SEC Filing – Axcella Therapeutics

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axla-20200930

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________________________________________________________

FORM 10-Q

______________________________________________________________________________


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

FOR THE QUARTERLY PERIOD ENDED September 30, 2020


☐			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 001-38501

______________________________________________________________________________

AXCELLA HEALTH INC.

(Exact name of registrant as specified in its charter)

______________________________________________________________________________


Delaware			26-3321056
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

840 Memorial Drive Cambridge, Massachusetts (Address of principal executive offices)			02139 (Zip Code)

(857) 320-2200 (Registrant’s telephone number, including area code)

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	AXLA	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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☒

		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 November 9, 2020, the registrant had 37,540,886 shares of common stock, $0.001 par value per share, outstanding.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this Quarterly Report on Form 10-Q, or Quarterly Report, we use the following defined terms:

"product candidate" to refer to one of our investigational product candidates.

"development platform" to refer to our proprietary human-focused development platform.

"dose" to refer to the exposure amount of a product candidate in Clinical Studies or planned Clinical Trials.

"non-drug" to refer to a non-therapeutic use of a product candidate. Such use may be as a medical food, food product or dietary supplement.

"Clinical Trial" to refer to a human clinical study of a drug product candidate subject to the requirements for an effective Investigational New Drug application, or an IND.

"Clinical Study" to refer to Institutional Review Board-Approved, or IRB-Approved, clinical studies conducted in humans with our product candidates under U.S. Food and Drug Administration, or the FDA, regulations and guidance supporting research with food outside of an IND (prior to any decision to develop a product candidate as a drug product candidate under an IND or a non-drug product candidate). In these food studies, based on our understanding of FDA regulations and guidance, we evaluate in humans, including individuals with disease, a product candidate for safety, tolerability and effects on the normal structures and functions of the body. These studies are not designed or intended to evaluate a product candidate’s ability to diagnose, cure, mitigate, treat or prevent a disease as these would be evaluated in Clinical Trials if we decide to develop a product candidate as a drug or therapeutic.

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•the benefits of our product candidates to health and/or disease and their commercial potential;

•the success, cost and timing of our product development activities, including statements regarding the timing of initiation and completion of preclinical studies, Clinical Studies or Clinical Trials and related preparatory work, and the timing of the availability of the results of these preclinical studies, Clinical Studies and Clinical Trials, including our planned IND submissions and Clinical Trials for AXA1125 and AXA1665;

•our ability to use our research platform to design new product candidates with desirable biological activity;

•our ability to obtain and maintain regulatory approval or find alternate regulatory commercialization pathways from the FDA, the European Medicines Agency, or the EMA, and other comparable regulatory authorities for our product candidates, and any related restrictions, limitations or warnings in the label of an approved product candidate;

•the financing needs and sufficiency of our funds to support company operations and business plans through certain periods of time, including funding necessary to complete further development of our product candidates, and, if successful, commercialization of these candidates as drug or non-drug products;

•our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates, development platform and the type of such protection;

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•our ability and the potential to successfully manufacture our product candidates for preclinical studies, Clinical Studies and Clinical Trials and for commercial use, if approved;

•the size and growth potential of the markets for our product candidates and our ability to serve those markets, either alone or in combination with others;

•the rate and degree of market acceptance of our product candidates, if approved;

•regulatory developments in the United States and foreign countries;

•our ability to enter into a collaboration, partnership, or other agreement with a third party on reasonable terms or at all to develop one or more product candidates or commercialize any of our product candidates, if approved;

•our ability to secure sufficient manufacturing and supply chain capacity;

•the success of competing products or therapies that are or may become available;

•our ability to attract and retain key scientific, management or other necessary personnel;

•our estimates regarding expenses for both product development and as a public company, future revenue, capital requirements and needs for additional financing;

•the potential for faults in our internal controls;

•the effect of the COVID-19 pandemic on any of the foregoing; and

•other risks and uncertainties, including those discussed in Part II, Item 1A, Risk Factors in this Quarterly Report.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

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AXCELLA HEALTH INC.

FORM 10-Q

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		Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)		5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss	6
	Condensed Consolidated Statements of Cash Flows	7
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	8
	Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosure About Market Risk		28
Item 4. Controls and Procedures		29

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		103
Item 3. Defaults Upon Senior Securities		103
Item 4. Mine Safety Disclosures		103
Item 5. Other Information		103
Item 6. Exhibits		104
	SIGNATURES	105

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PART I - FINANCIAL INFORMATION

Item I. Condensed Consolidated Financial Statements (Unaudited)

AXCELLA HEALTH INC.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)


	As of
	September 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	114,063	$	92,053
Marketable securities	3,192		—
Prepaid expenses and other current assets	2,422		1,487
Total current assets	119,677		93,540

Property and equipment, net	265		608
Security deposits	211		211
Total assets	$	120,153	$	94,359

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,129	$	1,998
Accrued expenses and other current liabilities	4,152		6,358

Total current liabilities	5,281		8,356
Long term debt, net of discount	25,115		24,897
Other liabilities	995		882
Total liabilities	31,391		34,135
Commitments and contingencies	—		—

Stockholders' equity:
Common stock, $0.001 par value; 150,000,000 shares authorized, 37,919,824 and 23,607,797 shares issued and 37,500,843 and 23,188,816 shares outstanding at September 30, 2020 and December 31, 2019, respectively	38		24
Additional paid-in capital	346,152		276,286
Treasury stock, 418,981 shares at cost	—		—
Accumulated other comprehensive loss	(4)		—
Accumulated deficit	(257,424)		(216,086)
Total stockholders' equity	88,762		60,224
Total liabilities and stockholders' equity	$	120,153	$	94,359

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AXCELLA HEALTH INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(in thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Operating expenses:
Research and development	$	7,541	$	12,157	$	26,441	$	29,063
General and administrative	4,184		4,840		12,928		13,036
Total operating expenses	11,725		16,997		39,369		42,099
Loss from operations	(11,725)		(16,997)		(39,369)		(42,099)
Other income (expense):


Change in fair value of preferred stock warrant liability	—		—		—		(51)
Interest income (expense), net	(712)		(307)		(1,969)		(1,174)
Total other income (expense), net	(712)		(307)		(1,969)		(1,225)
Net loss	$	(12,437)	$	(17,304)	$	(41,338)	$	(43,324)
Net loss per basic and diluted	$	(0.34)	$	(0.75)	$	(1.39)	$	(3.01)
Weighted average common shares outstanding, basic and diluted	36,942,475		23,083,367		29,804,034		14,430,397
Comprehensive loss:
Net loss	$	(12,437)	$	(17,304)	$	(41,338)	$	(43,324)
Other comprehensive income (loss):
Unrealized losses on marketable securities	(4)		—		(4)		—
Comprehensive loss	$	(12,441)	$	(17,304)	$	(41,342)	$	(43,324)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AXCELLA HEALTH INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(41,338)	$	(43,324)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	343		518
Stock-based compensation expense	4,927		4,322

Change in fair value of preferred stock warrant liability	—		51
Non-cash interest expense	354		429
Gain on sale of property and equipment	—		(18)
Changes in current assets and liabilities:
Prepaid expenses and other assets	(935)		(2,108)
Accounts payable	(810)		2,013
Accrued expenses and other current liabilities	(2,249)		536
Net cash used in operating activities	(39,708)		(37,581)

Cash flows from investing activities:
Purchases of property and equipment	(59)		(102)
Proceeds from the sale of property and equipment	—		19
Purchases of marketable securities	(3,196)		—

Net cash used in investing activities	(3,255)		(83)

Cash flows from financing activities:

Proceeds from issuance of common stock, net of issuance costs	64,973		64,532
Payment of success fee obligation	—		(1,220)
Proceeds from exercise of common stock options	—		241
Net cash provided by financing activities	64,973		63,553

Net increase in cash and cash equivalents	22,010		25,889
Cash and cash equivalents, beginning of period	92,053		79,466
Cash and cash equivalents, end of period	$	114,063	$	105,355

Supplemental cash flow information:
Cash paid for interest	$	1,842	$	2,151


Supplemental disclosure of non-cash investing and financing activities:
Reclassification of warrants to additional paid-in capital	$	—	$	476
Conversion of preferred stock to common stock upon closing of the initial public offering	$	—	$	197,888
Public offering costs incurred but unpaid at period end	$	20	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AXCELLA HEALTH INC.

Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)

(in thousands, except share data)


	Common stock		Additional paid-in capital			Treasury stock			Accumulated other comprehensive income (loss)			Accumulated deficit		Total stockholders’ equity (deficit)
		Shares			Par Value			Shares			Amount
BALANCE - January 1, 2019		5,193,915	$	6		$	7,290	418,981	$	—		$	—	$	(157,049)	$	(149,753)
Exercise of common stock options		1,335				12										12
Accretion of preferred stock to redemption value						(46)										(46)
Stock-based compensation						1,137										1,137
Net loss														(11,573)		(11,573)
BALANCE - March 31, 2019		5,195,250	6			8,393		418,981	—			—		(168,622)		(160,223)
Exercise of common stock options		44,697				211										211
Conversion of preferred stock to common stock upon closing of the initial public offering		14,641,997	15			197,873										197,888
Issuance of common stock, net of issuance costs of $6,896		3,571,428	3			64,529										64,532
Reclassification of warrants to additional paid-in capital						476										476
Exercise of common stock warrant		45,414				—										—
Stock-based compensation						1,507										1,507
Net loss														(14,447)		(14,447)
BALANCE - June 30, 2019		23,498,786	24			272,989		418,981	—			—		(183,069)		89,944
Exercise of common stock options		18,660				26										26
Stock-based compensation						1,678										1,678
Net loss														(17,304)		(17,304)
BALANCE - September 30, 2019		23,517,446	$	24		$	274,693	418,981	$	—		$	—	$	(200,373)	$	74,344

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AXCELLA HEALTH INC.

Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) - continued

(in thousands, except share data)


	Common stock		Additional paid-in capital			Treasury stock			Accumulated other comprehensive income (loss)			Accumulated deficit		Total stockholders’ equity (deficit)
		Shares			Par Value			Shares			Amount
BALANCE - January 1, 2020		23,607,797	$	24		$	276,286	418,981	$	—		$	—	$	(216,086)	$	60,224
Stock-based compensation						1,599										1,599
Net loss														(15,009)		(15,009)
BALANCE - March 31, 2020		23,607,797	24			277,885		418,981	—			—		(231,095)		46,814
Exercise of common stock options		3,166	—													—
Issuance of common stock, net of issuance costs of $4,338		13,055,264	13			58,072										58,085
Stock-based compensation						1,956										1,956
Net loss														(13,892)		(13,892)
BALANCE - June 30, 2020		36,666,227	37			337,913		418,981	—			—		(244,987)		92,963
Issuance of common stock, net of issuance costs of $230		1,253,597	1			6,867										6,868
Stock-based compensation						1,372										1,372
Unrealized loss on available-for-sale securities												(4)				(4)
Net loss														(12,437)		(12,437)
BALANCE - September 30, 2020		37,919,824	$	38		$	346,152	418,981	$	—		$	(4)	$	(257,424)	$	88,762

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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AXCELLA HEALTH INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. NATURE OF BUSINESS

Axcella Health Inc. and subsidiaries ("Axcella," the "Company" or "we") is a biotechnology company that was incorporated in Delaware on August 27, 2008 and has a principal place of business in Cambridge, Massachusetts. The Company is focused on pioneering a new approach to treat complex diseases and improve health using endogenous metabolic modulator, or EMM, compositions. The Company's product candidates are comprised of multiple EMMs that are engineered in distinct combinations and ratios with the goal of simultaneously impacting multiple biological pathways.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, successful development of technology, obtaining additional funding, protection of proprietary technology, compliance with government regulations, risks of failure of preclinical studies, Clinical Studies and Clinical Trials, the need to obtain marketing approval for its product candidates, if required, and successfully market products, fluctuations in operating results, economic pressure impacting therapeutic pricing, dependence on key personnel, risks associated with changes in technologies, development by competitors of technological innovations and the ability to scale manufacturing to large scale production. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and any necessary regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has historically funded its operations with proceeds from sales of preferred and common stock and borrowings under a loan and security agreement. As of September 30, 2020, the Company had an accumulated deficit of $257.4 million. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash and cash equivalents at September 30, 2020 will be sufficient to fund its operations for at least the next twelve months from the date of the issuance of these interim condensed consolidated financial statements.

The COVID-19 pandemic has spread globally, including to the United States and European countries, which has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, business shutdowns and clinical site closures to non-essential care and clinical trials. Although we cannot presently predict the scope and severity of COVID-19, these developments and measures could materially and adversely affect our business, our results of operations and financial condition, particularly if the COVID-19 pandemic adversely impacts our ability to conduct and complete our ongoing Clinical Study and planned Clinical Trials in a timely manner or at all. Additionally, potential shutdowns of government agencies such as the Securities and Exchange Commission (the “SEC”) or the U.S. Food and Drug Administration (the "FDA") may limit our ability to raise capital and negatively impact our product development timelines.

The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the Company’s results of operations and financial position as of and for the three and nine months ended September 30, 2020. The full extent of the future impacts of COVID-19 on our operations is uncertain. A prolonged pandemic could have a material adverse impact on financial results and business operations of the Company, including the timing and ability of the Company to complete our ongoing Clinical Study and planned Clinical Trials and other efforts required to advance the development of our product candidates.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The Company's condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The Company's unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2019 and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 23, 2020 (the "2019 Annual Report"). The results for any interim period are not necessarily indicative of results for any future period.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments that are necessary to present fairly the Company’s financial position, the results of its operations, its statement of stockholders’ equity, and its cash flows for the periods presented. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020, or for any future period.

The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements. As of September 30, 2020, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the 2019 Annual Report.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. The Company bases its estimates on historical experience, known trends and other market-specific or relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions.

Concentrations of Credit Risk

The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company maintains its cash and cash equivalent balances and marketable securities with financial institutions that management believes are creditworthy. The Company’s cash equivalents and marketable securities as of September 30, 2020 consisted of corporate obligations, bank deposits, and money market funds that invest in U.S. treasury securities.

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The Company's investment policy includes guidelines on the quality of the institutions and financial instruments and defines the allowable investments that the Company believes minimizes the exposure to concentrations of credit risk. The Company has not experienced any credit losses and does not believe that it is subject to significant credit risk.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with a remaining maturity when purchased of three months or less to be cash equivalents.

