eq-10q_20190630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38692

 

EQUILLIUM, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

82-1554746

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

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

92037

(Address of principal executive offices)

(Zip Code)

 

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

 

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

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

EQ

 

The Nasdaq Global Market

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company filer

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of August 7, 2019, the registrant had 17,376,236 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 


EQUILLIUM, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

 

FINANCIAL INFORMATION

 

1

ITEM 1.

 

FINANCIAL STATEMENTS

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

2

 

 

Condensed Consolidated Statements of Stockholders' Equity (Deficit)

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Notes to Condensed Consolidated Financial Statements

 

5

ITEM 2.

 

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

 

11

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

18

ITEM 4.

 

CONTROLS AND PROCEDURES

 

18

PART II

 

OTHER INFORMATION

 

19

ITEM 1.

 

LEGAL PROCEEDINGS

 

19

ITEM 1A.

 

RISK FACTORS

 

19

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

62

ITEM 6.

 

EXHIBITS

 

63

SIGNATURES

 

64

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Equillium, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,661

 

 

$

28,508

 

Short-term investments

 

 

34,283

 

 

 

37,405

 

Prepaid expenses and other current assets

 

 

852

 

 

 

1,186

 

Total current assets

 

 

57,796

 

 

 

67,099

 

Property and equipment, net

 

 

77

 

 

 

64

 

Other assets

 

 

15

 

 

 

-

 

Total assets

 

$

57,888

 

 

$

67,163

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,974

 

 

$

1,119

 

Accrued expenses

 

 

1,688

 

 

 

909

 

Total current liabilities

 

 

3,662

 

 

 

2,028

 

Non-current liabilities

 

 

163

 

 

 

200

 

Total liabilities

 

 

3,825

 

 

 

2,228

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   17,376,236 shares issued and outstanding

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

81,506

 

 

 

80,441

 

Accumulated other comprehensive income

 

 

87

 

 

 

5

 

Accumulated deficit

 

 

(27,531

)

 

 

(15,512

)

Total stockholders' equity

 

 

54,063

 

 

 

64,935

 

Total liabilities and stockholders' equity

 

$

57,888

 

 

$

67,163

 

 

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

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,250

 

 

$

540

 

 

$

8,009

 

 

$

1,203

 

General and administrative

 

 

2,189

 

 

 

585

 

 

 

4,778

 

 

 

959

 

Total operating expenses

 

 

6,439

 

 

 

1,125

 

 

 

12,787

 

 

 

2,162

 

Loss from operations

 

 

(6,439

)

 

 

(1,125

)

 

 

(12,787

)

 

 

(2,162

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

-

 

 

 

(619

)

 

 

-

 

 

 

(1,108

)

Interest income

 

 

375

 

 

 

25

 

 

 

773

 

 

 

30

 

Other expense, net

 

 

(5

)

 

 

-

 

 

 

(5

)

 

 

-

 

Change in fair value of Biocon anti-dilution right

 

 

-

 

 

 

(46

)

 

 

-

 

 

 

(102

)

Total other income (expense), net

 

 

370

 

 

 

(640

)

 

 

768

 

 

 

(1,180

)

Net loss

 

$

(6,069

)

 

$

(1,765

)

 

$

(12,019

)

 

$

(3,342

)

Other comprehensive income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities, net

 

 

39

 

 

 

-

 

 

 

83

 

 

 

-

 

Foreign currency translation loss

 

 

(1

)

 

 

-

 

 

 

(1

)

 

 

-

 

Total other comprehensive income, net

 

 

38

 

 

 

-

 

 

 

82

 

 

 

-

 

Comprehensive loss

 

$

(6,031

)

 

$

(1,765

)

 

$

(11,937

)

 

$

(3,342

)

Net loss per share, basic and diluted

 

$

(0.35

)

 

$

(0.16

)

 

$

(0.69

)

 

$

(0.31

)

Weighted-average common shares outstanding,

   basic and diluted

 

 

17,376,236

 

 

 

10,715,461

 

 

 

17,376,236

 

 

 

10,711,788

 

 

See accompanying notes.

 

 

2


Equillium, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2017

 

 

10,708,074

 

 

$

-

 

 

$

10

 

 

$

-

 

 

$

(2,262

)

 

$

(2,252

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,577

)

 

 

(1,577

)

Balance at March 31, 2018

 

 

10,708,074

 

 

$

-

 

 

$

10

 

 

$

-

 

 

$

(3,839

)

 

$

(3,829

)

Issuance of common stock, net of liability

 

 

267,690

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,765

)

 

 

(1,765

)

Balance at June 30, 2018

 

 

10,975,764

 

 

$

-

 

 

$

11

 

 

$

-

 

 

$

(5,604

)

 

$

(5,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

See accompanying notes.

