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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, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _ TO _            
COMMISSION FILE NUMBER 001-38501
______________________________________________________________________________
AXCELLA HEALTH INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________
Delaware26-3321056
(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, $0.001 par value per share
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 filerAccelerated filer
Non-accelerated filerSmaller 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 October 28, 2022, the registrant had 73,554,837 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 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 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 I, 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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SUMMARY OF MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
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.
Substantial doubt exists as to our ability to continue as a going concern.
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.
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.
Regulatory requirements for development of our product candidates as drugs or as non-drug products are uncertain and evolving. Should we choose to develop any product candidate in parallel for more than one indication, the results from a Clinical Study or Clinical Trial in one indication, particularly any observation of a serious adverse event, may impact the Clinical Study or Clinical Studies or Clinical Trial or Clinical Trials in another indication. 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 Clinical Trials, and to assist us in meeting the regulatory requirements applicable to the 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.
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Our product candidates require precise, high-quality manufacturing capabilities. If any of our third-party manufacturers encounter difficulties in manufacturing our product candidates, our ability to provide supply of our product candidates for Clinical Studies or Clinical Trials, or for future commercial supply of products we bring to market under applicable regulatory requirements and approvals, could be delayed or terminated, or we may be unable to maintain a commercially viable cost structure.
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 condensed 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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AXCELLA HEALTH INC.
FORM 10-Q
TABLE OF CONTENTS
Page
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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 data)
As of
September 30,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents$25,425 $23,574 
Marketable securities 31,474 
Prepaid expenses and other current assets1,806 1,598 
Total current assets27,231 56,646 
Property and equipment, net999 870 
Operating lease right-of-use asset2,347  
Other assets211 211 
Total assets$30,788 $57,727 
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable$3,633 $4,301 
Accrued expenses and other current liabilities6,994 5,849 
Current portion of long-term debt4,000  
Convertible notes5,939  
Operating lease liability1,544  
Total current liabilities22,110 10,150 
Long-term debt, net of current portion and discount15,126 25,070 
Operating lease liability, net of current portion985  
Other liabilities119 499 
Total liabilities38,340 35,719 
Commitments and contingencies (Note 11)  
Stockholders' equity (deficit):
Common stock, $0.001 par value; 150,000,000 shares authorized, 53,072,008 and 39,605,701 shares issued and 52,653,027 and 39,186,720 shares outstanding at September 30, 2022 and December 31, 2021, respectively
53 40 
Additional paid-in capital387,822 359,261 
Treasury stock, 418,981 shares at cost
  
Accumulated other comprehensive loss (52)
Accumulated deficit(395,427)(337,241)
Total stockholders' equity (deficit)(7,552)22,008 
Total liabilities and stockholders' equity $30,788 $57,727 
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,
2022202120222021
Operating expenses:
Research and development$13,317 $10,130 $43,727 $30,668 
General and administrative3,776 4,773 12,315 13,975 
Total operating expenses17,093 14,903 56,042 44,643 
Loss from operations(17,093)(14,903)(56,042)(44,643)
Other income (expense):
Interest income123 32 210 115 
Interest expense(828)(742)(2,284)(2,204)
Other expense(43) (70)(5)
Total other income (expense), net(748)(710)(2,144)(2,094)
Net loss$(17,841)$(15,613)$(58,186)$(46,737)
Net loss per share, basic and diluted$(0.34)$(0.41)$(1.19)$(1.23)
Weighted average common shares outstanding, basic and diluted52,645,370 38,195,583 48,937,015 37,861,970 
Comprehensive loss:
Net loss$(17,841)$(15,613)$(58,186)$(46,737)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities66 2 52 27 
Comprehensive loss$(17,775)$(15,611)$(58,134)$(46,710)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AXCELLA HEALTH INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
September 30,
20222021
Cash flows from operating activities:
Net loss$(58,186)$(46,737)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization290 213 
Stock-based compensation3,053 4,772 
Non-cash interest expense407 477 
Non-cash lease expense(46) 
Other non-cash items177 619 
Changes in current assets and liabilities:
Prepaid expenses and other current assets(186)171 
Accounts payable(680)736 
Accrued expenses and other current liabilities1,121 (835)
Net cash used in operating activities(54,050)(40,584)
Cash flows from investing activities:
Purchases of property and equipment(407)(275)
Purchases of marketable securities (23,234)
Proceeds from sales and maturities of marketable securities31,349 18,326 
Net cash provided by (used in) investing activities30,942 (5,183)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs25,431 1,920 
Proceeds from convertible notes6,000  
Proceeds from exercise of common stock options and ESPP90 163 
Principal repayments of debt(6,000) 
Payment of terminal fee obligation and debt issuance costs(422)(1,726)
Repayments of the principal portion of finance lease(140)(89)
Net cash provided by financing activities24,959 268 
Net increase (decrease) in cash and cash equivalents1,851 (45,499)
Cash and cash equivalents, beginning of period23,574 71,590 
Cash and cash equivalents, end of period$25,425 $26,091 
Supplemental cash flow information:
Cash paid for interest$1,875 $1,727 
Supplemental disclosure of non-cash activities:
Obtaining a right-of-use asset in exchange for an operating lease liability$3,340 $ 
Purchases of property and equipment included in accounts payable$14 $ 
Issuance costs incurred but unpaid at period end$97 $ 
Property and equipment acquired through a capital lease$ $534 
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)
Three and Nine Months Ended September 30, 2021
Common stockAdditional
paid-in capital
Accumulated other comprehensive
 income (loss)
Accumulated deficitTotal
stockholders’ equity
SharesPar value
BALANCE - January 1, 202138,022,273 $38 $347,990 $(34)$(272,613)$75,381 
Costs incurred for the issuance of common stock4 4 
Exercise of common stock options27,143 — 27 27 
Vesting of restricted stock units60,000 — — — 
Stock-based compensation1,428 1,428 
Unrealized gain on marketable securities7 7 
Net loss(15,189)(15,189)
BALANCE - March 31, 202138,109,416 $38 $349,449 $(27)$(287,802)$61,658 