The Company’s marketable securities, which consisted of corporate obligations as of September 30, 2020, are classified as available-for-sale and are reported at fair value. Unrealized gains and losses on available-for-sale corporate obligations are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.

The Company evaluates its marketable securities with unrealized losses for other-than-temporary impairment. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary,” the Company reduces the investment to fair value through a charge to the statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

•Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above. The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities. The carrying value of the long term debt approximates fair value as evidenced by the recent amendment to the Company's debt facility.

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Comprehensive loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. For the nine months ended September 30, 2020, the Company’s only element of other comprehensive loss was unrealized gains (losses) on marketable securities.

Accounting Pronouncements Issued and Not Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended by various subsequently issued ASUs. The standard requires lessees to recognize an operating lease with a term greater than one year on their balance sheets as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The new standard will become effective for the Company on January 1, 2022. The Company expects to apply the modified retrospective approach as of the date of adoption such that prior periods will not be restated. The Company is evaluating the effect that adoption of the standard is expected to have on the Company’s consolidated financial statements and related disclosures and will recognize a lease obligation and right of use asset for its existing operating leases with a lease term greater than one year upon adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The new standard adjusts the accounting for assets held at amortized costs basis, including marketable securities accounted for as available-for-sale. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. The Company is required to adopt this standard effective January 1, 2023 and the Company is evaluating the impact the guidance will have on its consolidated financial statements.

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):


	September 30, 2020		December 31, 2019
Laboratory equipment	$	3,511	$	3,511
Leasehold improvements	597		597
Office and computer equipment	111		111
Furniture and fixtures	122		122
Property and equipment	4,341		4,341
Less: accumulated depreciation and amortization	(4,076)		(3,733)
Property and equipment, net	$	265	$	608

Depreciation and amortization expense for the nine months ended September 30, 2020 and 2019 was $0.3 million and $0.5 million, respectively.

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4. MARKETABLE SECURITIES AND FAIR VALUE

As of September 30, 2020, marketable securities by security type consisted of the following (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value




Corporate obligations	$	3,196	$	—	$	(4)	$	3,192
Total	$	3,196	$	—	$	(4)	$	3,192

The Company did not have marketable securities at December 31, 2019.

The following tables present the Company’s assets that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value, which is described further within Note 2, Summary of Significant Accounting Policies (in thousands):


	Fair value measurements at September 30, 2020 using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	111,565	$	—	$	—	$	111,565
Marketable securities:



Corporate obligations	—		3,192		—		3,192
Total	$	111,565	$	3,192	$	—	$	114,757


	Fair value measurements at December 31, 2019 using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	91,803	$	—	$	—	$	91,803
Total	$	91,803	$	—	$	—	$	91,803

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following (in thousands):


	September 30, 2020		December 31, 2019
Accrued employee compensation and benefits	$	2,525	$	3,109
Accrued external research and development expenses	772		1,799
Accrued professional fees	797		985
Other	58		465
Total accrued expenses and other current liabilities	$	4,152	$	6,358

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6. DEBT FINANCING

Long term debt consisted of the following (in thousands):


	September 30, 2020		December 31, 2019
Principal amount of long term debt	$	26,000	$	26,000
Debt discount	(351)		(456)
Deferred financing fees	(534)		(647)

Long term debt, net	$	25,115	$	24,897

In January 2018, the Company entered into a Loan and Security Agreement. Under the Loan and Security Agreement, the Company granted the lender a first priority security interest in all assets of the Company, excluding intellectual property and granted a negative pledge on such intellectual property. The interest rate was LIBOR plus 8.50% per annum.

In October 2018, the Company amended its Loan and Security Agreement to extend the interest only period through January 2021 and the maturity date to January 2023 if certain conditions were met. The conditions per the agreement were met upon the completion of the IPO in May 2019. Additionally, per the amended agreement, the monthly principal payments of $1.1 million were to commence in February 2021 for 24 months. The interest rate was not changed through the amendment.

On August 28, 2020, the Loan and Security Agreement was further amended to, among other things; (i) extend the date on which repayment of principal commences until November 2021, (ii) provide for further extensions of the date on which repayment of principal commences to January 2022 and May 2022, provided that certain specified regulatory and clinical milestones are satisfied by the Company, (iii) increase the final payment fee from 5.35% to 6.35% and (iv) add a 0.20% floor to the LIBOR rate. The interest rate was 8.70% as of September 30, 2020.

For the nine months ended September 30, 2020 and 2019, interest expense arising from the amortization of the debt discount and deferred financing fees was $0.3 million and $0.4 million, respectively.

Terminal Interest Fee

The Company's debt facility includes a terminal interest fee obligation totaling $1.7 million, which is due with the final principal payment of the loan and has been modified from time to time as the facilities were amended. The Company is accruing the terminal fee obligation over the term of the facility. The carrying value of the terminal interest fee was $1.0 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively.

The scheduled principal maturity of the long term debt as of September 30, 2020 is as follows (in thousands):


Year Ending December 31,
2021	$	2,167
2022	13,000
2023	10,833

	$	26,000

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7. STOCKHOLDERS' EQUITY

Redeemable Convertible Preferred Stock

Upon closing of the IPO, all outstanding redeemable convertible preferred stock converted into an aggregate of 14,641,997 shares of common stock. The holders of the Company’s preferred stock had certain voting, dividend, and redemption rights, as well as liquidation preferences and conversion privileges. All rights, preferences, and privileges associated with the preferred stock were terminated at the time of the Company’s IPO in conjunction with the conversion of all outstanding shares of preferred stock into shares of common stock.

2020 Follow-on Offering

On May 18, 2020, the Company completed a public offering pursuant to which the Company issued an aggregate of 12,650,000 shares of its common stock, which included the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $4.75 per share, before deducting underwriting discounts and commissions. The Company received net proceeds of approximately $55.9 million after deducting the underwriting discounts, commissions, and other offering expenses.

At-the-Market Offering

On June 5, 2020, the Company entered into a sales agreement with SVB Leerink LLC (“SVB Leerink”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $35 million from time to time through SVB Leerink, acting as its agent (the “ATM Offering”). During the three and nine months ended September 30, 2020, the Company sold an aggregate of 1,253,597 and 1,658,861 shares, respectively, of its common stock under the ATM Offering for net cash proceeds of $6.9 million and $9.0 million, respectively, after deducting commissions and expenses of $0.2 million and $0.4 million, respectively.

2019 Stock Option and Incentive Plan

The 2019 Stock Option and Incentive Plan (the "2019 Plan") provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards and cash-based awards to the Company's officers, employees, directors and consultants. The number of shares available for future grant under the 2019 Plan was 747,299 as of September 30, 2020.

2019 Employee Stock Purchase Plan

The 2019 Employee Stock Purchase Plan (the "2019 ESPP") provides participating employees with the opportunity to purchase shares of common stock. As of September 30, 2020, the total number of shares that may be issued under the 2019 ESPP was 469,069 shares. As of September 30, 2020, no shares have been issued under the 2019 ESPP.

