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Item 7. Management’s Discussion and Analysis

2021-03-24 compared with 2020-03-26 · 138 added, 78 removed, 156 unchanged (58% of the section changed)

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Our pipeline is focused on developing itolizumab (EQ001) as a potential best-in-class, disease modifying treatment for multiple severe immuno-inflammatory disorders.

We currently have active clinical development programs for itolizumab (EQ001) for the treatment of acute graft-versus-host disease, or aGVHD, lupus/lupus nephritis and uncontrolled asthma.

Our Investigational New Drug application, or IND, with the U.S.

Food and Drug Administration, or FDA, for acute graft-versus-host disease, or aGVHD, was accepted in July 2018.

Food and Drug Administration, or FDA, for aGVHD was accepted in July 2018.

The FDA granted itolizumab (EQ001) Fast Track designation for the treatment of aGVHD in December 2018 and Orphan Drug designations for both the prevention and treatment of aGVHD in February 2019.

In March 2019, we initiated a Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of aGVHD.

In June 2019, we initiated a Phase 1b proof-of-concept clinical trial in Australia for the treatment of uncontrolled moderate to severe asthma.

Our IND for lupus nephritis was accepted by the FDA in July 2019, and we initiated a Phase 1b proof-of-concept clinical trial for the treatment of lupus nephritis in September 2019.

In March 2019, we initiated the EQUATE study, a Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of aGVHD.

In August 2020, the EQUATE study was amended to (a) expand the eligibility criteria to include patients with Grade II aGVHD who have more severe disease as indicated by elevations in Magic Algorithm Probability biomarkers, which predict a greater severity of aGVHD and (b) extend the dosing window of itolizumab (EQ001) from three to seven days after first administration of steroid treatment.

In August 2020, we reported positive interim data from the first two cohorts of the Phase 1b part of this trial, and in November 2020, we reported positive interim data through the third dosing cohort.

In November 2020, we expanded enrollment in the second and third cohorts in order to collect additional clinical data at those two dosing levels.

In February 2021, we submitted a protocol amendment to the FDA to allow for further expansion of enrollment of additional patients until we initiate the next phase of development in aGVHD.

In June 2019, we initiated the EQUIP study, a Phase 1b clinical trial for the treatment of uncontrolled asthma.

That study is enrolling patients in Australia and New Zealand.

In July 2019, our IND for lupus/lupus nephritis was accepted by the FDA, and we initiated the EQUALISE study, a Phase 1b proof-of-concept multiple ascending dose clinical trial for the treatment of lupus nephritis in September 2019.

The FDA granted itolizumab (EQ001) Fast Track designation for the treatment of lupus nephritis in December 2019.

In March 2020, as a result of impacts and risks associated with the current global pandemic caused by COVID-19, we decided to pause enrollment of our Phase 1b clinical trial of itolizumab (EQ001) in uncontrolled asthma and our Phase 1b clinical trial of itolizumab (EQ001) in 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 current global pandemic and our concern for the well-being of patients and their caregivers.

We are continuing to enroll patients in the Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of aGVHD given the acute life-threatening severity of the disease as we believe itolizumab (EQ001) represents a potentially life-saving treatment for these severely ill patients.

We have ongoing translational biology programs to assess the therapeutic utility of itolizumab (EQ001) in additional indications where CD6 and its ligand, activated leukocyte cell adhesion molecule (ALCAM), play an important role in the pathogenesis of T cell mediated diseases.

Our selection of current and future indications is driven by our analysis of the scientific, translational, clinical and commercial rationale for advancing itolizumab (EQ001) into further development .

We acquired rights to itolizumab (EQ001) for the territories of the United States and Canada in May 2017 pursuant to a collaboration and license agreement with Biocon, and the territories of Australia and New Zealand in December 2019, pursuant to an amendment to that agreement.

Following completion of a Phase 3 clinical trial conducted by Biocon outside of North America, itolizumab (EQ001) was approved in India for the treatment of moderate to severe plaque psoriasis and is marketed by Biocon in India as ALZUMAb.

