Equillium, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Equillium is a clinical-stage biotechnology company developing itolizumab (EQ001), with no product revenue to date.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $4.2m | $1.2m | $12.2m | $2.4m |
| General and administrative expense | $2.1m | $1.0m | $6.9m | $2.0m |
| Operating loss | $6.3m | $2.2m | $19.1m | $4.4m |
| Net loss | $6.0m | $4.9m | $18.0m | $8.3m |
| Basic and diluted loss per share | $0.35 | $0.44 | $1.04 | $0.76 |
| Cash used in operations | Not provided for quarter | Not provided for quarter | $13.9m | $3.7m |
At September 30, 2019, cash and cash equivalents were $27.7m and short-term investments were $34.6m, totaling $62.2m in available cash and investments. Total assets were $63.0m; total liabilities were $14.0m, including $9.6m of long-term notes payable; stockholders’ equity was $49.0m. Current assets of $62.9m compared with current liabilities of $4.3m. Accumulated deficit was $33.5m. No operating margin is meaningful because the company had no revenue.
Cash and cash equivalents decreased by $0.9m over the nine-month period, to $27.7m. Investing activities provided $3.2m, primarily reflecting investment maturities exceeding purchases; financing activities provided $9.9m from term loans.
Changes versus comparable periods
- Year-to-date R&D expense increased $9.8m, mainly due to clinical development, higher compensation and consulting, overhead, and preclinical activity.
- Year-to-date G&A expense increased $4.9m, primarily from compensation and consulting, public-company costs and travel, and professional fees.
- Year-to-date net loss more than doubled, while operating cash use rose from $3.7m to $13.9m as development activity and public-company expenses expanded.
- Interest expense fell to $2,000 year to date from $2.3m in 2018, largely because convertible notes and associated noncash interest were extinguished upon the October 2018 IPO. Interest income rose to $1.1m from $57,000 as cash and investments were higher.
- The company borrowed $10.0m under a new term-loan agreement in September 2019; no notes payable were reported at December 31, 2018. The agreement also provides for up to $10.0m of additional milestone-dependent borrowing.
Outlook, developments and principal risks
- Management said the September 30 cash, cash equivalents and short-term investments were expected to fund currently planned operations for at least the next 12 months; the liquidity note says more than a year from the filing date. Management cautioned that estimates may be wrong and spending or operating plans could change.
- The company expects increasing expenses and losses for the foreseeable future and does not expect product-sale revenue for at least several years, if ever. It anticipates funding needs through equity, debt, and collaboration or license arrangements; additional financing may be unavailable or dilutive or may require giving up valuable rights.
- Clinical program updates: Phase 1b/2 aGVHD trial began in Q1 2019, with top-line Phase 1b data expected in the second half of 2020; an uncontrolled-asthma Phase 1b proof-of-concept trial began in June 2019; and a lupus-nephritis Phase 1b proof-of-concept trial began in September 2019. The filing reports slower-than-expected enrollment in the aGVHD trial, citing site activation, the limited severe-patient population, and screen failures.
- The $10.0m September loan bears interest at the greater of 8.25% or prime plus 3.00%, is interest-only through June 2021 (potentially December 2021 if the Term B loan is drawn), and matures June 1, 2024. It is secured by substantially all assets other than intellectual property, subject to specified exceptions. The company issued warrants for 80,428 shares at $3.73; additional warrants would accompany potential later draws. The company reported compliance with loan covenants at quarter-end.
- A material regulatory uncertainty is the pending OFAC request concerning authorization to import and develop itolizumab, whose antibody sequence is of Cuban origin. The company says it currently relies on an OFAC general license, but its applicability has not been confirmed; denial or delay of authorization could prevent development and commercialization.
- Other material risks include clinical-trial failure or delay, safety findings, reliance on Biocon for drug supply and licensed rights, competition, and the need for substantial additional capital. Biocon-related obligations include up to $30m in regulatory milestones, up to $565m in sales milestones, and tiered royalties; no milestone or royalty payments had been made or received to date.
- The company reported no legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2019.
Key facts for investors to verify
- Whether cash burn and clinical spending remain consistent with management’s stated runway, and when additional financing may be required.
- Progress, enrollment, safety and results in the aGVHD, asthma and lupus-nephritis trials, including the expected timing of aGVHD top-line data.
- OFAC’s response and the legal basis for continuing itolizumab development and importation.
- Loan covenants, interest and repayment terms, collateral, milestone-based draw availability, and potential warrant dilution.
- Biocon license milestone, royalty, supply and development obligations, and the impact of any changes to the partnership.