Item 1. Financial Statements
Item 1. Financial Statements
Equillium, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and par value data)
September 30,
December 31,
2020
2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
49,249
$
13,219
Short-term investments
41,288
39,924
Prepaid expenses and other current assets
1,623
2,288
Total current assets
92,160
55,431
Property and equipment, net
225
93
Other assets
-
15
Total assets
$
92,385
$
55,539
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$
1,681
$
1,873
Accrued expenses
2,631
2,010
Current portion of long-term notes payable
833
-
Total current liabilities
5,145
3,883
Long-term notes payable
9,043
9,681
Other non-current liabilities
71
127
Total liabilities
14,259
13,691
Commitments and contingencies
Stockholders' equity:
Common stock, $0.0001 par value; 200,000,000 shares authorized;
24,724,544 and 17,425,654 shares issued and outstanding as of
September 30, 2020 and December 31, 2019, respectively
2
1
Additional paid-in capital
140,161
82,938
Accumulated other comprehensive (loss) income
(30
)
21
Accumulated deficit
(62,007
)
(41,112
)
Total stockholders' equity
78,126
41,848
Total liabilities and stockholders' equity
$
92,385
$
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
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Operating expenses:
Research and development
$
4,218
$
4,182
$
12,817
$
12,191
General and administrative
2,298
2,142
7,761
6,920
Total operating expenses
6,516
6,324
20,578
19,111
Loss from operations
(6,516
)
(6,324
)
(20,578
)
(19,111
)
Other (expense) income, net:
Interest expense
(276
)
(2
)
(823
)
(2
)
Interest income
81
324
423
1,097
Other income (expense), net
114
(12
)
83
(17
)
Total other (expense) income, net
(81
)
310
(317
)
1,078
Net loss
$
(6,597
)
$
(6,014
)
$
(20,895
)
$
(18,033
)
Other comprehensive (loss) income, net:
Unrealized (loss) gain on available-for-sale securities, net
(71
)
(14
)
(2
)
69
Foreign currency translation (loss) gain
(56
)
7
(48
)
6
Total other comprehensive (loss) income, net
(127
)
(7
)
(50
)
75
Comprehensive loss
$
(6,724
)
$
(6,021
)
$
(20,945
)
$
(17,958
)
Net loss per share, basic and diluted
$
(0.31
)
$
(0.35
)
$
(1.11
)
$
(1.04
)
Weighted-average common shares outstanding,
basic and diluted
21,374,240
17,376,236
18,885,623
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
Vesting of restricted stock liability
-
-
19
-
-
19
Stock-based compensation expense
-
-
581
-
-
581
Other comprehensive income
-
-
-
38
-
38
Net loss
-
-
-
-
(6,069
)
(6,069
)
Balance at June 30, 2019
17,376,236
$
1
$
81,506
$
87
$
(27,531
)
$
54,063
Vesting of restricted stock liability
-
-
18
-
-
18
Stock-based compensation expense
-
-
633
-
-
633
Issuance of common stock warrants
-
-
266
-
266
Other comprehensive loss
-
-
-
(7
)
-
(7
)
Net loss
-
-
-
-
(6,014
)
(6,014
)
Balance at September 30, 2019
17,376,236
$
1
$
82,423
$
80
$
(33,545
)
$
48,959
Additional
Accumulated
Other
Total
Common Stock
Paid-in
Comprehensive
Accumulated
Stockholders'
Shares
Amount
Capital
Income (Loss)
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
Issuance of common stock pursuant to employee
stock purchase plan
39,885
-
96
-
-
96
Vesting of restricted stock liability
-
-
18
-
-
18
Stock-based compensation expense
-
-
1,350
-
-
1,350
Other comprehensive loss
-
-
-
(377
)
-
(377
)
Net loss
-
-
-
-
(6,461
)
(6,461
)
Balance at June 30, 2020
17,723,850
$
1
$
86,284
$
97
$
(55,410
)
$
30,972
Issuance of common stock, net of issuance costs
5,461,169
1
35,722
-
-
35,723
Issuance of common stock under ATM, net of issuance costs
1,539,525
-
17,290
-
-
17,290
Vesting of restricted stock liability
-
-
18
-
-
18
Stock-based compensation expense
-
-
847
-
-
847
Other comprehensive loss
-
-
-
(127
)
-
(127
)
Net loss
-
-
-
-
(6,597
)
(6,597
)
Balance at September 30, 2020
24,724,544
$
2
$
140,161
$
(30
)
$
(62,007
)
$
78,126
See accompanying notes.