 

3


Equillium, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,019

)

 

$

(3,342

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11

 

 

 

2

 

Stock-based compensation

 

 

1,027

 

 

 

1

 

Non-cash interest expense

 

 

-

 

 

 

1,108

 

Accretion of discount on investments, net

 

 

(241

)

 

 

-

 

Change in fair value of Biocon anti-dilution right

 

 

-

 

 

 

102

 

Other non-cash expense

 

 

12

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

318

 

 

 

(26

)

Accounts payable

 

 

890

 

 

 

103

 

Accrued expenses

 

 

782

 

 

 

(6

)

Net cash used in operating activities

 

 

(9,220

)

 

 

(2,058

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(56

)

 

 

(22

)

Purchases of short-term investments

 

 

(25,630

)

 

 

-

 

Maturities of short-term investments

 

 

29,075

 

 

 

-

 

Net cash provided by (used in) investing activities

 

 

3,389

 

 

 

(22

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible promissory notes, net

 

 

-

 

 

 

1,599

 

Proceeds from issuance of unvested common stock

 

 

-

 

 

 

3

 

Net cash provided by financing activities

 

 

-

 

 

 

1,602

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(16

)

 

 

-

 

Net decrease in cash and cash equivalents

 

 

(5,847

)

 

 

(478

)

Cash and cash equivalents at beginning of period

 

 

28,508

 

 

 

7,104

 

Cash and cash equivalents at end of period

 

$

22,661

 

 

$

6,626

 

 

See accompanying notes.

 

4


Notes to Condensed Consolidated Financial Statements

1. Organization and Accounting Pronouncements

Description of Business

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

From inception through June 30, 2019, the Company has devoted substantially all of its efforts to organizing and staffing the company, business planning, raising capital, in-licensing rights to itolizumab, conducting preclinical research, filing two initial Investigational New Drug applications (INDs) and commencing clinical development of the Company’s initial product candidate, itolizumab (EQ001). 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

As of June 30, 2019, the Company had $56.9 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 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 or any future product candidate, which will not be for at least the next several years, if ever. Accordingly, until such time as the Company can generate significant revenue from sales of its product candidates, if ever, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, and collaboration and license agreements. However, the Company may not be able to secure additional financing or enter into such other arrangements in a timely manner or on favorable terms, if at all. 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 June 30, 2019 will be sufficient to fund operations for more than a year from the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission (SEC).

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, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2019.

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.

5


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. The guidance is effective for reporting periods beginning after December 15, 2019 due to the Company’s emerging growth company status. ASU 2016-02 mandates a modified retrospective transition method. The Company plans to adopt the provisions of ASU 2016-02 in the first quarter of 2020, and the Company is evaluating the impact on the condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The standard is effective for annual reporting periods beginning after December 15, 2018 and interim periods reporting within fiscal years beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2019, which did not have a material effect on the condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company plans to adopt the provisions of ASU 2018-13 in the first quarter of 2020, and the Company is currently evaluating the impact on the 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 other key personnel as to the progress of studies, or other services being conducted. During the course of a study, the Company adjusts its rate of expense recognition if actual results differ from its estimates. The Company classifies its estimates for accrued research and development expenses as accrued expenses on the accompanying condensed consolidated balance sheet.

Stock-Based Compensation

The Company measures employee and non-employee stock-based awards 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.

6


The expected term of stock options was estimated using the “simplified method” for employee options as the Company has no historical information to develop reasonable expectations about future exercise patterns and post vesting employment termination behavior for its stock option grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For options granted to non-employees, the Company uses the remaining contractual life. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option. The Company accounts for forfeitures when they occur, and reverses any compensation cost previously recognized for awards for which the requisite service has not been completed, in the period that the award is forfeited.

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 stock options under the Company’s equity incentive plan and have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Common stock options

 

 

1,203,483

 

 

 

-

 

 

 

1,203,483

 

 

 

-

 

Total

 

 

1,203,483

 

 

 

-

 

 

 

1,203,483

 

 

 

-

 

 

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

 

 

 

June 30,

 

 

for Identical

 

 

Observable

 

 

Inputs

 

 

 

2019

 

 

Assets (Level 1)

 

 

Inputs (Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

19,930

 

 

$

19,930

 

 

$

-

 

 

$

-

 

Agency securities

 

 

9,721

 

 

 

-

 

 

 

9,721

 

 

 

-

 

Certificates of deposit

 

 

4,632

 

 

 

4,632

 

 

 

-

 

 

 

-

 

Total

 

$

34,283

 

 

$

24,562

 

 

$

9,721

 

 

$

-

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Unobservable

 

 

 

December 31,

 

 

for Identical

 

 

Observable

 

 

Inputs

 

 

 

2018

 

 

Assets (Level 1)

 

 

Inputs (Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

29,821

 

 

$

29,821

 

 

$

-

 

 

$

-

 

Agency securities

 

 

5,659

 

 

 

-

 

 

 

5,659

 

 

 

-

 

Certificates of deposit

 

 

1,925

 

 

 

1,925

 

 

 

-

 

 

 

-

 

Total

 

$

37,405

 

 

$

31,746

 

 

$

5,659

 

 

$

-

 

 

7


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 accessible 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. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.