Fair Value of Stock Awards

The fair value of each option issued to employees was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Risk-free interest rate	0.38	%	1.43% - 1.95%		1.12	%	1.43% - 2.50%
Expected option life (in years)	6.06		0.34 - 6.25		5.93		0.25 - 6.25
Expected dividend yield	0	%	0	%	0	%	0	%
Expected volatility	75.5	%	73.4	%	73.6	%	73.4	%

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Stock Option Activity

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2020:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Life (in Years)	Intrinsic Value (in thousands)
Outstanding as of January 1, 2020	5,176,944	$	7.35
Granted	801,890	4.44
Exercised	(4,071)	1.12
Canceled	(812,963)	8.93
Outstanding as of September 30, 2020	5,161,800	$	6.65	7.52	$	1,772
Exercisable as of September 30, 2020	2,835,131	$	6.98	6.71	$	1,151
Vested or expected to vest as of September 30, 2020	5,136,800	$	6.65	7.52	$	1,772

The intrinsic value of options exercised was nominal during both the nine months ended September 30, 2020 and 2019.

The weighted-average grant date fair value of the options granted during the nine months ended September 30, 2020 and 2019, was $2.83 and $6.73 per share, respectively.

Restricted Stock Units

The fair values of restricted stock units are based on the market value of our stock on the date of grant. The following table summarizes the Company's restricted stock unit activity for the nine months ended September 30, 2020:


	Number of Shares	Weighted Average Grant Date Fair Value per Share
Outstanding as of January 1, 2020	66,801	$	3.40
Granted	336,166	4.61
Vested	—	—
Forfeited	(108,371)	3.68
Outstanding as of September 30, 2020	294,596	$	4.67

Stock-Based Compensation Expense

Stock-based compensation expense was classified in the statements of operations and comprehensive loss as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Research and development	$	532	$	659	$	2,129	$	1,727
General and administrative	840		1,019		2,798		2,595
Total stock compensation expense	$	1,372	$	1,678	$	4,927	$	4,322

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As of September 30, 2020, there was $8.3 million of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 2.1 years and $0.8 million of unrecognized compensation expense related to unvested restricted stock units that is expected to be recognized over a weighted-average period of approximately 1.8 years.

8. NET LOSS PER SHARE

Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator:
Net loss	$	(12,437)	$	(17,304)	$	(41,338)	$	(43,324)
Accretion of redeemable convertible preferred stock	—		—		—		(46)
Net loss attributable to common stockholders	$	(12,437)	$	(17,304)	$	(41,338)	$	(43,370)
Denominator:
Weighted average common shares outstanding, basic and diluted	36,942,475		23,083,367		29,804,034		14,430,397
Net loss per share, basic and diluted	$	(0.34)	$	(0.75)	$	(1.39)	$	(3.01)

The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:


	Nine Months Ended September 30,
	2020	2019


Options to purchase common stock	5,161,800	4,895,872
Unvested restricted stock units	294,596	—
	5,456,396	4,895,872

9. RELATED-PARTY TRANSACTIONS

In August 2019, the Company entered into a consulting agreement with the chairman of the Company's Board of Directors to provide various consulting services to the Company. The total expense under the agreement for the three and nine months ended September 30, 2020 was $0.1 million and $0.2 million, respectively. As of September 30, 2020, there were no amounts payable to the chairman for costs related to the consulting agreement.

10. SUBSEQUENT EVENTS

The Company has evaluated subsequent events for financial statement purposes occurring through November 12, 2020, the date that these condensed consolidated financial statements were issued.

* * * * * *

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

The following discussion of the financial condition and results of operations of Axcella Health Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report, and the audited financial statements and notes included in our Annual Report on Form 10-K, filed with the SEC on March 23, 2020. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Quarterly Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this Quarterly Report, including under Item 1A. “Risk Factors” and under “Special Note Regarding Forward-Looking Statements.” In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage biotechnology company focused on pioneering a new approach to treat complex diseases and improve health using endogenous metabolic modulator, or EMM, compositions. Our product candidates are comprised of multiple EMMs that are engineered in distinct combinations and ratios with the goal of simultaneously impacting multiple biological pathways. Our pipeline includes lead therapeutic candidates for non-alcoholic steatohepatitis, or NASH, and the reduction in risk of overt hepatic encephalopathy, or OHE, recurrence. Additional muscle- and blood-related programs are in earlier-stage development.

Using our development platform, we have efficiently designed a pipeline of product candidates that are comprised of amino acids and their derivatives, which have a general history of safe use. These orally administered compositions have shown the potential to generate multifactorial effects in initial Clinical Studies.

An overview of our current therapeutic product candidates and their current development status is illustrated below.

https://cdn.kscope.io/6e136a5ad81a25afc13f93157963baa0-axla-20200930_g1.jpg

1.Initial Clinical Studies refers to Non-IND Clinical Studies initiated prior to a development path decision.

2.Planned Clinical Trial, contingent upon IND acceptance by the FDA and other factors such as the impact of the COVID-19 pandemic.

3.On August 5, 2020, we announced positive top-line results for our AXA1665-002 Clinical Study. Indication expected to be reduction in risk of overt hepatic encephalopathy recurrence contingent upon IND acceptance by the FDA.

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We have yet to make a development decision for our other product candidates, AXA2678 and AXA4010.

https://cdn.kscope.io/6e136a5ad81a25afc13f93157963baa0-axla-20200930_g2.jpg

1.Initial Clinical Studies refers to non-IND Clinical Studies initiated prior to a development path decision. Timing of planned cohort 1 readout based on current expectations and subject to risks associated with the COVID-19 pandemic.

To date, we have funded our operations with proceeds from the sale of preferred stock and common stock, and borrowing of debt. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $12.4 million and $17.3 million for the three months ended September 30, 2020 and 2019, respectively and our net losses were $41.3 million and $43.3 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $257.4 million. We expect to incur net losses as we continue to develop our product candidates.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, strategic alliances and marketing and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of September 30, 2020, we had cash, cash equivalents and marketable securities of $117.3 million. We believe that our existing cash, cash equivalents and marketable securities as of September 30, 2020 will enable us to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months following the filing date of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and Capital Resources.” To finance our operations significantly beyond that point, we will need to raise additional capital, which cannot be assured.

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The extent to which COVID-19 impacts our business, operations or financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, new information that may emerge concerning the severity of COVID-19 or the nature or effectiveness of actions to contain COVID-19 or treat its impact, among others. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. If we or any of the third parties with whom we engage, however, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.

Components of our results of operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or we execute license or collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from collaborations or license agreements that we may enter into with third parties, or any combination thereof.

Operating expenses

Research and development expenses

Our research and development expenses consist primarily of costs incurred in connection with our research activities, including our drug discovery efforts, and the development of our product candidates, which include:

•direct external research and development expenses, including fees, reimbursed materials and other costs paid to consultants, contractors, contract manufacturing organizations, or CMOs and clinical research organizations, or CROs, in connection with our clinical and preclinical development and manufacturing activities;

•employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions;

•expenses incurred in connection with the preclinical and clinical development of our product candidates, including any Clinical Studies, planned Clinical Trials and other research programs, including under agreements with third parties, such as consultants, contractors and CROs;

•the cost of developing and scaling our manufacturing process and manufacturing products for use in our preclinical studies, Clinical Studies and Clinical Trials, including under agreements with third parties, such as consultants, contractors and CMOs;

•patent-related costs incurred in connection with filing and prosecuting patent applications; and

•facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance.

We expense research and development costs as incurred. We often contract with CROs and CMOs to facilitate, coordinate and perform agreed-upon research, design, development, and manufacturing of our product candidates. To ensure that research and development costs are expensed as incurred, we record monthly accruals for clinical studies and manufacturing costs based on the work performed under the contract.