Today, India is the only jurisdiction where ALZUMAb is approved or marketed.

Our partnership with Biocon includes an exclusive supply agreement for clinical and commercial drug product of itolizumab (EQ001).

Biocon currently manufactures itolizumab (EQ001) at commercial scale in a facility in India regulated by the FDA.

The first part of the EQUALISE study is focused on evaluating the safety of itolizumab in patients with SLE followed by a second part in lupus nephritis patients where, in addition to safety, potential clinical activity of itolizumab (EQ001) will be assessed.

In September 2020, our EQUALISE study was amended to test doses up to 3.2 mg/kg in lupus nephritis patients, allow for a longer duration of treatment up to 26 weeks, and to change the design to an open-label study.

In March 2020, as a result of impacts and risks associated with the COVID-19 pandemic, we decided to pause enrollment in our Phase 1b clinical trials of itolizumab (EQ001) in uncontrolled asthma and lupus nephritis.

This decision was not based on any observed safety issues associated with itolizumab (EQ001) but rather out of an abundance of caution related to the COVID-19 pandemic and our concern for the well-being of patients and their caregivers.

In July 2020, we announced that patient enrollment in both of those trials had resumed.

We did not pause enrollment of patients in the Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of aGVHD given the acute life-threatening severity of the disease as we believe itolizumab (EQ001) represents a potentially life-saving treatment for these severely ill patients.

However, there remains a risk that enrollment of that trial, as well as the recently resumed Phase 1b trials in uncontrolled asthma and lupus nephritis, in addition to the timing of topline data from all three of those trials may also be adversely impacted by the COVID-19 pandemic.

We acquired rights to itolizumab (EQ001) for the territories of the United States and Canada in May 2017 pursuant to a collaboration and license agreement with Biocon SA (subsequently assigned to Biocon Limited, or together, Biocon).

December 2019, we expanded our rights to itolizumab (EQ001) to include the territories of Australia and New Zealand pursuant to an amendment to that agreement.

In August 2019, we entered into a letter agreement with Biocon that grants us exclusive rights to negotiate licensing rights with third parties to develop and commercialize itolizumab (EQ001) in select major markets outside of North America.

This letter agreement allows us to represent itolizumab (EQ001) more broadly commercially and participate in value that may be created with strategic partners across geographies.

Since our inception, substantially all of our efforts have been focused on organizing and staffing our company, business planning, raising capital, in-licensing rights to itolizumab (EQ001), conducting preclinical research, filing two initial INDs and commencing clinical development of itolizumab (EQ001).

Our collaboration with Biocon includes an exclusive supply agreement for clinical and commercial drug product of itolizumab (EQ001).

Biocon currently manufactures itolizumab (EQ001) at commercial scale in a facility in India regulated by the FDA.

Following completion of a Phase 3 clinical trial conducted by Biocon outside of North America, itolizumab was approved in 2012 in India for the treatment of moderate to severe plaque psoriasis and has since been marketed by Biocon in India as ALZUMAb.

More recently, following a randomized, controlled study of itolizumab in hospitalized patients with COVID-19 conducted by Biocon, in July 2020 the DCGI granted restricted emergency use approval of itolizumab for the treatment of CRS in COVID-19 patients with moderate to severe ARDS.

In September 2020, the DCGI granted approval of itolizumab produced in a CHO cell line, marketed in India under the brand name ALZUMAb-L, or ALZUMAb Lyophilized, for the treatment of plaque psoriasis, as well as emergency use authorization for the treatment of CRS in COVID-19 patients with moderate to severe ARDS.

Based on the encouraging results observed in Biocon’s COVID-19 study, the novel and differentiated T cell modulating mechanism of action of itolizumab, and the fact that no targeted immuno-modulating therapies were approved to treat COVID-19 patients, we advanced our plan to develop itolizumab to treat hospitalized patients with COVID-19.

