and demonstrated pharmacodynamic activity, but the bioavailability of the initial formulation was lower than expected. Preclinical and translational data have demonstrated that EQ302 has increased potency 21 compared to EQ102, is both stable and permeable in the gut, and can be further modified for optimal systemic or gut-restricted activity. In December 2023, we announced that given our recent progress with EQ302 and its superior product profile relative to EQ102, we have transitioned away from further developing EQ102 and are instead advancing EQ302 towards the clinic for the potential treatment of patients with gastrointestinal and skin diseases. We acquired our rights to itolizumab (EQ001) pursuant to a collaboration and license agreement with Biocon SA (subsequently assigned to Biocon Limited, or together, Biocon) in May 2017, which has been subsequently amended, or Biocon License. In March 2022, we initiated EQUATOR, a global Phase 3 pivotal clinical study of itolizumab (EQ001) in 200 patients with acute graft-versus-host disease, or aGVHD. The decision to initiate the EQUATOR study was based on findings from our completed Phase 1b clinical study in aGVHD, called EQUATE, and feedback from both the U.S. Food and Drug Administration, or FDA, and leading physicians in the field of hematopoietic stem cell transplantation. We expect the interim review of EQUATOR data of the first approximately 100 subjects by the Data Safety Monitoring Committee will occur in the third quarter of 2024. We recently completed EQUALISE, a Phase 1b proof-of-concept clinical study of itolizumab (EQ001) in patients with systemic lupus erythematosus, or SLE, and lupus nephritis, or LN. In November 2023, we announced data from the Type B LN portion of the study presented at the annual meetings of the American College of Rheumatology and the American Society of Nephrology. That data represented all but the last patient in the follow-up period and demonstrated that itolizumab (EQ001) was well-tolerated and produced a clinically meaningful response in highly proteinuric subjects. In April 2024, we announced positive topline data from the Type B LN portion of EQUALISE and that the topline data had been delivered to Ono Pharmaceutical Co., Ltd., or Ono. We are also collaborating with Biocon and co-funding a Phase 2 clinical study of itolizumab in subjects with ulcerative colitis. The study, which is being conducted by Biocon in India and commenced in November 2022, is a randomized, double-blinded, placebo-controlled clinical study in up to 90 subjects, to evaluate the safety and efficacy of itolizumab in patients with moderate to severe ulcerative colitis. On December 5, 2022, we entered into the Asset Purchase Agreement with Ono pursuant to which we granted Ono an exclusive option to acquire our rights to itolizumab (EQ001) or the Option. These rights include all therapeutic indications and the rights to commercialize itolizumab (EQ001) in the United States, Canada, Australia, and New Zealand. In exchange for the Option, Ono paid us a one-time, upfront payment of an amount equal to JPY 3.5 billion, or $26.4 million. If Ono exercises the Option, Ono will pay us a one-time, payment of an amount equal to JPY 5.0 billion, or approximately $32.2 million based on the currency exchange rate quoted by MUFG Bank, Ltd on May 8, 2024. We expect Ono to make its option exercise decision in the second half of 2024. We are also eligible to receive up to $101.4 million upon the achievement of certain development, regulatory and commercialization milestones. Pursuant to the Asset Purchase Agreement, we are responsible for conducting all research and development of itolizumab (EQ001), which is being funded by Ono on a quarterly basis from July 1, 2022 through the option period. Unless terminated early, the option period will expire three months following the delivery of topline data from the EQUALISE clinical study in LN and the results of the interim analysis from the EQUATOR Phase 3 clinical study in aGVHD. In April 2024, we delivered topline data from the EQUALISE clinical study in LN to Ono. The Asset Purchase Agreement can be terminated at any time by Ono upon written notice, provided that in limited circumstances Ono will be obligated to continue to reimburse us for research and development costs and expenses of itolizumab (EQ001) for a certain period of time following such termination. If Ono does not timely exercise its Option, the Asset Purchase Agreement and the Option will automatically terminate. The Asset Purchase Agreement also contains customary termination rights for both parties for material breach and an outside date (subject to limited adjustments) that permits either party to terminate the Asset Purchase Agreement if the closing has not occurred by December 31, 2025. We have a proprietary product discovery platform that we can leverage to design novel peptides to target and inhibit multiple cytokines that are involved in validated biological and disease pathways. For example, we recently highlighted preclinical data from EQ302, a preclinical stage, first-in-class, selective, bi-specific inhibitor of IL-15 and IL-21 for oral delivery. We also have ongoing translational biology programs to assess the therapeutic utility of our product candidates in additional indications where the mechanism of action is believed to play an important role in the pathogenesis of a particular disease. Our selection of current and future indications is driven by our analysis of the scientific, translational, clinical and commercial rationale for advancing our product candidates into further development. 