EQUILLIUM, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled "Selected Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section entitled "Risk Factors" and in other parts of this Annual Report on Form 10-K. Please also see the section entitled "Special Note Regarding Forward-Looking Statements."
Overview
We are a clinical-stage biotechnology company leveraging deep understanding of immunobiology to develop products to treat severe autoimmune and inflammatory, or immuno-inflammatory, disorders with high unmet medical need. Our initial product candidate, itolizumab (EQ001), is a clinical-stage, first-in-class monoclonal antibody that selectively targets the novel immune checkpoint receptor CD6. CD6 plays a central role in the modulation of effector T cell, or Teff cell, activity and trafficking. Activated Teff cells drive a number of immuno-inflammatory diseases across therapeutic areas including transplant science, systemic autoimmunity, pulmonary, neurologic, gastrointestinal, renal, vascular, ophthalmic and dermatologic disorders. Therefore, we believe itolizumab (EQ001) may have broad therapeutic utility in treating a large and diverse set of severe immuno-inflammatory diseases.
Our pipeline is focused on developing itolizumab (EQ001) as a potential
best-in-class, disease modifying treatment for multiple severe
immuno-inflammatory disorders. Our Investigational New Drug application, or IND,
with the
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
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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). 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. We have incurred losses since our inception.
Our net losses were
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 expect that our existing cash, cash equivalents and short-term investments as
of
We do not expect to generate any revenues from product sales unless and until we
successfully complete development and obtain regulatory approval for itolizumab
(EQ001) or any future product candidate, which will not be for at least the next
several years, if ever. Accordingly, until such time as we can generate
significant revenue from sales of our product candidates, if ever, we expect to
finance our cash needs through a combination of equity offerings, debt
financings, and collaboration and license agreements. However, we may not be
able to secure additional financing or enter into such other arrangements in a
timely manner or on favorable terms, if at all. In addition, subject to limited
exceptions, our loan and security agreement with
ATM Facility
In
Financial Overview Revenue
We currently have no products approved for sale, and we have not generated any revenues to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our product candidates, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenues will depend on the successful development and eventual commercialization of itolizumab (EQ001) and any future product candidates. If we fail to complete the development of itolizumab (EQ001) or any future product candidates in a timely manner, or to obtain regulatory approval for our product candidates, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.
Research and Development Expenses
Research and development expenses primarily consist of costs associated with our research and development activities, preclinical activities, and clinical development of itolizumab (EQ001). Our research and development expenses include:
• salaries and other related costs, including stock-based compensation and
benefits, for personnel in research and development functions;
• external research and development expenses incurred under arrangements with
third parties, such as consultants and advisors for research and
development;
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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; and
• costs related to general overhead expenses such as travel, insurance and
rent expenses associated with our research and development activities.
We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.
Our direct research and development expenses consist principally of external costs, such as fees paid to CROs and consultants in connection with our preclinical and clinical development.
We plan to substantially increase our research and development expenses for the foreseeable future as we continue 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. Clinical development timelines, the probability of success, and development costs can differ materially from expectations.
Completion of clinical trials may take several years or more, and the length of time generally varies according to the type, complexity, novelty, and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
• per patient clinical trial costs;
• the number of clinical trials required for approval;
• the number of sites included in our clinical trials;
• the length of time required to enroll suitable patients;
• the inefficiencies and additional costs related to any delays and potential
restarts of clinical trials;
• the number of doses that patients receive;
• the number of patients that participate in our clinical trials;
• the drop-out or discontinuation rates of patients in our clinical trials;
• the duration of patient follow-up;
• potential additional safety monitoring or other studies requested by
regulatory agencies;
• the number and complexity of procedures, analyses and tests performed during
our clinical trials;
• the costs of procuring drug product for our clinical trials;
• the phase of development of the product candidate; and
• the efficacy and safety profile of the product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation and benefits, and consulting fees for executive, finance, and accounting functions. Other significant costs include legal fees relating to patent and corporate matters, insurance, travel and facility costs.
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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
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
Interest Income
Interest income consists primarily of interest income earned on cash, cash equivalents and short-term investments.