In September 2020, we completed our Pre-IND meeting with the FDA and in October 2020, we filed an IND with the FDA to conduct a global Phase 3, randomized, double-blind, placebo-controlled clinical trial of itolizumab (EQ001) in COVID-19 patients.

In October 2020, we received a Study May Proceed letter from the FDA.

In November 2020, we announced that due to the rapidly evolving COVID-19 treatment landscape, we elected not to initiate the EQUINOX Phase 3 clinical trial to evaluate itolizumab in hospitalized COVID-19 patients.

We continue to evaluate additional indications for future development.

We have ongoing translational biology programs to assess the therapeutic utility of itolizumab (EQ001) in additional indications where CD6 and its ligand, ALCAM, play an important role in the pathogenesis of T cell mediated diseases.

Since our inception, substantially all of our efforts have been focused on organizing and staffing our company, business planning, raising capital, in-licensing rights to itolizumab (EQ001), conducting preclinical research, filing three INDs, conducting clinical development of itolizumab (EQ001) and the general and administrative activities associated with operating as a public company.

We have not generated any revenue from product sales or otherwise.

Since inception, we have primarily financed our operations through our initial public offering, or IPO, private placements of convertible promissory notes, term loans and our ATM facility.

Since inception, we have primarily financed our operations through our initial public offering, or IPO, a follow-on public offering, private placements of convertible promissory notes, term loans and sales of our common stock through “at-the-market” sales agreements, or ATM offerings, with Jefferies LLC, or Jefferies.

We have incurred losses since our inception.

Our net losses were $25.6 million and $13.3 million for the years ended December 31, 2019 and 2018, respectively.

Our net losses were $29.8 million for the year ended December 31, 2020 and $25.6 million for the year ended December 31, 2019.

As of December 31, 2020, we had an accumulated deficit of $70.9 million.

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We expect to continue to incur significant expenses and increasing losses into the foreseeable future.

We anticipate our expenses will increase substantially as we continue our research and development activities, including the ongoing and planned clinical development of itolizumab (EQ001), potentially acquire additional products and/or product candidates, seek regulatory approval for and potentially commercialize any approved product candidates, hire additional personnel, protect our intellectual property, and incur general corporate costs.

We anticipate our expenses will increase substantially as we continue our research and development activities, including the ongoing and future clinical development of itolizumab (EQ001), potentially expand the indications in which we conduct clinical development of itolizumab (EQ001), potentially acquire additional products and/or product candidates, seek regulatory approval for and potentially commercialize any approved product candidates, hire additional personnel, protect our intellectual property, incur increasing expense associated with our outstanding debt, and incur general corporate costs.

We expect that our existing cash, cash equivalents and short-term investments as of December 31, 2020, will enable us to fund our currently planned operations for at least the next 12 months.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for itolizumab (EQ001) or any future product candidate, which will not be for at least the next several years, if ever.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for itolizumab (EQ001) or any future product candidate, which 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.

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.

In addition, subject to limited exceptions, our loan and security agreement with Oxford Finance LLC and Silicon Valley Bank also prohibits us from incurring indebtedness without the prior written consent of the lenders.

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.

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.

In November 2019, we entered into the ATM facility with Jefferies, under which we may offer and sell shares of our common stock having an aggregate offering price of up to $8.45 million from time to time through Jefferies acting as our sales agent.

Sales of our shares of common stock will be made by any method that is deemed to be an “at the market offering”.

As of December 31, 2019, we sold 18,250 shares of our common stock under the ATM facility for gross proceeds of $0.1 million.

Financial Overview

We currently have no products approved for sale, and we have not generated any revenues to date.

In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our product candidates, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever.

In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our product candidates, as well as product sales from any approved product, which approval 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 itolizumab (EQ001) and any future product candidates.

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

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

costs related to preparing and filing three INDs with the FDA and other regulatory interactions and submissions;

external expenses related to chemistry, manufacturing, and controls (CMC) and supply of drug product;

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

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

We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of itolizumab (EQ001) and potentially expand the number of indications for which we are developing itolizumab (EQ001).