3
Equillium, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2020
2019
Operating activities:
Net loss
$
(20,895
)
$
(18,033
)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization
28
17
Stock-based compensation
2,984
1,660
Net unrealized (gain) loss on foreign currency transactions
(85
)
19
Non-cash consulting expense
81
-
Amortization of term loan discount and issuance costs
195
-
Realized gain on investments
(13
)
-
Amortization/accretion of investments, net
30
(327
)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
862
495
Accounts payable
(229
)
1,559
Accrued expenses
671
694
Net cash used in operating activities
(16,371
)
(13,916
)
Investing activities:
Purchases of property and equipment
(172
)
(56
)
Purchases of short-term investments
(30,314
)
(36,095
)
Maturities of short-term investments
28,930
39,315
Net cash (used in) provided by investing activities
(1,556
)
3,164
Financing activities:
Proceeds from issuance of common stock, net of issuance costs
35,758
-
Proceeds from issuance of common stock under ATM facility, net of issuance costs
18,080
-
Proceeds from issuance of notes payable, net of issuance costs
-
9,941
Proceeds from ESPP purchase
96
-
Net cash provided by financing activities
53,934
9,941
Effect of exchange rate changes on cash and cash equivalents
23
(40
)
Net increase (decrease) in cash and cash equivalents
36,030
(851
)
Cash and cash equivalents at beginning of period
13,219
28,508
Cash and cash equivalents at end of period
$
49,249
$
27,657
Supplemental disclosures of non-cash activities:
Issuance of commitment shares to Lincoln Park pursuant to agreement
$
171
$
-
Equity issuance costs in accounts payable
$
50
$
-
Fair value of common stock warrants in connection with issuance of notes payable
$
-
$
266
Notes payable issuance costs in accounts payable
$
-
$
58
See accompanying notes.
4
Notes to Condensed Consolid ated 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 a clinical-stage biotechnology company leveraging deep understanding of immunology to develop novel products to treat severe autoimmune and inflammatory disorders with high unmet medical need.
From inception through September 30, 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 three 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 September 30, 2020, the Company had $90.5 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 is unlikely to happen within the next 12 months, 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 September 30, 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 its 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. In July 2020, the Company announced that patient enrollment in both of those trials had resumed. The Company did not pause enrollment of 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, as well as enrollment in the Company’s recently announced trial to evaluate itolizumab in hospitalized COVID-19 patients suffering from acute respiratory distress syndrome and the recently resumed Phase 1b trials in uncontrolled asthma and lupus nephritis, in addition to the timing of topline data from all four of those trials 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
5
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.
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 periods. 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 both the three and nine months ended September 30, 2020, net realized and unrealized gains totaled $0.1 million. For the three and nine months ended September 30, 2019, net realized and unrealized losses totaled $12,000 and $17,000, respectively.
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 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted.
6
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.
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 development personnel and other key personnel as well as considering input from representatives of our contract service providers 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.
Australian Research and Development Tax Incentive
The Company 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 for eligible research and development expenditures. However, the Company must have revenue of less than AUD $20.0 million during the reimbursable period and cannot be controlled by income tax exempt entities. The Tax Incentive is recognized as a reduction to research and development expense when there is a reasonable assurance that the Tax Incentive will be received, the relevant expenditure has been incurred, and the amount can be reliably measured.