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These CRO and CMO contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical or manufacturing milestones. In the event that we prepay CRO or CMO fees, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development or manufacturing services are performed. Most professional fees, including project and clinical management, data management, monitoring and manufacturing fees are incurred throughout the contract period. These professional fees are expensed based on their estimated percentage of completion at a particular date. Our CRO and CMO contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs and other miscellaneous costs and raw materials. We expense the costs of pass through fees under our CRO and CMO contracts as they are incurred, based on the best information available to us at the time.

A significant portion of our research and development costs are not tracked by project as they benefit multiple projects or our technology platform, and, as such, are not separately classified.

Research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the stage of preclinical and clinical activities and development. Many factors can affect the cost and timing of our Clinical Studies and planned Clinical Trials, including, without limitation, slow patient enrollment and the availability of supplies, including as a result of the COVID-19 pandemic, and real or perceived lack of effect on biology or safety of our product candidates. In addition, the development of all of our product candidates may be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing and costs of the further development of our product candidates.

See “Risk Factors” for further discussion of these and additional risks and uncertainties associated with product development and commercialization that may significantly affect the timing and cost of our research and development expenses and our ability to obtain regulatory approval for and successfully commercialize our product candidates. We expect research and development expenses to increase as we advance existing product candidates into additional Clinical Trials and Clinical Studies and develop new product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries, benefits, travel and stock-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, consulting, accounting and audit services.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development of our product candidates. We also anticipate that we will incur increased finance, accounting, audit, legal, compliance, director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate.

Other income (expense)

Interest income (expense), net

Interest expense consists of interest expense on outstanding borrowings under our loan and security agreement as well as amortization of debt discount and debt issuance costs. Interest income has historically been insignificant and consists of interest earned on our invested cash balances.

Income taxes

Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss, or NOLs, carryforwards and tax credits will not be realized.

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Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,
	2020		2019		Change

Operating expenses:
Research and development	$	7,541	$	12,157	$	(4,616)
General and administrative	4,184		4,840		(656)
Total operating expenses	11,725		16,997		(5,272)
Loss from operations	(11,725)		(16,997)		5,272
Other income/(expense), net	(712)		(307)		(405)
Net loss	$	(12,437)	$	(17,304)	$	4,867

Research and Development Expenses

The following table summarizes our research and development expenses incurred during the three months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,
	2020		2019		Change
Salary and benefits-related	$	3,707	$	3,666	$	41
Clinical research and outside services	2,766		7,646		(4,880)
Facility related and other	1,068		845		223
Total research and development expenses	$	7,541	$	12,157	$	(4,616)

Clinical research and outside services costs decreased by $4.9 million due to lower costs associated with Clinical Studies' expenses as the Company has completed its AXA1125-003 Clinical Study, the wind down of its AXA1665-002 Clinical Study, and the closure of its AXA1957-002 pediatric study.

General and Administrative Expenses

The following table summarizes our general and administrative expenses incurred during the three months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,
	2020		2019		Change
Salary and benefits-related	$	2,430	$	2,479	$	(49)
Other contract services and outside costs	1,370		1,784		(414)
Facility related and other	384		577		(193)
Total general and administrative expenses	$	4,184	$	4,840	$	(656)

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Other contract services and outside costs decreased by $0.4 million, driven by decreases in professional and legal fees, largely as a result of one-time expenses related to becoming a public company in 2019.

Other Income (Expense), net

Other income (expense), net was $0.7 million for the three months ended September 30, 2020, compared to $0.3 million for the three months ended September 30, 2019. The increase in other income (expense), net was driven by lower interest income of $0.5 million, partially offset by lower interest expense on borrowings under our loan and security agreement of $0.1 million as a result of declines in interest rates.

Comparison of the Nine Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands):


	Nine Months Ended September 30,
	2020		2019		Change

Operating expenses:
Research and development	$	26,441	$	29,063	$	(2,622)
General and administrative	12,928		13,036		(108)
Total operating expenses	39,369		42,099		(2,730)
Loss from operations	(39,369)		(42,099)		2,730
Other income/(expense), net	(1,969)		(1,225)		(744)
Net loss	$	(41,338)	$	(43,324)	$	1,986

Research and Development Expenses

The following table summarizes our research and development expenses incurred during the nine months ended September 30, 2020 and 2019 (in thousands):


	Nine Months Ended September 30,
	2020		2019		Change
Salary and benefits-related	$	12,498	$	10,153	$	2,345
Clinical research and outside services	10,647		16,072		(5,425)
Facility related and other	3,296		2,838		458
Total research and development expenses	$	26,441	$	29,063	$	(2,622)

The increase of $2.3 million in salary and benefits-related costs resulted from higher average salaries and bonuses for personnel in research and development. This included an increase of $0.4 million in stock compensation expense due to an increase in the number of awards granted. Clinical research and outside services costs decreased by $5.4 million due to lower costs associated with Clinical Studies' expenses as the Company has completed its AXA1125-003 Clinical Study, the wind down of its AXA1665-002 Clinical Study, and the closure of its AXA1957-002 pediatric study.

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General and Administrative Expenses

The following table summarizes our general and administrative expenses incurred during the nine months ended September 30, 2020 and 2019 (in thousands):


	Nine Months Ended September 30,
	2020		2019		Change
Salary and benefits-related	$	7,795	$	7,340	$	455
Other contract services and outside costs	4,033		4,538		(505)
Facility related and other	1,100		1,158		(58)
Total general and administrative expenses	$	12,928	$	13,036	$	(108)

Salary and benefits-related costs increased by $0.5 million primarily as a result of increased headcount in connection with becoming a public company. This includes an increase of $0.2 million in stock compensation expense due to an increase in the number of awards granted. Other contract services and outside costs decreased by $0.5 million, driven by decreases in professional and legal fees, largely as a result of one-time expenses related to becoming a public company in 2019.

Other Income (Expense), net

Other income (expense), net was $2.0 million for the nine months ended September 30, 2020, compared to $1.2 million for the nine months ended September 30, 2019. The increase in other income (expense), net was driven by lower interest income of $1.1 million, partially offset by lower interest expense on borrowings under our loan and security agreement of $0.4 million as a result of declines in interest rates.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations to date primarily with proceeds from the sale of preferred stock and common stock, and borrowings under our loan and security agreement.

On May 18, 2020, we completed a follow-on public offering pursuant to which we issued an aggregate of 12,650,000 shares of our common stock, which included the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $4.75 per share, before deducting underwriting discounts and commissions. We received aggregate net proceeds of approximately $55.9 million after deducting the underwriting discounts and commissions and other offering expenses.

On June 5, 2020, we entered into a sales agreement with SVB Leerink LLC, or SVB Leerink, pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $35 million from time to time through SVB Leerink, acting as our agent, or the ATM Offering. During the three and nine months ended September 30, 2020, the Company sold an aggregate of 1,253,597 and 1,658,861 shares, respectively, of its common stock under the ATM Offering for net cash proceeds of $6.9 million and $9.0 million, respectively, after deducting commissions and expenses of $0.2 million and $0.4 million, respectively.