Issuance of common stock, net of issuance costs of $71
126,527 1 555 556 
Exercise of common stock options3,257 — 6 6 
Vesting of restricted stock units4,604 — — — 
Issuance of common stock related to ESPP30,465 — 107 107 
Stock-based compensation1,677 1,677 
Unrealized gain on marketable securities18 18 
Net loss(15,935)(15,935)
BALANCE - June 30, 202138,274,269 $39 $351,794 $(9)$(303,737)$48,087 
Issuance of common stock, net of issuance costs of $56
321,149 — 1,395 1,395 
Exercise of common stock options81,433 — 23 23 
Vesting of restricted stock units12,104 — — — 
Stock-based compensation1,667 1,667 
Unrealized gain on marketable securities2 2 
Net loss(15,613)(15,613)
BALANCE - September 30, 202138,688,955 $39 $354,879 $(7)$(319,350)$35,561 

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AXCELLA HEALTH INC.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)
(in thousands, except share data)
 Three and Nine Months Ended September 30, 2022
Common stockAdditional
paid-in capital
Accumulated other comprehensive
 income (loss)
Accumulated deficitTotal
stockholders’ equity (deficit)
SharesPar value
BALANCE - January 1, 202239,605,701 $40 $359,261 $(52)$(337,241)$22,008 
Issuance of common stock, net of issuance costs of $223
13,321,602 13 25,413 25,426 
Exercise of common stock options8,499 — 6 6 
Vesting of restricted stock units59,019 — — — 
Stock-based compensation1,509 1,509 
Unrealized loss on marketable securities(18)(18)
Net loss(19,039)(19,039)
BALANCE - March 31, 202252,994,821 $53 $386,189 $(70)$(356,280)$29,892 
Costs incurred for the issuance of common stock— — 30 30 
Vesting of restricted stock units5,797 — — — 
Issuance of common stock related to ESPP57,751 — 84 84 
Stock-based compensation594 594 
Unrealized gain on marketable securities4 4 
Net loss(21,306)(21,306)
BALANCE - June 30, 202253,058,369 $53 $386,897 $(66)$(377,586)$9,298 
Costs incurred for the issuance of common stock— — (25)(25)
Vesting of restricted stock units13,639 — — — 
Stock-based compensation950 950 
Unrealized gain on marketable securities66 66 
Net loss(17,841)(17,841)
BALANCE - September 30, 202253,072,008 $53 $387,822 $ $(395,427)$(7,552)
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
Company Overview
Axcella Health Inc., doing business as “Axcella Therapeutics,” and subsidiaries ("Axcella," the "Company," "we" or "us") is a clinical-stage 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 using compositions of endogenous metabolic modulators, or EMMs. 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's pipeline includes lead therapeutic candidates for the treatment of non-alcoholic steatohepatitis, or NASH, and for the treatment of Long COVID (also known as Post COVID-19 Condition and Post-Acute Sequelae of COVID-19, or “PASC”) associated fatigue.
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.
Going Concern
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. Consequently, management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within 12 months after the date these interim financial statements herein are issued.
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Historically, the Company has funded its operations with proceeds from sales of preferred and common stock and borrowings under a loan and security agreement. The Company may never commercialize a product and achieve profitability, and unless and until it does, the Company will need to raise additional capital. The Company has had recurring losses since inception and incurred losses of $17.8 million and $58.2 million during the three and nine months ended September 30, 2022, respectively, and an accumulated deficit of $395.4 million. Net cash used in operations for the nine months ended September 30, 2022 was $54.1 million. The Company has spent, and expects to continue to spend, significant funds to continue development of its current and potential future pipeline candidates and continue to generate operating losses for the foreseeable future. As of September 30, 2022, the Company had cash and cash equivalents of $25.4 million. In September 2022, the Company received $6.0 million from the issuance of convertible notes to funds associated with Flagship Pioneering and, in October 2022, the Company secured an additional $28.1 million in net proceeds through a registered direct offering of common stock. As part of the registered direct offering, the $6.0 million convertible notes were automatically converted into the Company's common stock. In accordance with its loan and security agreement with SLR Investment Corp., the Company is required to comply with an unrestricted minimum cash level of $20.0 million until certain clinical trial data conditions are met, and there is a risk that the Company may be unable to remain in compliance with those financial covenants in the future in which case the debt may become immediately due and payable. Based on its current operating plan, the Company believes that it has sufficient cash, cash equivalents and marketable securities to fund its operations into the second quarter of 2023, however, if the Company is unable to satisfy the financial covenants, and SLR Investment Corp. seeks immediate repayment of the loan in full, the Company believes that its cash, cash equivalents and marketable securities will be sufficient to fund its operations into the late first quarter of 2023. The Company does not have sufficient cash, cash equivalents, and marketable securities to support current operations through a full 12 months from the issuance date of this Quarterly Report on Form 10-Q. Accordingly, the foregoing conditions, taken together, raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of these condensed consolidated financial statements. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company will be seeking additional financing options to raise additional capital going forward. However, there is no assurance the Company will be successful in obtaining such additional financing on terms acceptable to it, if at all, and it may not be able to enter into other arrangements to obtain additional financing, and therefore cannot be deemed probable. As a result the Company has concluded that these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
If the Company is unable to obtain additional financing, it could be forced to delay, reduce or eliminate the Company’s research and development programs, expansion or commercialization efforts, which could adversely affect its business prospects and ability to continue operations.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
Furthermore, the accompanying condensed consolidated financial statements are unaudited and 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. On January 1, 2022, the Company adopted ASU No. 2016-02, Leases (Topic 842) and the related accounting policies. Other than the adoption of Topic 842, there were no material changes to the Company's significant accounting policies and estimates as reported in its Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 30, 2022. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements as of and for the year ended December 31, 2021. The accompanying interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2022, the results of its operations for the three and nine months ended September 30, 2022 and 2021, its cash flows for the nine months ended September 30, 2022 and 2021, and its statements of stockholders’ equity (deficit) for the three and nine months ended September 30, 2022 and 2021.