We recognize the Australian Research and Development Tax Incentive, or the Tax Incentive, as a reduction of research and development expense.

The amounts are determined based on our assumed eligible research and development expenditures and are non-refundable, provided that in order to qualify for the Tax Incentive the filing entity must have revenue of less than AUD $20.0 million during the tax year for which a reimbursement claim is made and cannot be controlled by an income tax exempt entity.

The Tax Incentive is recognized when there is reasonable assurance that the Tax Incentive will be received, the relevant expenditure has been incurred, and the amount can be reliably measured or reliably estimated.

We plan to substantially increase our research and development expenses for the foreseeable future as we continue to advance the development of itolizumab (EQ001) and potentially expand the number of indications for which we are developing itolizumab (EQ001).

The successful development of itolizumab (EQ001) is highly uncertain.

At this time, due to the inherently unpredictable nature of preclinical and clinical development, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of itolizumab (EQ001) or the period, if any, in which material net cash inflows from itolizumab (EQ001) may commence.

At this time, due to the inherently unpredictable nature of preclinical and clinical development, which has been further exacerbated by the uncertain magnitude, extent and duration of impacts associated with the COVID-19 pandemic, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of itolizumab (EQ001) or the period, if

any, in which material net cash inflows from itolizumab (EQ001) may commence.

Clinical development timelines, the probability of success, and development costs can differ materially from expectations.

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The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

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

per patient clinical trial costs;

the number of clinical trials required for approval;

the number of sites included in our clinical trials;

the number of sites and the number of countries included in our clinical trials;

the length of time required to enroll suitable patients;

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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, finance, and accounting functions.

Other significant costs include legal fees relating to patent and corporate matters, insurance, travel and facility costs.

Other significant costs include legal fees relating to patent and corporate matters, insurance, travel, board expenses, facility costs and taxes.

We anticipate that our general and administrative expenses will increase in future periods, reflecting an expanding infrastructure, increased legal, audit, tax and other professional fees associated with being a public company and maintaining compliance with stock exchange listing and SEC requirements, director and officer insurance premiums associated with being a public company, and accounting and investor relations costs.

In addition, if we obtain regulatory approval for any product candidate, we expect to incur expenses associated with building the infrastructure to commercialize such product.

However, we do not expect to receive any such regulatory approval for at least the next several years, if ever.

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 on our term loans payable and convertible promissory notes, which convertible promissory notes were converted into shares of common stock in connection with our IPO in October 2018.

Interest expense consists of interest and amortization of discounts on our outstanding term notes payable.

Interest Income

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

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

Other Income, Net

Other income, net consists of net foreign currency transaction gains related to our Australian subsidiary.

Change in Fair Value of Biocon Anti-Dilution Right

Prior to the IPO, we were required to issue to Biocon additional shares of common stock to maintain Biocon’s ownership interest of our fully-diluted capitalization until we have received aggregate cumulative gross proceeds from sales of equity securities of $15.0 million, or the Biocon Anti-Dilution Right.

The Biocon Anti-Dilution Right was classified as a liability in the accompanying consolidated balance sheet.

The Biocon Anti-Dilution Right was recorded at fair value using the precedent transaction method.

The fair value of the Biocon Anti-Dilution Right was re-measured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense).

The Biocon Anti-Dilution Right was satisfied in full upon the issuance of 228,060 shares of common stock to Biocon in connection with the completion of the IPO.

Other income, net consists primarily of net foreign currency transaction gains related to our Australian subsidiary.

Results of Operations

Comparison of the Year Ended December 31, 2019 and 2018

Comparison of the Years Ended December 31, 2020 and 2019

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

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Other income, net

Change in fair value of Biocon Anti-Dilution Right

Research and Development Expenses

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The increase in research and development expense primarily includes the following changes:

$7.4 million increase in clinical development activities

$3.9 million increase in employee compensation and benefits and consulting expenses

$2.4 million increase in employee compensation and benefits, primarily related to increased headcount;

$1.0 million decrease in research and development expenses associated with the recording of a Tax Incentive benefit from the Australian Taxation Office, or ATO, as a reduction to research and development expenses.