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Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):


	Nine Months Ended September 30,
	2020		2019
Cash used in operating activities	$	(39,708)	$	(37,581)
Cash used in investing activities	(3,255)		(83)
Cash provided by financing activities	64,973		63,553
Net increase in cash and cash equivalents	$	22,010	$	25,889

Operating Activities

During the nine months ended September 30, 2020, operating activities used $39.7 million of cash, primarily resulting from our net loss of $41.3 million and net cash used by changes in our operating assets and liabilities of $4.0 million, partially offset by net non-cash charges of $5.6 million, of which $4.9 million was stock-based compensation expense. Net cash used by changes in our operating assets and liabilities for the nine months ended September 30, 2020 consisted of decreases in accounts payable, accrued expenses and other current liabilities of $3.1 million and an increase in prepaid expenses and other assets of $0.9 million. The decreases in accounts payable, accrued expenses and other current liabilities was driven by the timing of research and development activities and the payment of 2019 incentive bonuses. The increase in prepaid expenses and other assets was primarily due to increased prepayments for business insurance.

During the nine months ended September 30, 2019, operating activities used $37.6 million of cash, primarily resulting from our net loss of $43.3 million, an increase in prepaid expense of $2.1 million and a decrease in accrued expenses of $0.5 million. The increase in prepaid expenses was due to upfront payments for Clinical Study expenses and business insurance. This was partially offset by non-cash charges, including stock-based compensation expense of $4.3 million, depreciation expense of $0.5 million and an increase in accounts payable of $2.0 million.

Investing Activities

During the nine months ended September 30, 2020, net cash used in investing activities primarily consisted of the purchase of marketable securities totaling $3.2 million.

During the nine months ended September 30, 2019, net cash used in investing activities primarily consisted of the purchase of capital equipment.

Financing Activities

During the nine months ended September 30, 2020, net cash provided by financing activities of $65.0 million solely consisted of the net proceeds from the issuance of common stock.

During the nine months ended September 30, 2019, net cash provided by financing activities of $63.6 million primarily consisted of net proceeds from the issuance of common stock upon the completion of our IPO.

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Loan and Security Agreement

At September 30, 2020, we had $26.0 million in outstanding long-term debt pursuant to our loan and security agreement. Pursuant to the recent amendment of the loan and security agreement, the interest-only period was extended through October 2021 and the maturity date was extended to October 2023. Monthly principal payments of $1.1 million will commence November 2021 for 24 months and provides for further extensions of the date on which repayment of principal commences to January 2022 and May 2022, provided that certain specified regulatory and clinical milestones are satisfied by the Company. The terminal interest fee of 6.35%, or $1.7 million, is due with the final principal payment of the loan. We granted the lender a first priority security interest in all of our assets, excluding intellectual property and ranted a negative pledge on such intellectual property. There are no financial covenants under our loan and security agreement.

Funding Requirements

We believe that our existing cash, cash equivalents and marketable securities as of September 30, 2020 will be adequate to fund our operating expenses, capital expenditure requirements and debt service obligations through at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance existing product candidates into additional Clinical Trials and Clinical Studies and develop new product candidates. Our cash requirements depend on numerous factors, including, without limitation, expenditures in connection with our research and development programs, including with respect to the timing and progress of Clinical Trials, Clinical Studies and preclinical development activities; payments to CROs, CMOs and other third-party providers; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; our ability to raise additional equity or debt financing; potential repayments of our long-term debt; and our ability to enter into collaboration or license agreements and our receipt of any upfront, milestone or other payments thereunder. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources. See “Risk Factors” for further discussion of these and additional risks and uncertainties that may significantly affect the timing and amount of expenditures of our capital resources.

We will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, strategic alliances and marketing and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all, including as a result of market volatility following the COVID-19 pandemic. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. We also intend to continue to evaluate options to refinance our outstanding long-term debt. The amounts involved in any such transactions, individually or in the aggregate, may be material.

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Critical Accounting Policies and Use of Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates. There have been no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 23, 2020.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not have, any off-balance sheet arrangements, as defined under applicable SEC rules.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not required by Small Reporting Company rules.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of September 30, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2020 were effective at a reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three and nine months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material change to our internal control over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the effect of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

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Part II. Other Information

Item 1. Legal Proceedings

From time to time, we may be involved in various claims, threatened or actual, and legal proceedings relating to claims arising out of our operations or products, if any. We are not currently a party to any material legal proceedings. The outcome of claims or litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations.

Item 1A. Risk Factors

Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Quarterly Report and in other documents that we file with the SEC, in evaluating the Company and our business. Investing in our common stock involves a high degree of risk. If any of the following risks and uncertainties actually occurs, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks described below are not intended to be exhaustive and are not the only risks that we face. New risk factors can emerge from time to time, and it is not possible to predict the impact that any factor or combination of factors may have on our business, prospects, financial condition and results of operations.

Summary Risk Factors

Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:

•We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.

•We will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete development and commercialization of our product candidates.

•Clinical development is a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any product candidates, which could impair our ability to fund our operations or obtain financing on acceptable terms, or at all.

•Any use of our product candidates to support and maintain homeostasis, which helps support normal structures and functions of the body, or to modulate dysregulated metabolism is a novel approach and negative perception of any product candidates that we develop could adversely affect our ability to conduct our business, obtain regulatory approvals or identify alternate regulatory pathways, to the extent required by applicable laws, to market such product candidates.

•All of our drug product candidates will require significant additional preclinical and/or clinical development before we can seek regulatory approval for and launch a drug product commercially.

•The successful development of our product candidates is highly uncertain.

•We face significant competition from other healthcare companies, and our operating results will suffer if we fail to compete effectively.

•If we lose key management personnel, or if we are unable to recruit additional highly skilled personnel, our ability to identify and develop new or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.

•COVID-19 may materially and adversely affect our business and our financial results.

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•We currently have no marketing and sales organization and have no experience in marketing products for therapeutic or non-drug uses. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.

•We are very early in our development efforts. Our drug product candidates will require significant additional preclinical and clinical development before we seek regulatory approval. Product candidates that we decide to bring to market as non-drug products may also require additional development, and all of our product candidates may require significant interactions with regulatory authorities and investments before their respective commercial launches. If we are unable to advance our product candidates to final development, meet regulatory requirements, including obtaining regulatory approval, where applicable, or ultimately commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.

•Regulatory requirements for development of our product candidates as drugs or as non-drug products are uncertain and evolving. Changes in these laws, including our ability to conduct Clinical Studies or Clinical Trials, or the current interpretation or application of these laws, or conflicts between us and the FDA on the applicability or interpretation of applicable laws, would have a significant adverse impact on our ability to develop and commercialize our products.

•If we are unable to obtain and maintain patent protection for any product candidates we develop or for our development platform or other technologies, our competitors could develop and commercialize products or technology similar or identical to ours, and our ability to successfully commercialize any product candidates we may develop, and our technology may be adversely affected.

•We rely on third parties to conduct our Clinical Studies and will rely on third parties to conduct any Clinical Trials for any product candidate that we decide to develop as a drug product candidate and to assist us in meeting the regulatory requirements applicable to development and marketing of our products. If these third parties do not successfully carry out their contractual duties or meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize any potential product candidates.

•We have experience manufacturing our product candidates only for purposes of our ongoing and completed Clinical Studies to date, and have very limited experience manufacturing our product candidates for the purposes of Clinical Trials, or at commercial scale, and if we decide to establish our own manufacturing facility for our product candidates, we cannot assure you that we can manufacture our product candidates in compliance with regulations at a cost or in quantities necessary to make them commercially viable.