The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2021, and the notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Axcella Health Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the CEO, who is the chief operating decision maker, in making decisions on how to allocate resources and assess performance. The Company operates in one reportable business segment.
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, liabilities, equity, expenses and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the Company’s ability to continue as a going concern. 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.
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Cash and Cash Equivalents
Cash and cash equivalents include cash held in banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value. The Company considers all highly liquid investments with a remaining maturity when purchased of three months or less to also be cash equivalents.
Marketable Securities
The Company’s marketable securities, which consisted of corporate debt obligations as of December 31, 2021, were classified as available-for-sale and reported at fair value. Unrealized gains and losses on available-for-sale securities 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 condensed 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 condensed consolidated statements of operations and comprehensive loss. No such adjustments were necessary as of December 31, 2021.
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’s cash equivalents as of September 30, 2022 consisted of bank deposits and money market funds that invest in U.S. treasury securities. The Company invests in high-quality financial instruments and its portfolio does not consist of any instrument with a maturity duration in excess of twenty-four months, which the Company believes limits it's credit risk.
In addition, 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.
Fair Value Measurements
Certain assets and liabilities of the Company are carried at fair value. 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.
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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 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 its debt approximates fair value as evidenced by the recent amendment to the Company's debt facility.
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 three and nine months ended September 30, 2022, the Company’s only element of other comprehensive loss was unrealized gains (losses) on marketable securities.
Net Loss Per Share
Basic net loss per share attributable to common stockholders is calculated by dividing net loss by the weighted average shares outstanding during the period. Diluted net income (loss) per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period. All common stock equivalents have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented.
Newly Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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. Under the standard, disclosures are required to enable financial statement users to assess the amount, timing, and uncertainty of cash flows arising from the leases. Companies are also required to recognize and measure leases existing at, or entered into after, the adoption date using a modified retrospective approach, with certain practical expedients available. Comparative periods prior to adoption have not been retrospectively adjusted.
Effective January 1, 2022, the Company adopted ASU 2016-02, using the required modified retrospective approach and utilizing January 1, 2022 as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases (Topic 840).
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company does not have material financing leases.
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Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects an internally developed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. Prospectively, the Company will adjust the right-of-use assets for straight-line rent expense or any incentives received and remeasure the lease liability at the net present value using the same incremental borrowing rate that was in effect as of the lease commencement or transition date.
The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.
ASC 842 transition practical expedients and application of transition provisions to leases at the transition date
The Company elected the following practical expedients, which must be elected as a package and applied consistently to all of its leases at the transition date (including those for which the entity is a lessee or a lessor): i) the Company did not reassess whether any expired or existing contracts are or contain leases; ii) the Company did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840 are classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases); and iii) the Company did not reassess initial direct costs for any existing leases.
For leases that existed prior to the date of initial application of ASC 842 (which were previously classified as operating leases), a lessee may elect to use either the total lease term measured at lease inception under ASC 840 or the remaining lease term as of the date of initial application of ASC 842 in determining the period for which to measure its incremental borrowing rate. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates.
Application of ASC 842 policy elections to leases post adoption
The Company has made certain policy elections to apply to its leases executed post adoption, or subsequent to January 1, 2022, as further described below.
In accordance with ASC 842, components of a lease should be split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.
Entities may elect not to separate lease and non-lease components. Rather, entities would account for each lease component and related non-lease component together as a single lease component. The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only.
ASC 842 allows for the use of judgment in determining whether the assumed lease term is for a major part of the remaining economic life of the underlying asset and whether the present value of lease payments represents substantially all of the fair value of the underlying asset. The Company applies the bright line thresholds referenced in ASC 842-10-55-2 to assist in evaluating leases for appropriate classification. The aforementioned bright lines are applied consistently to the Company’s leases.
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On January 1, 2022, the Company recorded right-of-use asset of $3.3 million and lease liability of $3.6 million. The standard did not have a material impact on the statement of operations or statement of cash flows. Additionally, there is no tax impact from the adoption as the net increase in deferred tax assets is fully offset with an increase to the valuation allowance.
Accounting Pronouncements Issued and Not Adopted
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 cost 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 condensed consolidated financial statements.
Tax Related
The 2017 Tax Cuts and Jobs Act amended IRC Section 174 to require that specified research and experimental (SR&E) expenditures be capitalized and amortized which applies to tax years beginning January 1, 2022, or later. On August 16, 2022, the Inflation Reduction Act of 2022 (IRA) was signed into law. This is a broad package of legislation which includes a number of tax-related provisions, including: (a) a 15 percent book minimum tax on “adjusted financial statement income of applicable corporations, (b) a plethora of clean energy tax incentives in the form of tax credits, and (c) a 1 percent excise tax on certain corporate stock buybacks. The Company does not expect a material impact and will continue to monitor and evaluate impacts on its condensed consolidated financial statements.
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3. MARKETABLE SECURITIES
During the three and nine months ended September 30, 2022, the Company sold marketable securities worth $7.0 million and $15.9 million, respectively. For the nine months ended September 30, 2022, the Company recognized realized losses on the sale of those securities of less than $0.1 million, and reclassified amounts out of accumulated other comprehensive loss during the periods. As a result, as of September 30, 2022, the Company did not hold any marketable securities.
As of December 31, 2021, marketable securities by security type consisted of the following (in thousands):
December 31, 2021
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Corporate obligations$31,526 $ $(52)$31,474 
The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. At December 31, 2021, the balance in accumulated other comprehensive loss was comprised solely of activity related to marketable securities. For the nine months ended September 30, 2021, there were no sales of marketable securities and no realized gains or losses on the sale or maturity of marketable securities.