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 non-clinical research, including the initial preclinical development of EQ302, filing three Investigational New Drug applications, or INDs, conducting clinical development of EQ101, EQ102 and itolizumab (EQ001), conducting chemistry, manufacturing and controls, or CMC, activities in preparation for a potential biologics license application, or BLA, filing for itolizumab, conducting business development activities such as the acquisition of 22 Bioniz, the Asset Purchase Agreement with Ono and other transactions not completed, initiating a stock repurchase program, and the general and administrative activities associated with operating a public company. Furthermore, in connection with the acquisition of Bioniz, we expanded our pipeline from one product candidate to multiple product candidates, all at various stages of development. This expansion may accelerate the rate at which our operating losses increase as we incur costs to further the development and seek regulatory approval for these product candidates. We have generated revenue from the Asset Purchase Agreement related to the one-time, upfront payment from Ono in exchange for the Option as well as from the itolizumab (EQ001) development funding from Ono. We have not generated any revenue from product sales, milestone payments or royalties. Since inception, we have primarily financed our operations through debt and equity financings and revenue generated from the Asset Purchase Agreement. We have incurred losses since our inception. For the three months ended March 31, 2024 and 2023, our net losses were $2.7 million and $3.9 million, respectively. As of March 31, 2024, we had an accumulated deficit of $188.5 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development activities, non-clinical and clinical activities, acquired in-process research and development, 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 advance our research and development activities, including the ongoing and future clinical development of EQ101, EQ302 and itolizumab (EQ001), potentially expand the indications in which we conduct clinical development of our product candidates, potentially acquire and/or develop new product candidates, including preclinical drug candidates identified through our multi-cytokine targeting drug discovery platform, seek regulatory approval for and potentially commercialize any approved product candidates, hire additional personnel, protect our intellectual property and incur general corporate costs. We expect that our existing cash, cash equivalents and short-term investments as of March 31, 2024, will enable us to fund our operations into the second half of 2025, assuming no further repurchases under our stock repurchase program. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for EQ101, EQ302, or any future product candidate, which is unlikely to happen within the next 12 months, if ever. Further, under the Asset Purchase Agreement with Ono, our revenues related to itolizumab (EQ001) are limited to the upfront option fee already received, reimbursement of our development costs of itolizumab (EQ001) during the option period, and the potential option exercise fee and potential milestone payments. If Ono does not exercise its Option, we would not expect to generate any revenues from product sales of itolizumab (EQ001) unless and until we successfully complete development and obtain regulatory approval for itolizumab (EQ001), which is unlikely to happen within the next 12 months, 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, such as our Asset Purchase Agreement with Ono. 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 conflict between Russia and Ukraine, the conflict in the Middle East, bank failures, inflationary pressures on the economy and monetary policy responses by government agencies and other macroeconomic factors, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth and uncertainty about economic stability. 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. 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. Financial Overview Revenue To date, we have not generated any revenues from therapeutic product sales, developmental milestones or royalties. For the three months ended March 31, 2024 and 2023, our revenues were derived from development funding from Ono and recognition of deferred revenue associated with an upfront payment under the Asset Purchase Agreement. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our product candidates, including further revenue such as development funding and potential option exercise and milestone payments from the Asset Purchase Agreement, as well as product sales from any approved product, which approval is unlikely to happen within the next 12 months, if ever. Our ability to generate product revenues will depend on the successful development and eventual commercialization of EQ101, EQ302, itolizumab (EQ001) if Ono does not exercise its option, and any future product candidates. If we fail to complete the development of EQ101, EQ302, 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. Asset Purchase Agreement with Ono Pharmaceutical Co., Ltd. 23 On December 5, 2022, we entered into the Asset Purchase Agreement pursuant to which we granted Ono the Option in exchange for a one-time, upfront payment of an amount equal to JPY 3.5 billion, or $26.4 million. These rights include all therapeutic indications and the rights to commercialize itolizumab in the United States, Canada, Australia, and New Zealand. If Ono exercises the Option, we will receive JPY 5.0 billion, or approximately $32.2 million based on the currency exchange rate quoted by MUFG Bank, Ltd. on May 8, 2024. We are also eligible to receive up to $101.4 million upon achievement of certain development, regulatory and commercialization milestones. We are responsible for conducting all research and development of itolizumab, which is being funded by Ono on a quarterly basis from July 1, 