•The trading price of our stock is highly volatile.

The summary risk factors described above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC. If any such risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations.

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Risks related to our financial position and capital needs

We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.

We are a biotechnology company with a limited operating history. Investment in product development in the healthcare industry, including of biotechnology products, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and/or become commercially viable. To date, our product candidates have been or are currently being studied in Clinical Studies as food products. Subject to positive feedback and allowance by FDA for our AXA1665 and AXA1125 programs, we plan to pursue future development of AXA1665 and AXA1125 in Clinical Trials enabled by IND applications. We have no products approved for commercial sale, have not generated any revenue from product sales to date and continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2008. Our net loss was $41.3 million for the nine months ended September 30, 2020 and $59.0 million for the year ended December 31, 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $257.4 million. We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and development of our product candidates in Clinical Studies, Clinical Trials for any product candidate we elect to develop as a drug product candidate under an IND and as we seek regulatory approvals, as necessary, for and commercialize our product candidates, if approved. We anticipate that our expenses will increase substantially if, and as, we:

•conduct preclinical studies, Clinical Studies, and for those product candidates that we elect to develop as therapeutics, Clinical Trials or their equivalent in non-U.S. jurisdictions;

•incur setbacks or delays to the initiation or completion of preclinical studies, product development, Clinical Studies and/or Clinical Trials due to the COVID-19 pandemic;

•further develop our proprietary human-focused product development platform;

•continue to discover and develop our current product candidates as well as additional product candidates;

•maintain, expand and protect our intellectual property portfolio;

•hire or contract additional clinical, scientific, manufacturing, quality and commercial personnel to support our product research, development and commercialization efforts;

•continue to develop, scale and validate a manufacturing process and specifications for our product candidates, including under requirements for drug development;

•incur any disruption or delays to the supply of our product candidates due to the COVID-19 pandemic;

•continue to establish in-house manufacturing capabilities for our research and product development efforts;

•establish a commercial manufacturing source and secure supply chain capacity sufficient to provide preclinical study material, Clinical Study material, Clinical Trial material for any product candidate we elect to develop as a drug product candidate under an IND, and commercial quantities of any product candidates that we may commercialize as drug or non-drug products, following receipt of any necessary approvals or authorizations;

•acquire or in-license other product candidates and technologies;

•seek various non-drug product marketing pathways and, if applicable, drug regulatory authorizations;

•establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain regulatory approval or identify an alternate regulatory pathway to market; and

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•add operational, compliance, financial and management information systems and personnel to support our operations as a public company.

To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including, but not limited to: completing preclinical studies, Clinical Studies and Clinical Trials for any product candidate we elect to develop as a drug product candidate under an IND; obtaining marketing approval or identifying alternate regulatory pathways for product candidates; manufacturing, marketing and selling products for which we may obtain marketing approval; or successfully satisfying any pre- or post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company, which could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.

Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, which may be significant. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders' equity and working capital.

We will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete development and commercialization of our product candidates.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts for our current and future programs: to conduct further research and development, preclinical studies, Clinical Studies and/or Clinical Trials for any product candidates we elect to develop as a drug product candidate under an IND; to validate the manufacturing process and specifications for our product candidates; to seek regulatory approvals for or identify alternate regulatory pathways to market for our product candidates; and to launch and commercialize any products for which we receive regulatory approval or identify an alternate regulatory pathway to market, including potentially building our own commercial organization. As of September 30, 2020, we had $117.3 million of cash, cash equivalents and marketable securities on hand. Based on our current operating plan, we believe that our existing cash and cash equivalents, will enable us to fund our operating expenses, capital expenditure requirements and debt service obligations through at least the next 12 months. However, our future capital requirements and the period for which our existing resources will support our operations may vary significantly from our expectations, and we will in any event require additional capital in order to complete clinical development of any of our current product candidates. Our monthly spending levels will vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

•our decisions regarding the development path under which we will develop our product candidates (e.g., either continuing to develop a product candidate as a non-drug product, or initiating development as drug product candidate under an IND or non-U.S. equivalent);

•the initiation, progress, timing, costs and results of preclinical studies, Clinical Studies, planned Clinical Trials, and any need to conduct additional studies as may be required by a regulatory authority, including additional studies that may be required by a regulatory authority in order to allow the initiation of Clinical Trials under an IND or the non-U.S. equivalent for any of our product candidates;

•any clinical development plans we establish for these product candidates;

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•any setbacks or delays to the initiation or completion of preclinical studies, Clinical Studies and/or Clinical Trials due to the COVID-19 pandemic;

•further development of our development platform and supporting infrastructure;

•the number and characteristics of product candidates that we develop or may in-license;

•the terms of any partnership or collaboration agreements we may choose to initiate or conclude;

•the outcome, timing and cost of meeting regulatory requirements established by the FDA, any other regulatory authorities in the United States, and, when applicable, comparable foreign regulatory authorities, such as the EMA;

•the effect of changes in regulations or policy relating to the development and commercialization of our product candidates by the FDA, any other regulatory authorities in the United States and, when applicable, other comparable foreign regulatory authorities, such as the EMA;

•the cost of establishing, maintaining and overseeing a quality system compliant with GCP (quality regulations, guidance and standards applicable to oversight of Clinical Trials, if any);

•the costs of establishing, maintaining and overseeing a quality system compliant with current Good Manufacturing Practice, or cGMP, and other quality standards applicable to non-drug and drug product development and a supply chain for the development and manufacture of our product candidates;

•any disruption or delays to the supply of our product candidates due to the COVID-19 pandemic;

•the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us related to our product candidates or our development platform, or other technologies;

•the effect of competing technological and market developments;

•the cost and timing of establishing, expanding and scaling compliance programs related to our activities and product candidate development and commercialization and related legal activities, including defense of any potential litigation against us;

•the cost and timing of establishing, expanding and scaling of manufacturing capabilities, or contracting with third parties for access to such capabilities; and

•the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval or identify alternate regulatory pathways in regions where we choose to commercialize our products.

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We do not have any committed external source of funds or other support for our development efforts and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product revenue or, if we were to enter into third-party agreements, royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, your ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourselves. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or one or more of our other research and development initiatives. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline, causing you to lose all or part of your investment.

Clinical development is a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any product candidates, which could impair our ability to fund our operations or obtain financing on acceptable terms, or at all.

To obtain the requisite regulatory approvals to commercialize any of our product candidates that we decide to develop as a drug product candidate, we must demonstrate through extensive preclinical studies and Clinical Trials that our product candidates are safe and effective in humans for their intended use. Clinical Studies to commercialize non-drug products also require a significant financial investment to generate data that supports claims we may make for such products and establish their safety and tolerability. Clinical testing is expensive, difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. We may be unable to establish, where applicable, endpoints, dose levels and regimens or bioanalytical assay methods that applicable regulatory authorities would consider clinically meaningful or legally permissible. A Clinical Study or Clinical Trial can fail at any stage of testing. Additionally, our Clinical Studies, Clinical Trials or other studies may not result in data that supports intended claims for our product candidates. The outcome of preclinical studies, Clinical Studies and early Clinical Trials may not be predictive of the success of later preclinical studies, Clinical Studies and/or Clinical Trials, and interim results of these studies or trials do not necessarily predict final results. In particular, differences in trial design between Clinical Studies and early-stage Clinical Trials and later-stage Clinical Trials make it difficult to extrapolate from the results of Clinical Studies and earlier Clinical Trials to the results from later Clinical Trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and Clinical Trials have nonetheless failed to obtain marketing approval of their product candidates, or have data that supports desirable marketing claims even where marketing approval is not required. Successful completion of Clinical Trials is a prerequisite to submitting an NDA to the FDA, or its equivalent in other jurisdictions such as a marketing authorization application to the EMA, for each product candidate targeting therapeutic indication(s) and, consequently, a pre-requisite for the ultimate approval and commercial marketing of any product candidate for therapeutic indication(s).