The aggregate fair value of marketable securities by contractual maturity were as follows (in thousands):
Contractual MaturitiesDecember 31,
2021
Mature in one year or less$28,220 
Mature in two years or less3,254 
Total$31,474 

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4. FAIR VALUE MEASUREMENTS
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 (in thousands):
Fair Value Measurements at September 30, 2022 using:
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$22,925 $ $ $22,925 
Total$22,925 $ $ $22,925 
Fair Value Measurements at December 31, 2021 using:
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$23,021 $ $ $23,021 
Marketable securities:
Corporate obligations 31,474  31,474 
Total$23,021 $31,474 $ $54,495 
As of September 30, 2022 and December 31, 2021, the Company’s cash equivalents were invested in money market funds and were valued based on Level 1 inputs. The Company’s marketable securities consist of corporate obligations which are adjusted to fair value at each balance sheet date, based on quoted prices, which are considered Level 2 inputs. During the three and nine months ended September 30, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
September 30,
2022
December 31,
2021
Laboratory equipment$3,671 $3,426 
Leasehold improvements564 564 
Office and computer equipment322 148 
Furniture and fixtures122 122 
Property and equipment4,679 4,260 
Less: accumulated depreciation and amortization(3,680)(3,390)
Property and equipment, net$999 $870 
Depreciation and amortization expense was $0.3 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively. There were no disposals for the nine months ended September 30, 2022. Property and equipment totaling $0.3 million was disposed of for the nine months ended September 30, 2021, and no gains or losses were recorded.
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6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following (in thousands):
September 30,
2022
December 31,
2021
Accrued employee compensation and benefits$1,737 $3,005 
Accrued external research and development expenses4,404 2,000 
Accrued professional fees650 601 
Other203 243 
Total accrued expenses and other current liabilities$6,994 $5,849 
7. DEBT
Debt consisted of the following (in thousands):
September 30,
2022
December 31,
2021
Principal amount of long-term debt$20,000 $26,000 
Debt discount(165)(196)
Deferred financing fees(709)(734)
Current portion of long-term debt(4,000) 
Long-term debt, net of current portion and discount$15,126 $25,070 
In 2021, the Company entered into a loan and security agreement (the "New Loan and Security Agreement") with SLR Investment Corp., formerly known as Solar Capital Ltd., for term loans in an aggregate principal amount of $26.0 million. The New Loan and Security Agreement replaced the prior loan and security agreement between the Company and SLR Investment Corp. (the "Prior Loan and Security Agreement").
The term loans under the New Loan and Security Agreement will accrue interest at an annual rate equal to 8.60% plus the greater of (a) the thirty (30) day U.S. Dollar LIBOR rate and (b) 0.10%, payable monthly in arrears. The interest rate was 11.23% as of September 30, 2022. The monthly principal payments of $0.4 million will be paid over a period of 45 months beginning in January 2023 through the final maturity date of September 1, 2026. Per the New Loan and Security Agreement, the date on which repayment of principal commences can be further extended to July 2023 and January 2024, provided the Company satisfies certain equity related conditions. The term loans are also subject to a prepayment fee of 3.00% if prepayment occurs within the first year subsequent to September 2, 2021, 2.00% in the second year and 1.00% in the third year through final maturity.
The New Loan and Security Agreement also contains certain financial covenants, including an unrestricted minimum cash level until certain clinical trial study data conditions are met. Customary representations and warranties, as well as certain non-financial covenants, including engaging in any change of control transaction or incurring additional indebtedness or liens are included in the New Loan and Security Agreement as well. As security for its obligations under the New Loan and Security Agreement, the Company granted SLR Investment Corp. a first priority perfected security interest in all of the Company’s existing and after-acquired assets, including intellectual property.
In September 2022, the Company made a $6.4 million prepayment to SLR Investment Corp. under the New Loan and Security Agreement, including principal payments of $6.0 million and payment of a terminal fee obligation of $0.4 million.
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The scheduled principal maturity of the long-term debt as of September 30, 2022 is as follows (in thousands):
Year Ending December 31,
2022 (remaining 3 months)$ 
20235,333 
20245,333 
20255,334 
20264,000 
$20,000 
Refer to Note 13, Subsequent Events, for a discussion of the extension of the interest only period.
8. CONVERTIBLE NOTES
On September 20, 2022, the Company received $6.0 million from existing investor Flagship Pioneering through the issuance of convertible notes. The convertible notes mature one year from the date of issuance and bear interest at the rate of 8.00% per annum payable upon the earlier of (i) voluntary conversion of the notes in accordance with the terms therein and (ii) the maturity date. Upon a change of control, the convertible notes and all accrued and unpaid interest shall be due and payable in full. All principal and accrued interest under the convertible notes will automatically convert at the Company’s next equity financing at a conversion price equal to the lower of: (a) the closing price of the common stock on the conversion date; or (b) the average closing price of the common stock for the five trading days immediately preceding the conversion date. The convertible notes are subordinate and junior in right of payment to the senior secured debt issued pursuant to the New Loan and Security Agreement with SLR Investment Corp.
The Company determined that the convertible notes contain cash redemption features and share settled put options which do not result in a variable repayment amount, therefore these features do not require bifurcation from the notes. The Company allocated the full proceeds to the convertible notes and has classified the outstanding principal and interest balance, net of estimated issuance costs, as a current liability in the condensed consolidated balance sheet.
Refer to Note 13, Subsequent Events, for a discussion of the conversion of the notes on October 13, 2022.