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.
7
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 c ommon stock equivalent shares):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Common stock options
2,474,461
1,203,483
2,474,461
1,203,483
Common stock warrants
80,428
80,428
80,428
80,428
Total
2,554,889
1,283,911
2,554,889
1,283,911
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
September 30,
for Identical
Observable
Inputs
2020
Assets (Level 1)
Inputs (Level 2)
(Level 3)
Short-term investments:
U.S. treasury securities
$
37,119
$
37,119
$
-
$
-
Certificates of deposit
4,169
4,169
-
-
Total
$
41,288
$
41,288
$
-
$
-
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 $9.9 million at September 30, 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 September 30, 2020 and December 31, 2019, the Company had investments in money market funds of $19.3 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 September 30, 2020 or December 31, 2019.
8
4. Cer tain 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
September 30, 2020
U.S. treasury securities
1 or less
$
37,095
$
29
$
(5
)
$
37,119
Certificates of deposit
1 or less
4,145
24
-
4,169
Total
$
41,240
$
53
$
(5
)
$
41,288
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 and nine months ended September 30, 2020, there were net gross realized gains on short-term investments totaling $0 and $13,000, respectively. There were no gross realized gains and losses on sales of short-term investments for the three and nine months ended September 30, 2019. Unrealized losses and gains are included in accumulated other comprehensive (loss) income.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
September 30,
December 31,
2020
2019
Accrued payroll and other employee benefits
$
1,598
$
1,215
Clinical studies
756
442
Other accruals
191
267
Accrued interest
69
71
Preclinical research
17
15
Total accrued expenses
$
2,631
$
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 adv ance 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 Boa rd 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 Mi lestone, 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 T erm 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 Lenders, 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):
September 30,
December 31,
2020
2019
Principal
$
10,000
$
10,000
Add: accreted liability for Final Payment fee
141
35
Less: unamortized discount
(265
)
(354
)
Total
$
9,876
$
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 ad verse 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 th e 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 t he applicable Prepayment Fee. At September 30, 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 September 30, 2020 are as follows (in thousands):
September 30,
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
(309
)
Unamortized discounts
(265
)
9,876
Less current portion
(833
)
Noncurrent portion
$
9,043
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 Company’s 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.
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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.
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 September 30, 2020, the Company has not made or received payments in connection with the milestones or royalties within the agreement.
7. Stockholders’ Equity
As of September 30, 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 24,724,544 and 17,425,654 shares of common stock outstanding as of September 30, 2020 and December 31, 2019, respectively.
Follow-On Public Offering
In August 2020, the Company completed an underwritten public offering of 5,461,169 shares of common stock at $7.00 per share, which included 461,169 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company received gross proceeds from this offering totaling $38.2 million. The proceeds, net of underwriting discounts and related issuance costs, were $35.7 million.
At-the-Market Offering Program
In November 2019, the Company entered into an Open Market Sales Agreement SM with Jefferies LLC (Jefferies) under which the Company may offer and sell shares of its common stock from time to time, through an “at-the-market”, or ATM, equity offering program under which Jefferies acts as sales agent (2019 ATM Facility). The Company sets certain parameters for the sale of shares, which may include but are not limited to the number of shares to be issued, the time period during which sales are requested to be made, and any minimum price below which sales may not be made. Jefferies is entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold plus reimbursement of certain expenses.
The maximum aggregate offering price of common stock that could be sold under the 2019 ATM Facility was $8.45 million. During the three and nine months ended September 30, 2020, the Company sold an aggregate 750,840 and 925,489 shares of its common stock, respectively, and received gross proceeds of $7.5 million and $8.4 million, respectively, under the 2019 ATM Facility. The Company paid commissions on the gross proceeds in the aggregate amount of approximately $0.2 million and $0.3 million, during the three and nine months ended September 30, 2020, respectively, resulting in net proceeds of $7.3 million and $8.1 million, respectively. As of September 30, 2020, the 2019 ATM Facility was fully utilized.