2022, through the option period. Unless terminated early, the option period will expire three months following the delivery of topline data from the EQUALISE clinical study in LN and the results of the interim analysis from the EQUATOR Phase 3 clinical study in aGVHD. In April 2024, we delivered topline data from the EQUALISE clinical study in LN to Ono. During the three months ended March 31, 2024, we recognized $10.7 million of revenue under our Asset Purchase Agreement with Ono consisting of $8.0 million of development funding and $2.7 million related to the amortization of the upfront payment. During the three months ended March 31, 2023, we recognized $8.9 million of revenue under our Asset Purchase Agreement with Ono consisting of $6.7 million of development funding and $2.2 million related to the amortization of the upfront payment. As of March 31, 2024, aggregate deferred revenue related to the Asset Purchase Agreement was $13.4 million. Research and Development Expenses Research and development expenses primarily consist of costs associated with our non-clinical research and clinical development of our product candidates, as well as costs paid to contract manufacturing organizations, or CMOs, and to Biocon and its affiliates in connection with clinical product supply, formulation and device development, and the performance of CMC activities required for a potential BLA filing of itolizumab. Our research and development expenses include: • salaries and other related costs, including stock-based compensation and benefits, for personnel in research and development functions; • per patient clinical study costs; • 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 activities on our behalf; • costs related to preparing and filing three INDs with the FDA and other regulatory interactions and submissions; • pharmacovigilance costs related to global drug safety monitoring and reporting; • external expenses related to CMC, formulation and device development, and supply of drug product; and • costs related to general overhead expenses such as travel, insurance, rent expenses, lab supplies and equipment 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 non-clinical research and clinical development, as well as costs paid to CMOs and to Biocon and its affiliates in connection with clinical product supply, formulation and device development, and the performance of CMC activities required for a potential BLA filing of itolizumab. Equillium Australia Pty Ltd, or Equillium Australia, a wholly-owned subsidiary of Equillium, Inc., is eligible under the Australian Research and Development Tax Incentive Program, or the Tax Incentive, to obtain a cash refund from the Australian Taxation Office, or ATO, for eligible research and development expenditures. The cash refund is received by Equillium Australia, upon filing of a claim in connection with Equillium Australia’s annual income tax return. The Tax Incentive is a self-assess program whereby Equillium Australia must assess its eligibility each year to determine (i) if the entity is eligible, (ii) if the specific research and development activities are eligible and (iii) if the individual research and development expenditures have nexus to such research and development activities. Equillium Australia evaluates its eligibility under the Tax Incentive as of each balance sheet date based on the most current and relevant data available. Equillium Australia is able to continue to claim the Tax Incentive for as long as it remains eligible and continues to incur eligible research and development expenditures. The estimated Tax Incentive refund amounts are 24 recognized as a reduction to research and development expense when there is reasonable assurance that the Tax Incentive refund amounts will be received, the relevant expenditure has been incurred, and the amount can be reliably measured. We plan to substantially increase our research and development expenses for the foreseeable future as we advance the development of EQ101, EQ302, and itolizumab (EQ001) if Ono does not exercise its option, potentially expand the number of indications for which we are developing those product candidates, and potentially acquire or develop new product candidates. The successful development of EQ101, EQ302 and itolizumab (EQ001) is highly uncertain. At this time, due to the inherently unpredictable nature of pre-clinical and clinical development, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of our product candidates or the period, if any, in which material net cash inflows from the sales from our product candidates may commence. Clinical development timelines, the probability of success, and development costs can differ materially from expectations. Completion of clinical studies 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 studies may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others: • per patient clinical study costs; • the number of clinical studies required for approval; • the number of sites and the number of countries included in our clinical studies; • the length of time required to enroll suitable patients; • the inefficiencies and additional costs related to any delays and potential restarts of clinical studies; • the number of doses that patients receive; • the number of patients that participate in our clinical studies; • the drop-out or discontinuation rates of patients in our clinical studies; • 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 studies; • the costs of procuring drug product for our clinical studies; • 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 and capabilities to commercialize such product. However, the timing of any such approval is highly uncertain, and it may be several years, if ever, that we receive any such regulatory approval. Interest Expense Interest