The following table contains a summary of the notes (in thousands):
September 30,
2022
December 31,
2021
Principal amount of convertible notes$6,000 $ 
Interest on convertible notes13  
Issuance costs(74) 
Convertible notes$5,939 $ 

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9. STOCKHOLDERS' EQUITY
Common Stock
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 $35.0 million from time to time through SVB Leerink, acting as its agent (the “ATM Offering”). During the nine months ended September 30, 2022, the Company sold an aggregate of 232,600 shares of its common stock under the ATM Offering for net cash proceeds of $0.6 million, after deducting nominal commissions and expenses.
In March 2022, the Company completed a registered direct offering and in this transaction, and sold 13,089,002 shares of common stock were sold at the market for a purchase price of $1.91 per share, yielding net proceeds of approximately $24.8 million, after deducting expenses of approximately $0.2 million.
2019 Stock Option and Incentive Plan 
The 2019 Stock Option and Incentive Plan (the "2019 Plan") was approved by the Company's board of directors on April 29, 2019. 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. Awards under the 2019 plan generally vest ratably over the vesting period (3-4 years) and have a maximum term of 10 years. The number of shares initially reserved for issuance under the 2019 Plan is 905,000, which was increased on January 1, 2020 and will be increased each January 1 thereafter by 4% of the number of shares of the Company's common stock outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company's board of directors or compensation committee of the board of directors. The number of options available for future grant under the 2019 Plan was 1,021,909 as of September 30, 2022.
2019 Employee Stock Purchase Plan
The 2019 Employee Stock Purchase Plan (the "2019 ESPP") was approved by the Company's board of directors on April 29, 2019. A total of 237,181 shares of common stock were initially reserved for issuance under this plan, which was cumulatively increased on January 1, 2020 and will be increased each January 1 thereafter by 1% of the number of shares of the Company's common stock outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company's board of directors or compensation committee of the board of directors.
The number of shares available for future issuance under the 2019 ESPP was 788,670 shares as of September 30, 2022.
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Stock-Based Compensation Expense
In connection with all share-based payment awards, total stock-based compensation expense recognized was as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended September 30,
2022202120222021
Research and development
$472 $455 $1,313 $1,305 
General and administrative
478 1,212 1,740 3,467 
Total stock-based compensation expense$950 $1,667 $3,053 $4,772 
Fair Value of Stock Options
The fair value of stock option awards was estimated using the Black-Scholes option-pricing model. The expected term of these awards was determined using the simplified method, which uses the midpoint between the vesting date and the contractual term. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the stock awards. The expected dividend was zero as the Company had not paid any dividends on its common stock. Finally, as the Company does not have long-term trading history of its common stock, the expected volatility was derived from the average historical stock volatilities of several public companies within the industry that the Company considers to be comparable to the Company's business over a period equivalent to the expected term of the stock-based awards.
The Black-Scholes option pricing model assumptions are included in the table below.
Three Months Ended
September 30,
Nine Months Ended September 30,
2022202120222021
Risk-free interest rate2.90 %1.08 %2.05 %0.84 %
Expected option life (in years)6.086.086.086.00
Expected dividend yield % % % %
Expected volatility 92.9 %93.1 %92.0 %96.8 %
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Stock Option Activity
The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2022:
Number of SharesWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
(in Years)
Intrinsic
Value
(in
thousands)
Outstanding as of January 1, 20226,197,288 $5.72 
Granted2,245,197 1.86 
Exercised(8,499)0.72 
Canceled(632,747)4.54 
Outstanding as of September 30, 2022
7,801,239 $4.71 7.34$231 
Exercisable as of September 30, 2022
4,290,929 $6.09 5.94$108 
Vested or expected to vest as of September 30, 2022
7,476,239 $4.64 6.95$205 
The intrinsic value of options exercised during the nine months ended September 30, 2022 and 2021 was nominal.
The weighted-average grant date fair value of the options granted during the nine months ended September 30, 2022 and 2021 was $1.11 and $4.25 per share, respectively.
As of September 30, 2022, there was $6.5 million of unrecognized compensation expense that is expected to be recognized over a weighted-average period of approximately 2.3 years.
Restricted Stock Units
The fair values of restricted stock units are based on the market value of the Company's common stock on the date of grant. The following table summarizes the Company's restricted stock unit activity for the nine months ended September 30, 2022:
Number of SharesWeighted Average
Grant Date Fair
Value per Share
Outstanding as of January 1, 2022275,350 $4.15 
Granted48,278 1.70 
Vested(78,455)4.14 
Forfeited(75,000)3.13 
Outstanding as of September 30, 2022
170,173 $3.91 
As of September 30, 2022, there was $0.3 million of unrecognized compensation expense that is expected to be recognized over a weighted-average period of approximately 1.4 years.
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10. 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,
2022202120222021
Numerator:
Net loss
$(17,841)$(15,613)$(58,186)$(46,737)
Denominator:
Weighted average common shares outstanding, basic and diluted
52,645,370 38,195,583 48,937,015 37,861,970 
Net loss per share, basic and diluted
$(0.34)$(0.41)$(1.19)$(1.23)
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,
20222021
Options to purchase common stock
7,801,239 6,030,046 
Unvested restricted stock units
170,173 345,409 
Shares issuable under employee stock purchase plan65,790 24,770 
Convertible notes3,546,687  
11,583,889 6,400,225 
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11. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases a facility containing 19,200 square feet of laboratory and office space, which is located at 840 Memorial Drive, Cambridge, Massachusetts. The lease expires in April 2024, subject to an option to extend the lease for an additional three years. The lease agreement and most recent amendment contained escalating rent payments.
The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases for the three and nine months ended September 30, 2022 (in thousands, except weighted average figures):
Operating leasesThree Months Ended September 30, 2022Nine Months Ended September 30, 2022
Lease cost
Operating lease cost$401 $1,204 
Variable lease cost160 527 
Total lease cost$561 $1,731 
Other information
Operating cash flows used for operating leases$582 $1,777 
Weighted average remaining lease term (years)1.61.6
Weighted average discount rate (percentage)9.0 %9.0 %
For the three and nine months ended September 30, 2022, the Company incurred $0.6 million and $1.7 million in operating lease expense, respectively, and made lease payments of $0.6 million and $1.8 million, respectively, with such amounts reflected in the condensed consolidated statements of cash flows in operating activities.