On July 14, 2020, the Company entered into a new ATM equity offering program (2020 ATM Facility) with Jefferies under which the Company may offer and sell shares of the Company’s common stock having an aggregate price of up to $150 million, from time to time, through Jefferies acting as our sales agent. For the three and nine months ended September 30, 2020, the Company sold an aggregate of 788,685 shares of common stock under the 2020 ATM Facility for gross proceeds of $10.4 million. The Company paid cash commissions on the gross proceeds, plus reimbursement expenses to Jefferies and other issuance costs in the aggregate amount of approximately $0.4 million, resulting in net proceeds of $10.0 million. Since September 30, 2020 and through the date of the filing of this quarterly report on Form 10-Q, there have been no additional sales of the Company’s stock under the 2020 ATM Facility.
Purchase Agreement
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
12
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. 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 com mitment 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 s heet . During the three and nine months ended September 30, 2020, there were no sales of the Company’s stock under this Purchase Agreement. There have been no sales of the Company’s stock under this Purchase Agreement as of September 30, 2020 and through th e date of the filing of this Quarterly Report on Form 10-Q.
Repricing of Outstanding Options
On 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 vesting schedule and term of these options remained unchanged.
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 effect of the repricing generated a total incremental cost of approximately $0.4 million, of which approximately $26,000 and $0.1 million was recognized as stock-based compensation expense in the three and nine months ended September 30, 2020, respectively, with the remainder to be expensed over the remaining vesting periods.
Stock Options
The following table summarizes the stock option activity during the nine months ended September 30, 2020:
Shares
Subject to
Options
Weighted-
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
Options outstanding at December 31, 2019
1,821,093
$
5.64
Granted
653,368
$
3.95
Exercised
-
$
-
Forfeitures and cancellations
-
$
-
Options outstanding at September 30, 2020
2,474,461
$
3.47
8.69
$
6,149
Options exercisable at September 30, 2020
873,873
$
3.48
8.30
$
2,577
(a)
Aggregate intrinsic value in this table was calculated as the positive difference, if any, between the closing price per share of the Company’s common stock on September 30, 2020 of $5.77 and the price of the underlying options.
(b)
The weighted-average exercise price per share of the options outstanding and exercisable as of September 30, 2020 includes the impact of the repricing of 1,475,093 options on April 22, 2020 at $2.45 per share.
At September 30, 2020, unamortized stock compensation for stock options was $8.0 million, with a weighted-average recognition period of 2.6 years.
On May 28, 2020, the Compensation Committee of the Company’s Board of Directors issued to its Executive Chairman, Chief Executive Officer and two non-management directors retention stock options to purchase an aggregate of 169,368 shares of the Company’s common stock. These stock option grants immediately vested at the date of grant. The non-cash stock-based compensation expense recognized in the three and nine months ended September 30, 2020 associated with these stock option grants totaled $0 million and $0.4 million, respectively. At the time, the Executive Chairman and Chief
13
Executive Officer voluntarily agreed to a 65% and an 85% reduction, respectively, in their base salaries otherwise payable for the remainder of 2020. The two non-management directors voluntarily agreed to forego 100% of their annual cash retainers otherwise payable to such directors for the remainder of 2020.
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
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
Research and development
$
449
$
315
$
1,351
$
880
General and administrative
398
318
1,633
780
Total
$
847
$
633
$
2,984
$
1,660
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance at September 30, 2020 is as follows:
September 30,
December 31,
2020
2019
Stock options issued and outstanding
2,474,461
1,821,093
Warrants for common stock
80,428
80,428
Awards available under the 2018 Equity Incentive Plan
1,031,387
813,473
Employee stock purchase plan
638,087
503,716
Total
4,224,363
3,218,710
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.