expense consists of interest and amortization of discounts on our prior term loans payable. Interest Income 25 Interest income consists primarily of interest income earned on cash, cash equivalents and short-term investments, and is recognized when earned. Other Expense, net Other expense, net consists primarily of net foreign currency transaction gains and losses related to our Australian subsidiary. Income Tax Expense Income tax expense consists of federal and state income tax expense. Results of Operations Comparison of the Three Months Ended March 31, 2024 and 2023 The following table sets forth our results of operations for the three months ended March 31, 2024 and 2023 (in thousands): Three Months Ended March 31, 2024 2023 Change Revenue $ 10,689 $ 8,879 $ 1,810 Research and development 9,743 9,272 471 General and administrative 3,737 3,715 22 Interest expense - (232 ) 232 Interest income 439 639 (200 ) Other expense, net (382 ) (179 ) (203 ) Income tax expense - 60 (60 ) Revenue During the three months ended March 31, 2024 and 2023, we recognized revenue of $10.7 million and $8.9 million, respectively, under our Asset Purchase Agreement with Ono. For the three months ended March 31, 2024, development funding represented $8.0 million and amortization of the upfront payment represented $2.7 million. For the three months ended March 31, 2023, development funding represented $6.7 million and amortization of the upfront payment represented $2.2 million. Research and Development Expenses Research and development expenses were $9.7 million and $9.3 million for the three months ended March 31, 2024 and 2023, respectively. The increase in research and development expense primarily includes the following changes: • $1.0 million increase in expenses associated with CMC activities primarily performed by Biocon necessary to support a potential BLA filing related to our EQUATOR clinical study; • $0.6 million increase in drug substance purchases for the potential advancement of EQ101 clinical development; • $0.5 million increase in employee compensation and benefits, primarily related to increased headcount; and • $0.2 million increase in consulting expenses; offset by • $1.4 million decrease in clinical study expenses primarily driven by our EQ102 clinical study and to a lesser extent by our EQUALISE clinical study, partially offset by higher costs for our EQ101 and EQUATOR clinical studies; • $0.3 million decrease in research and development expenses associated with the recording of a Tax Incentive benefit from the ATO as a reduction to research and development expenses associated with our EQ101 and EQ102 clinical studies in Australia; and • $0.2 million decrease in non-clinical research expenses. General and Administrative Expenses General and administrative expenses were $3.7 million for each of the three-month periods ended March 31, 2024 and 2023. General and administrative expenses for the three months ended March 31, 2024 remained relatively constant compared to the same period in 2023. 26 Interest Expense There was no interest expense for the three months ended March 31, 2024. Interest expense was $0.2 million for the three months ended March 31, 2023. Interest expense consisted of interest on our prior term notes payable, which were paid off in May 2023. Interest Income Interest income was $0.4 million and $0.6 million for the three months ended March 31, 2024 and 2023, respectively. The decrease in interest income was primarily due to lower average cash, cash equivalents and short-term investment balances during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Other Expense, net Other expense, net was $0.4 million for the three months ended March 31, 2024, compared to $0.2 million for the three months ended March 31, 2023. The change relates primarily to an increase in net foreign currency transaction unrealized losses during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Income Tax Expense There was no income tax expense for the three months ended March 31, 2024. Income tax expense was $0.1 million for the three months ended March 31, 2023. Our 2023 income tax expense was primarily attributable to domestic cash tax expense resulting from differences between book and tax treatment of certain items. We do not record a deferred tax provision as there is a full valuation allowance offsetting our deferred tax assets. Liquidity and Capital Resources From inception through March 31, 2024, we have financed our operations primarily through the sale of equity and debt securities and income generated from our Asset Purchase Agreement with Ono as described in more detail in the Sources of Liquidity section below. As of March 31, 2024, we had an accumulated deficit of $188.5 million and anticipate that we will continue to incur net losses for the foreseeable future. As of March 31, 2024, we had $11.6 million in cash and cash equivalents and $20.7 million in short-term investments. Sources of Liquidity 2023 ATM Facility In October 2023, we entered into an at-the-market 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 $21.95 million from time to time through Jefferies acting as our sales agent, or the 2023 ATM Facility. As of the filing of this Quarterly Report on Form 10-Q, we have not sold any shares under the 2023 ATM Facility. Asset Purchase Agreement with Ono On December 5, 2022, we entered into the Asset Purchase Agreement with Ono, pursuant to which we granted Ono the exclusive right, but not the obligation, to acquire our rights to itolizumab. These rights include all therapeutic indications and the rights to commercialize itolizumab in the United States, Canada, Australia, and New Zealand. In exchange for the Option, Ono paid us a one-time upfront payment of an amount equal to JPY 3.5 billion, or $26.4 million. If Ono exercises the