Additional information related to our Australian Tax Incentive benefit is provided in the next paragraph;

$0.7 million increase in clinical development activities, primarily driven by expenses related to start-up costs associated with our planned COVID-19 trial, which in the fourth quarter of 2020, we elected not to initiate, as well as an increase in expenses related to our lupus nephritis clinical trial, offset by a reduction in expenses related to our asthma clinical trial;

$0.5 million decrease in overhead expenses primarily related to decreased travel expenses associated with our research and development activities, much of which resulted from the impact associated with the COVID-19 pandemic;

$0.2 million increase in preclinical research activities.

$0.7 million increase in overhead expenses primarily related to increased travel costs associated with our research and development activities

In January 2019, we formed a wholly-owned Australian subsidiary, Equillium Australia Pty Ltd, to conduct clinical development of itolizumab (EQ001) for the treatment of uncontrolled asthma.

The Tax Incentive under current Australian tax regulations provides for a 43.5% refundable research and development tax credit associated with qualified research and development activities performed in Australia.

In August 2020, we received cash totaling $0.7 million related to our initial Tax Incentive claim for the fiscal year ended December 31, 2019.

We recorded the cash received as a reduction to research and development expenses during the year ended December 31, 2020.

In addition, since we have established history in filing and receiving the Tax Incentive for our fiscal year ended December 31, 2019 with the ATO, we recorded an estimated tax benefit totaling $0.3 million for qualified research and development activities for the year ended December 31, 2020, and recorded it as a reduction to research and development expenses.

The estimated tax benefit is recognized when there is reasonable assurance that the tax benefit will be received, the relevant expenditure has been incurred, and the amount can be reliably measured or reasonably estimated.

General and Administrative Expenses

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The increase in general and administrative expense primarily includes the following changes:

$2.9 million increase in employee compensation and benefits and consulting expenses

$1.8 million increase in costs associated with being a public company

$0.7 million increase related to legal and audit fees

$0.8 million increase in employee compensation and benefits, primarily due to increased non-cash stock-based compensation of $1.0 million, of which approximately $0.4 million pertains to non-cash stock-based compensation associated with fully-vested retention option grants issued to our Chief Executive Officer, our Executive Chairman and two non-management directors partially offset by lower salary expense.

Additional information related to these changes in non-cash stock-based compensation and salary expenses is provided in the next paragraph;

$0.5 million increase in corporate consulting expenses ;

$0.2 million decrease in travel expenses, much of which resulted from the impact associated with the COVID-19 pandemic.

On May 28, 2020, our board of directors issued retention stock options to purchase an aggregate of 169,368 shares of our common stock to our Executive Chairman, Chief Executive Officer and two non-management directors.

These stock options immediately vested at the grant date and resulted in a $0.4 million charge to non-cash stock-based compensation in the year ended December 31, 2020.

At the time, the Executive Chairman and Chief 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.

The voluntary reductions in salary and retainers reduced expenses by approximately $0.4 million in calendar year 2020.

There was no similar non-cash stock-based compensation charge in the year ended December 31, 2019.

Interest Expense

Interest expense was $1.1 million for the year ended December 31, 2020, compared to $0.3 million for the year ended December 31, 2019.

The decrease in interest expense consists primarily of non-cash interest expense incurred in 2018, including accretion of debt premium and issuance costs in relation to our convertible promissory notes.

The convertible promissory notes were converted into equity in connection with the IPO in October 2018.

In 2019, interest expense incurred was primarily associated with our term notes payable.

The increase in interest expense was primarily due to higher interest expense on our term notes payable in 2020 compared to 2019.

We entered into our term notes payable in late September 2019.