As the result of adopting ASU 2016-02 using the modified retrospective transition method, we did not restate periods prior to the adoption date of January 1, 2022. These periods continue to be presented in accordance with ASC 840. Future minimum lease payments and lease liabilities as of September 30, 2022 and December 31, 2021 were as follows (in thousands):
As of
Maturity of lease liabilitiesSeptember 30,
2022
December 31,
2021
2022$422 $1,672 
20231,722 1,722 
2024580 580 
Total future minimum lease payments$2,724 $3,974 
Less: imputed interest(195)
Total lease liability$2,529 
Reported as:
Operating lease liability$1,544 
Operating lease liability, net of current portion985 
Total lease liability$2,529 
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Other Commitments
We enter into contracts in the normal course of business with contract research organizations ("CROs"), contract manufacturing organizations ("CMOs") and other third parties for preclinical research studies, Clinical Studies, Clinical Trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancelable obligations of service providers, up to the date of cancellation.
Legal Proceedings
The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.
12. RELATED-PARTY TRANSACTIONS
On September 20, 2022, the Company issued convertible notes in an aggregate principal amount of $6.0 million to existing investor Flagship Pioneering. Refer to Note 8, Convertible Notes, for further discussion.
As discussed in Note 13, on October 13, 2022, the Company sold shares of common stock through a registered direct offering. As part of the registered direct offering, $6.0 million in convertible notes held by funds associated with Flagship Pioneering were converted into common stock.
13. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for financial statement purposes occurring through the date these condensed consolidated financial statements were issued.
In October 2022, the Company secured $28.1 million in net proceeds after deducting estimated offering expenses through a registered direct offering of common stock. As part of the registered direct offering, the $6.0 million convertible notes held by funds associated with Flagship Pioneering were automatically converted into the Company's common stock. In total, the Company sold 20,847,888 shares of common stock at a purchase price of $1.64 per share.
In October 2022, the Company satisfied an equity related condition under the New Loan and Security Agreement with SLR Investment Corp. that extended the date on which repayment of principal commences from January 2023 to July 2023.
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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 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 30, 2022. 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 Part I, 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 using compositions of endogenous metabolic modulators, or EMMs. 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 the treatment of non-alcoholic steatohepatitis, or NASH, and for the treatment of Long COVID (also known as Post COVID-19 Condition and Post-Acute Sequelae of COVID-19, or “PASC”) associated fatigue.
Using our discovery platform, we have efficiently designed product candidates that are comprised of amino acids and their derivatives, which have a general history of safe use. The orally administered EMM compositions that we have tested clinically to date in our development model have shown the potential to generate multifactorial effects in our initial Clinical Studies.
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 $17.8 million and $58.2 million for the three and nine months ended September 30, 2022, respectively. Net losses for the same periods ended September 30, 2021 were $15.6 million and $46.7 million, respectively. As of September 30, 2022, we had an accumulated deficit of $395.4 million. We expect to continue to incur significant expenses for at least the next several years as we continue to develop our product candidates.
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As of September 30, 2022, we had cash and cash equivalents of $25.4 million. We are required to comply with an unrestricted minimum cash level of $20.0 million in accordance with our loan and security agreement with SLR Investment Corp. until certain clinical trial data conditions are met, and there is a risk that we may be unable to remain in compliance with those financial covenants in the future in which case the debt may become immediately due and payable. Based on our current operating plan, we believe that we have sufficient cash, cash equivalents and marketable securities to fund our operations into the second quarter of 2023, however, if we are unable to satisfy the financial covenants contained in our loan and security agreement with SLR Investment Corp., and SLR Investment Corp. seeks immediate repayment of our loan in full, we believe that our cash, cash equivalents and marketable securities will be sufficient to fund our operations into the late first quarter of 2023. We do not have sufficient cash, cash equivalents and marketable securities to support current operations through a full 12 months from the issuance date of this Quarterly Report on Form 10-Q. We will need substantial additional funding to continue development of our current and potential future pipeline candidates. 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 re-financings, collaboration agreements, strategic alliances 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. Further, inflation may affect our use of capital resources by increasing our cost of labor and clinical trial expenses. We also intend to continue to evaluate options to refinance our outstanding debt with SLR Investment Corp. The amounts involved in any such transactions, individually or in the aggregate, may be material. These factors individually and collectively raise substantial doubt about our ability to continue as a going concern.
An overview of our current therapeutic product candidates and their planned next development steps is illustrated below:
https://cdn.kscope.io/8ea76a0d9ce1c835e8d7f64c683ec6f9-axla-20220930_g1.jpg

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AXA1125 for Nonalcoholic Steatohepatitis (NASH)
AXA1125 is currently being developed as an oral product candidate for the treatment of NASH. In 2021, our IND for this candidate was cleared by the FDA, enabling us to proceed directly into a global Phase 2b Clinical Trial that was initiated in the second quarter of 2021. We branded this global trial EMMPACT based on the potential for AXA1125, an EMM composition, to deliver meaningful, multifactorial clinical benefits to patients with NASH. Based on AXA1125’s differentiated, multi-targeted design and data from our earlier Clinical Studies, we believe this candidate holds the potential, if approved, to serve as a first-line NASH monotherapy for both adult and pediatric patients and be used in combination with other agents if required.