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We do not know whether we will be able to initiate or complete Clinical Trials for product candidates we decide to develop as drug product candidates on schedule, if at all. Additionally, we may determine as a result of factors in or out of control to terminate plans or efforts in connection with planned Clinical Studies or Clinical Trials. For example, if we do not have sufficient funds to finance our planned Clinical Studies or Clinical Trials or the FDA or equivalent regulatory authority has requirements we are not able to comply with, or that we decide to not comply with, we may need to delay or cancel one or more of our planned Clinical Studies or Clinical Trials.

We may experience delays in completing our preclinical studies and initiating or completing Clinical Studies and, for those product candidates that we decide to develop as drug product candidates, Clinical Trials. We also may experience numerous unforeseen events during, or as a result of, any future Clinical Studies or Clinical Trials that we may conduct that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including, but not limited to:

•unforeseen events or events over which we have little to no control, such as the COVID-19 pandemic, can cause execution delays for our Clinical Studies or Clinical Trials, and issues related to the quality, completeness and interpretability of our data that could result in significant delays or additional costs and impact development plans for our product candidates;

•we may be unable to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of Clinical Trials for therapeutic indications for any drug product candidates or the marketing of our products as non-drug products;

•the FDA may not allow us to use data from our Clinical Studies to support a late-phase IND Clinical Trial or an IND Clinical Trial of any phase for AXA1665, AXA1125 or any other product candidate we decide to develop as a drug product candidate instead of a non-drug product candidate;

•the FDA or other regulatory authorities may disagree with the design, implementation or results of our Clinical Studies or Clinical Trials, which may delay or prevent us from pursuing certain regulatory pathways for product developments, or require us to submit additional data such as long-term toxicology studies or impose other requirements before permitting us to initiate or complete a Clinical Trial of any phase. For example, the FDA could require that we terminate a Clinical Study for a product candidate and continue such study only under an IND, and we may not be able to obtain such an IND, or we may be subject to an enforcement action for conducting a Clinical Study not under an IND. Additionally, although we hope to use data from Clinical Studies that we have completed for AXA1665 and AXA1125 to support initial Clinical Trials in late phases (Phase 2 or registrational trials), the FDA may not authorize us to pursue a Clinical Trial for one or more of these product candidates in a late phase or at all;

•regulatory authorities, IRBs or ethics committees may not authorize us or our investigators to commence or conduct a Clinical Study or Clinical Trial at a prospective study or trial site or may request early termination of a Clinical Study or Clinical Trial;

•we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective study or trial sites and prospective contract research organizations, or CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and study or trial sites;

•Clinical Studies or Clinical Trials of any of our product candidates may produce negative or inconclusive results and we may need to conduct additional preclinical studies, Clinical Studies, Clinical Trials or any other studies, or we may decide to abandon product development programs;

•the number of subjects or patients required for Clinical Studies or Clinical Trials of any of our product candidates may be larger than we anticipate, enrollment in these clinical studies or trials may be slower than we anticipate or subjects or patients may withdraw from these clinical studies or trials prior to completion or fail to return for required follow-up post study or trial completion at a higher rate than we anticipate;

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•we may need to add new or additional Clinical Study or Clinical Trial sites for various reasons, for example, our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the Clinical Study or Clinical Trial protocol or stop providing services for the study or trial, which may require that we add new clinical study or trial sites or investigators;

•the cost of preclinical studies, Clinical Studies, Clinical Trials or any other studies of any product candidates may be more than we anticipate or more than our available financial resources;

•the supply or quality of our product candidates or other materials necessary to conduct Clinical Studies and Clinical Trials, for which we expect to continue to rely on third party manufacturers and suppliers, may be insufficient or inadequate and may not achieve compliance with applicable cGMP and other quality standards applicable to drug or non-drug product development for various reasons including any potential failure of our oversight of their services or any potential inability of such third parties to successfully execute services in compliance with applicable rules and regulations;

•our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulatory authorities, IRBs or ethics committees to suspend or terminate our Clinical Studies and Clinical Trials, or reports may arise from preclinical or clinical testing of our product candidates that raise safety or other concerns about one or more of our product candidates;

•preclinical studies, Clinical Studies or Clinical Trials of our product candidates may produce negative or inconclusive results, which may result in our deciding, or being required, to conduct additional clinical studies or trials or abandon product development programs; and

•adverse events in a Clinical Study of a product candidate may cause the FDA or comparable foreign regulatory authorities to only allow future studies of such product candidate to proceed under an IND, if at all.

We could also encounter delays if a preclinical study, Clinical Study or Clinical Trial is suspended or terminated for any reason. Interruptions or suspensions of Clinical Studies or Clinical Trials related to the COVID-19 pandemic could result in issues related to the quality, completeness and interpretability of the data from such Clinical Studies or Clinical Trials or otherwise result in delays or increased costs in our development plans. A suspension or termination may be imposed due to a number of factors, including failure to conduct the Clinical Study or Clinical Trial in accordance with regulatory requirements or our clinical protocols, inspection of the Clinical Study or Clinical Trial operations or trial site by the FDA, comparable foreign regulatory authorities or IRB resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, including death of a study subject, failure to demonstrate a benefit from using a product or treatment, failure to establish or achieve clinically meaningful or legally permissible endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the Clinical Study or Clinical Trial. Many of the factors that cause, or lead to, a delay in the commencement or completion of Clinical Studies or Clinical Trials may also ultimately lead to the denial of regulatory approval of our product candidates for therapeutic indications, where applicable, or the failure to meet applicable regulatory requirements to support and commercialize non-drug products. Further, the FDA or comparable foreign regulatory authorities may disagree with our Clinical Study or Clinical Trial design and our interpretation of data from these clinical studies or trials, or may change the requirements for regulatory approval of a drug even after they have reviewed and commented on the design for our preclinical studies, Clinical Studies or Clinical Trials.

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Our product development costs will increase, or our operations may be hindered or prevented if we experience delays in clinical testing and marketing approvals, if applicable, or otherwise meeting regulatory requirements to commercialize our product candidates. We do not know whether any of our preclinical studies, Clinical Studies or Clinical Trials, if applicable, will begin or be completed as planned, will need to be restructured or will be completed on schedule, or at all. Significant delays in our preclinical studies, Clinical Studies or Clinical Trial also could shorten any periods during which we may have the exclusive right to commercialize our product candidates and may allow our competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates and harming our business and results of operations. Any delays in our preclinical or future clinical development programs may harm our business, financial condition and prospects significantly, and could impair our ability to fund our operations or obtain financing on acceptable terms, or at all.

Risks related to our business, technology and industry