Interest Income

Interest income was $0.5 million for the year ended December 31, 2020, as compared to $1.4 million for the year ended December 31, 2019 .

The increase in interest income was primarily due to higher average cash, cash equivalents and short-term investment balances during 2019 compared to 2018.

The decrease in interest income was primarily due to lower interest rates on our short-term investments during 2020 compared to 2019.

Other Income, Net

Other income, net consists of net foreign currency transaction gains related to our Australian subsidiary.

Change in Fair Value of Biocon Anti-Dilution Right

Change in fair value of the Biocon Anti-Dilution Right was $2.4 million for the year ended December 31, 2018.

In connection with our IPO in October 2018, the liability associated with the Biocon Anti-Dilution Right was reclassified to stockholders’ equity.

Therefore, there was no further activity in the year ended December 31, 2019.

Other income, net was $0.4 million for the year ended December 31, 2020, as compared to $15,000 for the year ended December 31, 2019.

The increase in other income, net during 2020 compared to 2019 related primarily to net foreign currency transaction unrealized gains.

Liquidity and Capital Resources

From inception through December 31, 2020, we raised an aggregate of approximately $148.1 million in gross proceeds pursuant to our IPO, follow-on public offering, private placements of convertible promissory notes, proceeds from term loans and proceeds from equity issuances under our ATM facilities.

As of December 31, 2020, we had $24.0 million in cash and cash equivalents and $58.2 million in short-term investments.

Sources of Liquidity

From inception through December 31, 2019, we have raised an aggregate of approximately $91.1 million in gross proceeds pursuant to our IPO, private placements of convertible promissory notes, proceeds from our term loans and proceeds from equity issuances under our ATM facility.

In September 2019, we entered into the Loan Agreement pursuant to which we can borrow up to $20.0 million in a series of term loans.

Registered Direct Offering

In February 2021, we entered into a securities purchase agreement with two institutional investors relating to the issuance and sale of an aggregate of 4,285,710 shares of common stock and warrants to purchase 1,285,713 shares of common stock for aggregate gross proceeds to us from this offering of approximately $30.0 million, excluding any proceeds we may receive upon exercise of the warrants.

No underwriter or placement agent participated in the offering.

The warrants are exercisable immediately upon issuance at an initial exercise price of $14.00 per share and are exercisable on a cashless basis.

The warrants expire on the earlier of (i) the fifth anniversary of issuance or (ii) the 15 th calendar date following the date on which we close upon an equity financing that results in not less than $25 million in gross proceeds to us at a price per share of common stock equal to or greater than $25.00, at which time, all remaining warrants will automatically exercise on a cashless basis.

Follow-on Public Offering

In August 2020, we 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.

We received gross proceeds from this offering totaling $38.2 million.

Net proceeds from this offering, net of underwriting discounts and related issuance costs, were $35.7 million.

2020 Purchase Agreement

In March 2020, we entered into a purchase agreement, or the Purchase Agreement, with Lincoln Park Capital Fund, LLC, or Lincoln Park, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park up to $15.0 million of shares of our common stock from time to time over the 36-month term of the Purchase Agreement.

Upon execution of the Purchase Agreement, we issued 65,374 shares of our common stock to Lincoln Park as commitment shares in accordance with the closing conditions contained within the Purchase Agreement.

We have not sold any shares of our common stock to Lincoln Park under the Purchase Agreement through the date of the filing of this Annual Report on Form 10-K.

At-the-Market Offering Program

In November 2019, we entered into an Open Market Sales Agreement SM with Jefferies to sell shares of our common stock having aggregate sales proceeds of up to $8.45 million, from time to time, through an ATM equity offering program under which Jefferies acts as sales agent, or the 2019 ATM Facility.

Under the 2019 ATM Facility, we set 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 was 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.

As of December 31, 2020, the 2019 ATM Facility had been fully utilized.

We sold an aggregate of 943,739 shares of our common stock under the 2019 ATM Facility for gross proceeds of $8.45 million.