We have conducted two prior Clinical Studies of AXA1125 in subjects with presumed NASH. AXA1125 was generally well tolerated in both of these studies with meaningful and sustained reductions shown in key measures of hepatic fat, insulin resistance, inflammation and fibrosis. In 2020, Axcella completed its most recent Clinical Study of AXA1125, AXA1125-003. This was a 16-week (with a two-week follow-up), randomized, single-blind, placebo-controlled Clinical Study to assess safety, tolerability and impact on the liver structure and function of two distinct EMM compositions, AXA1125 and AXA1957, in 102 adult subjects with NAFLD. Key inclusion criteria for this study included having at least 10% fat by MRI-PDFF and a corrected T1, or cT1, a measure of liver injury by multiparametric MRI, of at least 830 mSec. Subjects were stratified by the presence or absence of T2D. In this study, subjects received either AXA1125, two different doses of AXA1957 or a calorie-matched placebo control twice a day, or BID. Results from the study showed that AXA1125 and AXA1957 were generally well-tolerated, with sustained reductions noted for both product candidates versus placebo in key biomarkers of metabolism, inflammation and fibrosis over 16 weeks.
We initiated our EMMPACT Phase 2b Clinical Trial for this candidate in the second quarter of 2021. This global randomized, double-blind, placebo-controlled, multi-center Clinical Trial is evaluating the efficacy, safety and tolerability of AXA1125 in adult patients with biopsy-confirmed F2/F3 NASH. Following a recent protocol amendment, approximately 300 subjects (an increase of 30 subjects over the original design to ensure sufficient liver biopsy data) will be enrolled and randomized 1:1:1 to receive either 45.2 or 67.8 grams per day of AXA1125 or a matched placebo in two divided doses for 48 weeks, with a four-week safety follow-up period. Patients will be stratified based on the presence or absence of type 2 diabetes.
In September 2022, we reported interim results from our EMMPACT Phase 2b Clinical Trial. These interim results report findings regarding the effects of AXA1125 administration on selected outcome measures after 12 and 24 weeks of treatment. This interim analysis was preplanned to be conducted when enrollment reached 30% of the original target population of 270 subjects with biopsy confirmed stage 2 or 3 NASH across all trial arms. Data from this ongoing blinded study included 82 subjects at week 12 and 58 subjects at week 24; approximately half of the subjects have type 2 diabetes mellitus (T2DM). In addition to effects on hepatic fat and alanine aminotransferase (ALT), previously reported in 2 other studies, this study also included vibration controlled transient elastography (FibroScan®), a widely accepted and accessible non-invasive test (NIT) that assesses both liver fat and stiffness. Specifically, the study examines liver stiffness, changes of which have been correlated with improvements in liver fibrosis and outcomes in clinical studies. Study participants were randomized 1:1:1 to receive either a placebo or 22.6g or 33.9g of AXA1125 twice daily.
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At 24-weeks there were statistically significant improvements in the liver stiffness measurement (LSM) compared to placebo in the high dose arm for all subjects. Absolute changes in LSM were 0.13, -2.01, and -4.07 kilopascals (kPa) in the placebo, low dose and high dose arms, respectively (p= 0.0992 and 0.0096 for the low and high dose, respectively, compared to placebo). These results were supported by statistically significant improvements in other NITs of liver fibrosis: ELF and FIB-4. Statistically significant improvements in ALT were seen at both weeks 12 and 24 in all subjects (placebo-adjusted difference of -28.61% (p=0.0183) and -36.3% (p=0.0017) for the low and high doses, respectively). All subjects experienced significantly greater changes from baseline in MRI-PDFF at 12-weeks compared to the change from baseline in the placebo group (placebo adjusted difference of -18.98% (p=0.0082) and -21.24% (p=0.0014) for the low and high doses, respectively). Numerical trends of improvement relative to placebo in PDFF were seen at week 24 but these were not statistically significant in the small number of subjects. Overall, these positive results confirm AXA1125’s multi-targeted impact, a differentiated approach to directly and simultaneously targeting multiple pathways that are dysregulated in NASH. Consistent with previous results, AXA1125 was found to be very safe and well-tolerated in this study. Both dose levels are active and will be continued. Consistent with prior clinical trials, T2DM showed results comparable to non-diabetics.
The Clinical Trial’s primary endpoint will assess the proportion of patients with a biopsy-confirmed ≥2-point improvement in their NAFLD Activity Score (NAS) after the 48-week treatment period. Secondary endpoints will include the proportion of patients achieving biopsy-confirmed resolution of NASH without worsening of fibrosis and the proportion of patients achieving a ≥1 stage improvement in fibrosis without worsening of NASH, as well as a range of non-invasive markers, such as MRI-PDFF, vibration controlled transient elastography (FibroScan®), liver enzymes and measures of insulin resistance.
AXA1125 for the Treatment of Long COVID
AXA1125 is also currently being developed as a product candidate for the treatment of Long COVID. In October 2021, we announced that our Clinical Trial Authorisation application, or CTA, for this candidate was cleared by the Medicines and Healthcare products Regulatory Agency, or MHRA, in the United Kingdom, enabling us to proceed directly into a Phase 2a Clinical Trial, which was initiated in the fourth quarter of 2021. Based on AXA1125’s differentiated, multi-targeted design and data from our earlier Clinical Studies, we believe this candidate holds the potential, if approved, to serve as a first-line Long COVID therapy for patients.
Following clearance of the CTA, we initiated a Phase 2a Clinical Trial of AXA1125. The Phase 2a trial is a randomized, double-blind, placebo-controlled investigation to evaluate the efficacy and safety of AXA1125 in patients with exertional fatigue related to Long COVID. 41 patients were enrolled and randomized to receive either 67.8 grams per day of AXA1125 or a matched placebo in two divided doses for 28 days, with a one-week safety follow-up period. This same daily dose of AXA1125 has already been investigated in a 12-week Clinical Study in subjects with presumed NASH and was generally well tolerated.