At June 30, 2019 and December 31, 2018, the Company had investments in money market funds of $16.4 million and $12.6 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 June 30, 2019 and December 31, 2018.

 

4. Certain Financial Statement Caption Information

Short-Term Investments

The following is a summary of the Company’s short-term investments (in thousands):

 

 

 

Maturity

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

(in years)

 

Cost

 

 

Losses

 

 

Gains

 

 

Fair Value

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

1 or less

 

$

19,905

 

 

$

-

 

 

$

25

 

 

$

19,930

 

Agency securities

 

1 or less

 

 

3,955

 

 

 

-

 

 

 

24

 

 

 

3,979

 

Agency securities

 

>1 and <5

 

 

5,728

 

 

 

-

 

 

 

14

 

 

 

5,742

 

Certificates of deposit

 

1 or less

 

 

1,211

 

 

 

-

 

 

 

5

 

 

 

1,216

 

Certificates of deposit

 

>1 and <5

 

 

3,396

 

 

 

-

 

 

 

20

 

 

 

3,416

 

Total

 

 

 

$

34,195

 

 

$

-

 

 

$

88

 

 

$

34,283

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

1 or less

 

$

29,818

 

 

$

-

 

 

$

3

 

 

$

29,821

 

Agency securities

 

>1 and <5

 

 

5,657

 

 

 

-

 

 

 

2

 

 

 

5,659

 

Certificates of deposit

 

>1 and <5

 

 

1,925

 

 

 

-

 

 

 

-

 

 

 

1,925

 

Total

 

 

 

$

37,400

 

 

$

-

 

 

$

5

 

 

$

37,405

 

 

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. There were no gross realized gains and losses on sales of short-term investments for all periods presented. Unrealized gains and losses are included in accumulated other comprehensive loss.

8


Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2019

 

 

2018

 

Accrued payroll and other employee benefits

$

667

 

 

$

560

 

Clinical studies

 

853

 

 

 

245

 

Other accruals

 

153

 

 

 

96

 

Preclinical studies

 

15

 

 

 

8

 

Total accrued expenses

$

1,688

 

 

$

909

 

 

5. Collaboration and License Agreement

In May 2017, the Company entered into a collaboration and license agreement, clinical supply agreement, investor rights agreement, and common stock purchase agreement (collectively License Agreements) with Biocon SA (subsequently assigned to Biocon Limited (together, Biocon)). Pursuant to the License Agreements, Biocon granted the Company an exclusive license in the United States and Canada (Company Territory) 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 (Biocon Product) that uses Biocon technology or Biocon know-how. Pursuant to the License Agreements, Biocon agreed to be the Company’s exclusive supplier of itolizumab clinical drug product. Biocon will provide clinical drug product at no cost for up to three concurrent orphan indications until the Company’s first U.S. regulatory approval and all other clinical drug product at Biocon’s cost.

In consideration of the rights granted to the Company by Biocon, the Company issued Biocon shares of its common stock equal to 19.5% of its outstanding shares at the time of the execution of the License Agreements. In addition, the Company was required to issue Biocon additional shares of common stock to maintain Biocon’s ownership interest of the Company’s fully-diluted capitalization until the Company received aggregate cumulative gross proceeds from sales of equity securities of $15.0 million, the Biocon Anti-Dilution Right. The Biocon Anti-Dilution Right was recorded at fair value using the precedent transaction method and was determined to be $605,402 at the time of issuance. As an obligation existed to issue a variable number of shares and such obligation was not indexed to the Company’s common stock, the Biocon Anti-Dilution Right was classified as a liability in the accompanying balance sheet. 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 expense (income). In connection with the closing of the Company’s initial public offering in October 2018, the Company issued to Biocon 228,060 shares of common stock in full satisfaction of the Biocon Anti-Dilution Right and the liability was reclassified to stockholder’s equity.

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 quarterly tiered royalties based on a percentage from the mid-single digits to sub-teen double-digits of net sales of Biocon Products, subject to adjustments in certain circumstances. Biocon is also required to pay the Company royalties at comparable percentages for sales of itolizumab outside of the Company Territory if the approvals in such geographies included or referenced the Company’s data. To date, the Company has not made or received payments in connection with the milestones or royalties within the agreement.