Option, Ono will pay us a one-time, payment of an amount equal to JPY 5.0 billion, or approximately $32.2 million based on the currency exchange rate quoted by MUFG Bank Ltd. on May 8, 2024. We are also eligible to receive up to $101.4 million upon the achievement of certain development, regulatory and commercialization milestones. As of March 31, 2024, we have not received the option exercise payment or any milestone payments. We are responsible for conducting all research and development of itolizumab, which is being funded by Ono on a quarterly basis from July 1, 2022 through the option period. The option period will expire three months following the delivery of topline data from the EQUALISE clinical study in LN and the results of the interim analysis from the EQUATOR Phase 3 clinical study in aGVHD. In April 2024, we delivered topline data from the EQUALISE clinical study in LN to Ono. As of March 31, 2024, we have received $45.0 million in development funding from Ono. 27 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 EQ101 and itolizumab (EQ001) if Ono does not exercise its option, including potential new indications, and potentially advance preclinical research of EQ302 and other novel preclinical drug candidates identified through our multi-cytokine targeting drug discovery platform. We expect that our primary uses of capital will be for clinical development services, non-clinical research, CMC activities, formulation and device development, product supply, potential acquisition of new products, potential repurchases of shares of our common stock under our stock repurchase program, legal and other regulatory compliance expenses, employee compensation and related expenses, insurance premiums, working capital and other general overhead costs. In July 2023, our board of directors authorized a stock repurchase program pursuant to which we may repurchase up to $7.5 million of shares of our common stock through December 31, 2024. Under the program, we may repurchase shares of common stock during the term of the program through open market transactions or such other transactions as our board of directors or designated committee thereof may approve from time to time. The timing and amount of repurchases, if any, will depend on a variety of factors, including the price of our common stock, alternative investment opportunities, our cash resources, restrictions under any of our agreements, corporate and regulatory requirements and market conditions. As of March 31, 2024, we repurchased 298,385 shares of our common stock under the stock repurchase program for a total of $0.3 million. There have been no repurchases of our common stock under the stock repurchase program since March 31, 2024 and through the date of the filing of this Quarterly Report on Form 10-Q. We expect to fund any future repurchase of shares of our common stock, if any, under the program with existing cash and cash equivalents. We expect that our existing cash, cash equivalents and short-term investments as of March 31, 2024 will enable us to fund our currently planned operations into the second half of 2025, assuming no further repurchases under our stock repurchase program. 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 studies is costly, and the timing of progress in these studies 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 EQ101, EQ302 and itolizumab (EQ001) or any of our other product candidates or whether, or when, we may achieve profitability. Our future capital requirements will depend on many factors, including: • whether Ono exercises its option and the extent to which milestones payments, if any, are received: • the initiation, progress, timing, costs and results of our ongoing and future clinical studies of EQ101 and itolizumab (EQ001) and other product candidates, including as such activities may be adversely impacted by public health epidemics or outbreaks, the evolving conflict between Russia and Ukraine, the conflict in the Middle East and bank failures; • the potential advancement and cost of preclinical research of EQ302 and other novel preclinical drug candidates identified by our multi-cytokine targeting drug discovery platform; • the number and scope of indications we decide to pursue for the development of our product candidates; • the cost, timing and outcome of regulatory review of any BLA or New Drug Application, or NDA, we may submit for our product candidates; • the costs and timing of manufacturing EQ101 and itolizumab (EQ001) and other product candidates; • the costs of drug formulation research and development; • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; • our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates; • the costs associated with being a public company; • our ability to enter into partnerships or otherwise monetize our pipeline through strategic transactions on a timely basis, on terms that are favorable to us, or at all; • the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; • the extent to which we acquire or in-license other product candidates and technologies or engage in in-house discovery and preclinical research of new product candidates, for example EQ302; 28 • the legal and other transactional costs associated with our business development activities; and • the cost associated with commercializing EQ101 and itolizumab (EQ001) or any of our other product candidates, if approved for commercial sale. Until such time as we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, and collaboration and license agreements, such as our Asset Purchase Agreement with Ono. The sale of additional equity or convertible debt could result in additional dilution to our stockholders and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. The incurrence of debt financing would result in debt service obligations and the governing documents would likely include operating and financing covenants that would restrict our operations. As a result of the conflict between Russia and Ukraine, the conflict in the Middle East, bank failures, inflationary pressures on the economy and monetary policy responses taken by government agencies and other macroeconomic factors, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth 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. If we raise additional funds through collaboration or license agreements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or that may reduce the value of our common stock. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or other operations. Any of these actions could have a material effect on our business, financial condition and results of operations. We have experienced net losses and negative cash flows from operating activities since our inception and expect to continue to incur net losses into the foreseeable future. We had an accumulated deficit of $188.5 million as of March 31, 2024. We expect operating losses and negative cash flows to continue for at least the next several years as we incur costs related to the development of EQ101, EQ302 and itolizumab (EQ001) if Ono does not exercise its option, and any of our other product candidates. Material Cash Requirements Our expected material cash requirements are comprised of contractually obligated expenditures, including amounts due under our operating leases. For additional information relating to our leases, see Note 7 of the Notes to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. We have no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis. Our expected material cash requirements do not include potential contingent payments upon the achievement by us of regulatory and commercial milestones that we may be required to make under the terms of the merger agreement pursuant to which we acquired Bioniz, nor do they include potential contingent payments upon the achievement by us of regulatory and commercial milestones or royalty payments that we may be required to make under license agreements we have entered into or may enter into with various entities pursuant to which we have in-licensed certain intellectual property, including the Biocon License. For further details on the potential contingent payments related to our acquisition of Bioniz and related to the Biocon License, see Notes 5 and 8 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Cash Flows The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands): Three Months Ended March 31, 2024 2023 Net cash used in: Operating activities $ (8,800 ) $ (7,995 ) Investing activities (2,831 ) (25,181 ) Financing activities - (1,429 ) Effect of exchange rate changes on cash (17 ) 1 Net decrease in cash and cash equivalents $ (11,648 ) $ (34,604 ) Operating Activities During the three months ended March 31, 2024, cash used in operating activities was $8.8 million compared to $8.0 million during the three months ended March 31, 2023. Cash used in operating activities during the first quarter of 2024 primarily related to our net loss of $2.7 million, adjusted for non-cash items of $1.1 million, primarily consisting of non-cash stock-based compensation expenses, and net cash outflows from changes in deferred revenue and other operating assets and liabilities of $7.2 million. Cash used in operating activities during the first quarter of 2023 primarily related to our net loss of $3.9 million, adjusted for non-cash items of $1.0 million, 29 primarily consisting of non-cash stock-based compensation expenses, and net cash outflows from changes in deferred revenue and other operating assets and liabilities of $5.0 million. Investing Activities Net cash used in investing activities for the three months ended March 31, 2024 and 2023 were outflows of $2.8 million and $25.2 million, respectively, and reflects the purchases of short-term investments, property and equipment, offset by the sales and maturities of short-term investments. Financing Activities There was no cash used in or provided by financing activities during the three months ended March 31, 2024. Net cash used in financing activities for the three months ended March 31, 2023 was $1.4 million, and reflects principal payments on our prior notes payable. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, and similarly did not and do not have any holdings in variable interest entities. We do have certain contingent consideration liabilities in the form of potential milestone payments that are included in our Biocon License and in our merger agreement with Bioniz which are not reflected in our balance sheet. However, based on our current operating plans and our assessment of the probability and potential timing of such payments, we believe those payments, if any, are remote and highly unlikely to come due within the next 12 months. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. There have been no changes to our critical accounting policies and estimates described in the Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 25, 2024, that have had a material impact on our condensed consolidated financial statements and related notes. Recently Issued Accounting Pronouncements See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently issued and adopted accounting pronouncements. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk Not required for smaller reporting companies. Item 4. Contr ols and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or 30 procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As of March 31, 2024, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2024. There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 31 PART II - OTHE R INFORMATION Item 1. Legal Proceedings None.