On July 14, 2020, we entered into another Open Market Sales Agreement with Jefferies for a new ATM equity offering to sell shares of our common stock, from time to time, having aggregate sales proceeds of up to $150 million under which Jefferies would act as sales agent, or the 2020 ATM Facility.

The 2020 ATM Facility provides that 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.

We are not obligated to make any sales under the 2020 ATM Facility.

As of December 31, 2020, we sold an aggregate of 788,685 shares of common stock under the 2020 ATM Facility, for gross proceeds of $10.4 million.

We paid cash commissions on the gross proceeds, plus reimbursement expenses to Jefferies, legal fees and other issuance costs in the aggregate amount of $0.4 million, resulting in net proceeds of $10.0 million.

There have been no further sales of shares under the 2020 ATM Facility through the date of the filing of this Annual Report on Form 10-K

September 2019 Loan Agreement

In September 2019, we entered into a loan and security agreement, or Loan Agreement, with Oxford Finance LLC and Silicon Valley Bank, or together, the Lenders, pursuant to which we can borrow up to $20.0 million in a series of term loans.

Upon entering into the Loan Agreement, we borrowed $10.0 million, or Term A Loan.

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We may draw the Term B Loan during the period commencing on the date of the occurrence of the Term B Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term B Milestone, and (iii) the occurrence of an event of default and may draw the Term C Loan during the period commencing on the date of the occurrence of the Term C Milestone and ending on the earliest of (i) December 31, 2020, (ii) 60 days after achieving the Term C Milestone, and (iii) the occurrence of an event of default.

In November 2019, we entered into the ATM facility with Jefferies under which we may offer and sell shares of our common stock having an aggregate offering price of up to $8.45 million from time to time through Jefferies acting as our sales agent .

As of December 31, 2019, we have sold an aggregate of 18,250 shares of our common stock under the ATM facility for gross proceeds of $0.1 million.

As of December 31, 2020, we did not achieve the Term B or Term C Milestone and were not eligible to borrow the additional $10 million under the Loan Agreement.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance and expand our clinical development of itolizumab (EQ001).

We expect that our primary uses of capital will be for clinical research and development services, preclinical research, manufacturing, legal and other regulatory compliance expenses, compensation and related expenses, and general overhead costs.

We expect our expenses to increase substantially in connection with our ongoing and future activities, particularly as we advance and expand our clinical development of itolizumab (EQ001), including potential new indications.

We expect that our existing cash, cash equivalents and short-term investments as of December 31, 2020 will enable us to fund our currently planned operations for at least the next 12 months.

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Furthermore, our operating plans may change, and we may need additional funds sooner than planned.

Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress in these trials is uncertain.

Additionally, the process of testing product candidates in clinical trials is

costly, and the timing of progress in these trials is uncertain.

Because the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of itolizumab (EQ001) or whether, or when, we may achieve profitability.

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

the initiation, progress, timing, costs and results of our ongoing and planned clinical trials for itolizumab (EQ001);

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

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

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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.

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.

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The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):

Net cash (used in) provided by:

Net cash provided by (used in):

Operating activities

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Effect of exchange rate changes on cash

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

Net cash used in operating activities during the year ended December 31, 2019 primarily consisted of net loss of $25.6 million plus net non-cash adjustments of $2.0 million and net changes in operating assets and liabilities of $0.7 million.

The primary non-cash adjustments to net loss include stock-based compensation of $2.3 million and non-cash interest expense of $0.1 million offset by accretion of discount on investments of $0.4 million.

Cash flow impacts from changes in operating assets and liabilities were primarily driven by increases in accounts payable and accrued expenses of $1.8 million associated with higher clinical costs to support our clinical trials as well as higher bonus compensation accruals offset by $1.1 million of increased prepayments related to clinical costs and director and officer insurance premiums.

Net cash used in operating activities during the year ended December 31, 2018 primarily consisted of net loss of $13.3 million plus net non-cash adjustments of $5.4 million and net changes in operating assets and liabilities of $0.3 million.