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
Results of Operations
Comparison of the Year Ended
The following table sets forth our results of operations for the years ended
Year Ended Year Ended
December 31, December 31,
2019 2018 Increase
Research and development $ 17,640 $ 4,943 $ 12,697
General and administrative 9,087 3,672 5,415
Interest expense (279 ) (2,558 ) 2,279
Interest income 1,391 340 1,051
Other income, net 15 - 15
Change in fair value of Biocon
Anti-Dilution Right - (2,417 ) 2,417
Research and Development Expenses
Research and development expenses were
•$7.4 million increase in clinical development activities •$3.9 million increase in employee compensation and benefits and consulting expenses •$0.7 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 99
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General and Administrative Expenses
General and administrative expenses were
•$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
Interest Expense
Interest expense was
Interest Income
Interest income was
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
Liquidity and Capital Resources
Sources of Liquidity
From inception through
In
In
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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 that our existing cash, cash equivalents and short-term investments as
of
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 number and scope of indications we decide to pursue for itolizumab
(EQ001) development;
• the cost, timing and outcome of regulatory review of any Biologics License
Application, or BLA, we may submit for itolizumab (EQ001);
• the costs and timing of manufacturing for itolizumab (EQ001), if approved;
• the costs of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
• our efforts to enhance operational systems and our ability to attract, hire
and retain qualified personnel, including personnel to support the
development of itolizumab (EQ001);
• the costs associated with being a public company;
• the terms and timing of establishing and maintaining collaborations,
licenses and other similar arrangements;
• the extent to which we acquire or in-license other product candidates and
technologies; and
• the cost associated with commercializing itolizumab (EQ001), if approved for
commercial sale.
Until such time as we can generate substantial product revenues, if ever, we
expect to finance our cash needs through a combination of equity offerings, debt
financings, and collaboration and license agreements. The sale of additional
equity or convertible debt could result in additional dilution to our
stockholders and the terms of these securities may include liquidation or other
preferences that adversely affect the rights of our existing common
stockholders. The incurrence of debt financing would result in debt service
obligations and the governing documents would likely include operating and
financing covenants that would restrict our operations. If we raise additional
funds through collaboration or license agreements, we may have to relinquish
valuable rights to our technologies, future revenue streams, research programs
or product candidates or grant licenses on terms that may not be favorable to us
and/or that may reduce the value of our common stock. If we are unable to raise
capital when needed or on attractive terms, we would be forced to delay, reduce
or eliminate our research and development programs or other operations. Any of
these actions could have a material effect on our business, financial condition
and results of operations. We have experienced net losses and negative cash
flows from operating activities since our inception and expect to continue to
incur net losses into the foreseeable future. We had an accumulated deficit of
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Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below (in thousands):
Year Ended Year Ended
December 31, December 31,
2019 2018
Net cash (used in) provided by:
Operating activities $ (22,949 ) $ (7,526 )
Investing activities (2,166 ) (37,434 )
Financing activities 9,836 66,365
Effect of exchange rate changes on cash (10 ) -
Net (decrease) increase in cash and cash equivalents
Operating Activities
Net cash used in operating activities during the year ended
Net cash used in operating activities during the year ended
Investing Activities
Net cash used in investing activities totaled
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities totaled
Net cash provided by financing activities totaled
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined under
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Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
We are required to estimate our expenses resulting from our 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. We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended. We account 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. We determine accrual estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel as to the progress of studies, or other services being conducted. During the course of a study, we adjust our rate of expense recognition if actual results differ from our estimates.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Stock-Based Compensation Expense
We measure employee and non-employee stock-based awards, including stock options and stock purchase rights, at grant-date fair value and record compensation expense on a straight-line basis over the vesting period of the award. We use the Black-Scholes option pricing model to value our 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 our common stock, the expected term of our stock options and the expected dividend yield 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.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record a full valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
We record uncertain tax positions on the basis of a two-step process whereby (i) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We will recognize interest and penalties in income tax expense if and when incurred.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information concerning recent accounting pronouncements.
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