 

9


6. Stockholders’ Equity

As of June 30, 2019, the Company’s authorized capital stock consists of 200,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.

The Company had 17,376,236 shares of common stock outstanding as of June 30, 2019 and December 31, 2018.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance at June 30, 2019 is as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Stock options issued and outstanding

 

 

1,203,483

 

 

 

420,483

 

Awards available under the 2018 Equity Incentive Plan

 

 

1,448,930

 

 

 

1,363,119

 

Employee stock purchase plan

 

 

517,037

 

 

 

343,275

 

Total

 

 

3,169,450

 

 

 

2,126,877

 

 

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 consolidated statements of operations is as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development

 

$

310

 

 

$

-

 

 

$

565

 

 

$

-

 

General and administrative

 

 

271

 

 

 

1

 

 

 

462

 

 

 

1

 

Total

 

$

581

 

 

$

1

 

 

$

1,027

 

 

$

1

 

 

10


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 27, 2019. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” refer to Equillium, Inc.

Forward-Looking Statements

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

Overview

 

We are a clinical-stage biotechnology company leveraging deep understanding of immunobiology to develop products for 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 may have broad therapeutic utility in treating a large and diverse set of severe immuno-inflammatory diseases.

 

Our pipeline is focused on developing itolizumab as a potentially best-in-class, disease modifying treatment for multiple severe immuno-inflammatory disorders. In the first quarter of 2019, we initiated a Phase 1b/2 clinical trial of itolizumab for the treatment of acute graft-versus-host disease, or aGVHD, and expect top-line data from the Phase 1b part of this trial in the first quarter of 2020. Our Investigational New Drug application, or IND, with the U.S. Food and Drug Administration, or FDA, for aGVHD was accepted in July 2018.  The FDA granted itolizumab 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 June 2019, we initiated a Phase 1b proof-of-concept clinical trial in Australia for the treatment of uncontrolled moderate to severe asthma. We also plan to commence a development program in lupus nephritis. Our IND for lupus nephritis was accepted by the FDA in July 2019, and we plan to initiate a Phase 1b proof-of-concept clinical trial in the second half of 2019.

 

We have an ongoing translational biology program to assess the therapeutic utility of itolizumab 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 additional indications is driven by our analysis of the scientific, translational, clinical and commercial rationale for advancing itolizumab into further development.

 

We acquired U.S. and Canadian rights to itolizumab in May 2017, pursuant to a collaboration and license agreement with Biocon SA (subsequently assigned to Biocon Limited, or together, Biocon). Following completion of a Phase 3 clinical trial conducted outside of North America, itolizumab was approved in India for the treatment of moderate to severe plaque psoriasis and is marketed by Biocon as ALZUMAb. Today, India is the only jurisdiction where ALZUMAb is approved or marketed. Itolizumab (EQ001) has been evaluated in one Phase 1 clinical trial to date, conducted by Biocon, and is not approved for commercial sale in the United States or Canada. Our partnership with Biocon includes an exclusive supply agreement for clinical and commercial drug product of itolizumab. Biocon currently manufactures itolizumab at commercial scale in a facility regulated by the FDA.

 

11


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, conducting preclinical research, filing two initial INDs and commencing clinical development of itolizumab. We have not generated any revenue from product sales or otherwise. Since inception, we have primarily financed our operations with an aggregate of approximately $81.0 million in gross proceeds through our initial public offering, or IPO, and private placements of convertible promissory notes. We have incurred losses since our inception. Our net losses were $13.3 million for the year ended December 31, 2018 and $12.0 million for the six months ended June 30, 2019. As of June 30, 2019, we had an accumulated deficit of $27.5 million. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development activities, preclinical and clinical activities and general and administrative costs associated with our operations.

 

We expect to continue to incur significant expenses and increasing losses into the foreseeable future. We anticipate our expenses will increase substantially as we continue our research and development activities, including the ongoing and planned clinical development of itolizumab, 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 additional costs associated with being a public company. We expect that our existing cash, cash equivalents and short-term investments as of June 30, 2019, 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 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. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, reduce or terminate our research and development programs or other operations, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Financial Overview

Revenue

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 and any future product candidates. If we fail to complete the development of itolizumab 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. Our research and development expenses include:

 

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

 

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

 

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

 

costs related to preparing and filing 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.

12


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 and potentially expand the number of indications for which we are developing itolizumab. The successful development of itolizumab 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 or the period, if any, in which material net cash inflows from itolizumab 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 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.

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

Interest Expense

Interest expense consists of interest on our convertible promissory notes.

13


Interest Income

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

Other Expense, net

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

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 condensed 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.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the three and six months ended June 30, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018