The Phase 2a trial’s primary endpoint was change in phosphocreatine (PCr) recovery time, as measured by 31-phosphorus magnetic resonance spectroscopy (MRS), from baseline to Day 28 as an assessment of improvement of mitochondrial function within the skeletal muscle. PCr recovery time is a well-established and highly sensitive measure that has been strongly correlated with the 6-minute walk test (6MWT), a functional measure that has been used as a registrational endpoint in several other diseases in which fatigue and muscle weakness play a central role. Key secondary endpoints include lactate levels, a 6MWT, patient reported fatigue scores assessed by the Chalder Fatigue Questionnaire (CFQ-11), and safety and tolerability. The CFQ-11 is a validated patient reported outcome measure of fatigue that has been used in measuring patient impact in fatigue states such as chronic fatigue syndrome. The Clinical Trial was conducted with researchers at Oxford University’s Radcliffe Department of Medicine in the United Kingdom.
In May 2022, we completed patient enrollment in our Phase 2a Clinical Trial and on August 2, 2022, and we reported topline results.
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Subjects who received AXA1125 had improvements in measures of mental and physical fatigue that were both highly statistically significant and clinically relevant compared to those who received placebo. Mean changes in total, physical and mental scores in the CFQ-11 versus placebo were -4.30 (p=0.0039), -2.94 (p=0.0097) and -1.32 (p=0.0097), respectively. Clinically meaningful shifts in the severity of physical and mental fatigue were also noted in subjects who received AXA1125 compared to those who received placebo. There was a statistically significant correlation of improvement in fatigue score and greater distance achieved in the 6MWT (p=0.0027), an objective measure of physical ability, only observed in subjects who received AXA1125 when compared to those receiving placebo. There was a notable trend toward significant improvement in serum lactate levels after a 6MWT in AXA1125 subjects (p=0.0730). AXA1125 was safe and well tolerated with no significant emergent adverse events or serious adverse events reported by study subjects.
Baseline PCr among all subjects was significantly higher and had a higher degree of inter-subject variability (92.46 seconds + 35.3 seconds) than previously reported in the literature. These findings support the hypothesis that there is significant mitochondrial dysfunction in these patients but limits the utility of this parameter in a clinical trial. The trial did not meet this exploratory primary endpoint of showing a change from baseline to week four in the PCr recovery rate following moderate exercise between subjects receiving AXA1125 and placebo.
We are engaged with the FDA and a foreign regulatory body with respect to the design of the next clinical trial including the endpoints, number of subjects and treatment duration. We expect to have additional clarity regarding the future development path of AXA1125 for Long COVID by the end of 2022. We are making plans for the next clinical trial that we tentatively expect to be initiated in the first half of 2023.
AXA1665 for the Reduction in Risk of Overt Hepatic Encephalopathy (OHE) Recurrence
AXA1665 is a product candidate for the reduction in risk of OHE recurrence in adult patients with liver cirrhosis. In 2021, we announced that our IND for this candidate was cleared by the FDA, enabling us to proceed directly into a Phase 2 Clinical Trial, which was initiated in the second quarter of 2021. We have branded the Phase 2 trial EMMPOWER based on the potential for AXA1665, an EMM composition, to help patients, physicians and other caregivers overcome significant challenges associated with cirrhosis and OHE. Based on AXA1665’s differentiated, multi-targeted design and data gathered to date, we believe this candidate holds the potential to reduce OHE events and improve the quality of life for cirrhotic patients.
We have conducted two prior Clinical Studies of AXA1665 in subjects with mild (Child Pugh A) and moderate (Child Pugh B) hepatic insufficiency. AXA1665 was generally well tolerated in both studies, with multifactorial effects seen in subjects. In 2020, Axcella completed its most recent Clinical Study of AXA1665, AXA1665-002. This was a 12-week (with a four-week follow-up) randomized, placebo-controlled Clinical Study to assess AXA1665’s safety, tolerability and impact on normal liver and muscle structures and functions in approximately 60 subjects with mild (Child A) and moderate (Child B) hepatic insufficiency. Results from the study showed that AXA1665 demonstrated dose dependent improvements across all three psychometric tests that were utilized.
Following FDA clearance of an IND application for AXA1665, we initiated our EMMPOWER Phase 2 Clinical Trial for this candidate in the second quarter of 2021. This global randomized, double-blind, placebo-controlled, multi-center investigation is evaluating the efficacy and safety of AXA1665 in patients who have experienced at least one prior OHE event and have neurocognitive dysfunction at screening. Approximately 150 patients on lactulose ± rifaximin (stratified by rifaximin use) will be randomized 1:1 to receive either 53.8 grams per day of AXA1665 or a matched placebo in three divided doses for 24 weeks, with a four-week safety follow-up period.
The Clinical Trial’s primary endpoint will assess the proportion of patients with a ≥2-point increase in the psychometric hepatic encephalopathy score (PHES) after the 24-week treatment period. Key secondary endpoints will focus on the proportion of patients experiencing an OHE breakthrough event and time to first OHE breakthrough event, including time to hospitalization. Other secondary endpoints include changes in physical function and patient-reported outcomes.
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In May 2022, we terminated our EMMPOWER Phase 2 Clinical Trial of AXA1665 for reduction in risk of recurrent OHE. We plan to evaluate options for AXA1665.
Effects of COVID-19 Pandemic
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. However, if we or any of the third parties with whom we engage 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 Condensed Consolidated 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.
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, 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, Clinical Trials 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 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 to support our continued research and development of our product candidates. 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), Net
Other income (expense), net primarily consists of interest income and interest expense. Interest income consists of interest earned on our investments in cash equivalents, money market funds, and high-quality fixed income securities. Interest expense consists of interest on outstanding borrowings under a loan and security agreement, the amortization expense of the debt discount and debt issuance costs, and interest paid for leased capital equipment.
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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Table of Contents
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended
September 30,
20222021Change
Operating expenses:
Research and development
$13,317 $10,130 $3,187 
General and administrative
3,776 4,773 (997)
Total operating expenses
17,093 14,903 2,190 
Loss from operations
(17,093)(14,903)