The primary non-cash adjustments to net loss include non-cash interest expense of $2.6 million, $2.4 million for the change in fair value of the Biocon Anti-Dilution Right and stock-based compensation of $0.4 million.

Cash flow impact from changes in operating assets and liabilities were primarily driven by increases in accounts payable and accrued expenses of $1.4 million offset by prepaid expenses of $1.1 million primarily related to payments in the fourth quarter of 2018 for our director and officer insurance premiums.

Net cash used in operating activities during the year ended December 31, 2020 primarily consisted of a net loss of $29.8 million adjusted for net non-cash expenses of $3.9 million and net changes in operating assets and liabilities of $1.3 million.

The primary non-cash expense adjustment to net loss was stock-based compensation.

Cash flow impact from net changes in operating assets and liabilities was mainly driven by increases in accounts payable and accrued expenses totaling $1.8 million primarily due to higher clinical and pre-clinical activity resulting in increased accounts payable and accrued expenses, higher employee compensation accruals associated with increased headcount, partially offset by increases in prepaid expenses and other current assets totaling $0.5 million mainly due to the recording of an estimated tax benefit for qualified research and development and development activities in Australia.

Net cash used in operating activities during the year ended December 31, 2019 primarily consisted of net loss of a $25.6 million adjusted for non-cash expenses of $2.0 million and net changes in operating assets and liabilities of $0.7 million.

The primary non-cash expense adjustment to net loss was stock-based compensation.

Cash flow impact from net changes in operating assets and liabilities was mainly driven by increases in accounts payable and accrued expenses totaling $1.8 million primarily due to higher clinical trial costs as well as higher bonus compensation accruals partially offset by increased prepaid expenses and other current assets primarily related to higher prepaid clinical costs and director and officer insurance premiums totaling $1.1 million.

Investing Activities

Net cash used in investing activities was $18.6 million during the year ended December 31, 2020.

We purchased $55.5 million of short-term investments and $37.1 million of our short-term investments matured during the period.

Purchases of property and equipment for the year ended December 31, 2020 totaled $0.2 million.

Net cash used in investing activities totaled $2.2 million during the year ended December 31, 2019.

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Purchases of property and equipment for the year ended December 31, 2019 totaled $0.1 million.

Net cash used in investing activities was $37.4 million during the year ended December 31, 2018 primarily due to purchases of short-term investments during the period.

Financing Activities

Net cash provided by financing activities totaled $53.9 million during the year ended December 31, 2020.

We received net proceeds from the issuance of term notes payable totaling $9.9 million and proceeds from both the exercise of stock options and the sale of shares under our employee stock purchase plan totaling $0.1 million offset by a net use of cash of $0.2 million related to the ATM facility costs offset by the sale of shares under the ATM facility.

We received net proceeds from the sale of shares related to our follow-on public offering totaling $35.7 million, net proceeds from the sale of shares under our ATM facilities totaling $18.1 million and proceeds from both the issuance of shares under our employee stock purchase plan and proceeds from the exercise of stock options totaling $0.2 million.

Net cash provided by financing activities totaled $9.8 million during the year ended December 31, 2019.

We received net proceeds totaling $64.5 million from our IPO, $1.6 million in net proceeds from our convertible promissory notes and $0.3 million in proceeds from exercise of stock options.

We received net proceeds from the issuance of term notes payable totaling $9.9 million and proceeds from both the exercise of stock options and the sale of shares under our employee stock purchase plan totaling $0.1 million, offset by a net use of cash of $0.2 million related to the 2019 ATM facility costs offset by the sale of shares under the 2019 ATM facility.

Off-Balance Sheet Arrangements

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Financial Statements and Supplementary Data.

The financial statements and supplementary data required by this item are included after the Signatures page of this Annual Report on Form 10-K beginning on page F-1.

The financial statements and supplementary data required by this item are included after the signature page of this Annual Report on Form 10-K beginning on page F-1.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis