Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________
FORM 10-Q
______________________________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _ TO _            
COMMISSION FILE NUMBER 001-38501
______________________________________________________________________________
AXCELLA HEALTH INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________
Delaware
26-3321056
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
840 Memorial Drive
Cambridge, Massachusetts
(Address of principal executive offices)
02139
(Zip Code)
 
 
(857) 320-2200
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
AXLA
The Nasdaq Global Market
 
______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
ý
Smaller reporting company
ý
 
 
 
 
 
 
Emerging growth company
ý
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  ý
As of August 9, 2019, the registrant had 23,082,179 shares of common stock, $0.001 par value per share, outstanding.


1

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

"AXA Candidate" to refer to one of our investigational product candidates.

"AXA Development Platform" to refer to our proprietary human-focused development platform.

"dose" to refer to the exposure amount of an AXA Candidate in Clinical Trials and Non-IND, IRB-Approved Clinical Studies.

"non-drug" to refer to a non-therapeutic use of an AXA Candidate. Such use may be as a 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.

"Non-IND, IRB-Approved Clinical Study" to refer to Institutional Review Board-Approved, or IRB-Approved, clinical studies conducted in humans with our AXA 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 an AXA 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, an AXA Candidate for safety, tolerability and effects on the normal structures and functions of the body. These studies are not designed or intended to evaluate an AXA 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 an AXA 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 success, cost and timing of our product development activities, preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials, including statements regarding the timing of initiation and completion of preclinical studies, Non-IND, IRB-Approved Clinical Studies or Clinical Trials and related preparatory work, and the timing of the availability of the results of these preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials;
our ability to obtain funding for our operations, including funding necessary to complete further development of our initial AXA Candidates, and if successful, commercialization of these candidates as drug or non-drug products;
the potential for our identified research priorities to advance our AXA Development Platform, development programs or AXA Candidates;
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 AXA Candidates, and any related restrictions, limitations or warnings in the label of an approved AXA Candidate;
our expectations regarding our ability to obtain and maintain intellectual property protection for our AXA Candidates, AXA Development Platform and the type of such protection;

2

Table of Contents

our ability and the potential to successfully manufacture our AXA Candidates for preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials and for commercial use, if approved;
the size and growth potential of the markets for our AXA Candidates and our ability to serve those markets, either alone or in combination with others;
the rate and degree of market acceptance of our AXA 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 AXA Candidates or commercialize any of our AXA 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 or management 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; and
other risks and uncertainties, including those discussed in Part II, Item 1A, Risk Factors in this Quarterly Report.
Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

3

Table of Contents

AXCELLA HEALTH INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 

4

Table of Contents

PART I - FINANCIAL INFORMATION
Item I. Condensed Consolidated Financial Statements (Unaudited)

AXCELLA HEALTH INC.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
 
As of
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
117,910

 
$
79,466

Prepaid expenses and other current assets
3,523

 
835

Total current assets
121,433

 
80,301

Property and equipment, net
758

 
1,076

Security deposits and other assets
216

 
216

Deferred offering costs

 
251

Total assets
$
122,407

 
$
81,844

 
 
 
 
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,086

 
$
1,612

Accrued expenses
4,886

 
5,299

Total current liabilities
6,972

 
6,911

Long term debt, net of discount
24,718

 
24,521

Other liabilities
773

 
1,898

Preferred stock warrant liability

 
425

Total liabilities
32,463

 
33,755

Commitments and contingencies (Note 8)

 

Redeemable convertible preferred stock (Note 7)

 
197,842

Stockholders' equity (deficit):
 
 
 
Common stock, $0.001 par value; 150,000,000 and 47,000,000 shares authorized, 23,498,786 and 5,193,915 shares issued and 23,079,805 and 4,774,934 shares outstanding at June 30, 2019 and December 31, 2018, respectively
24

 
6

Additional paid-in capital
272,989

 
7,290

Treasury stock, 418,981 shares at cost

 

Accumulated deficit
(183,069
)
 
(157,049
)
Total stockholders' equity (deficit)
89,944

 
(149,753
)
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)
$
122,407

 
$
81,844

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

5

Table of Contents

AXCELLA HEALTH INC.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Operating expenses:
 
 
 
 
 
 
 
Research and development
$
9,343

 
$
6,007

 
$
16,906

 
$
11,462

General and administrative
4,728

 
2,901

 
8,196

 
5,037

Total operating expenses
14,071

 
8,908

 
25,102

 
16,499

Loss from operations
(14,071
)
 
(8,908
)
 
(25,102
)
 
(16,499
)
Other income (expense):
 
 
 
 
 
 
 
Change in fair value of preferred stock warrant liability

 
4

 
(51
)
 
41

Interest income (expense), net
(376
)
 
(519
)
 
(867
)
 
(1,065
)
Total other income (expense), net
(376
)
 
(515
)
 
(918
)
 
(1,024
)
Net loss
$
(14,447
)
 
$
(9,423
)
 
$
(26,020
)
 
$
(17,523
)
Net loss per share, basic and diluted
$
(0.95
)
 
$
(2.15
)
 
$
(2.60
)
 
$
(4.08
)
Weighted average common shares outstanding, basic and diluted
15,230,815

 
4,405,597

 
10,032,202

 
4,317,845

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

6

Table of Contents

AXCELLA HEALTH INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Six Months Ended
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(26,020
)
 
$
(17,523
)
Adjustment to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
364

 
627

Stock-based compensation expense
2,644

 
1,078

Change in fair value of preferred stock warrant liability
51

 
(41
)
Non-cash interest expense
292

 
207

Gain on sale of property and equipment

 
(36
)
Changes in current assets and liabilities:
 
 
 
Prepaid expenses and other current assets
(2,674
)
 
69

Accounts payable
111

 
243

Accrued expenses
(215
)
 
(290
)
Net cash used in operating activities
(25,447
)
 
(15,666
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(47
)
 
(486
)
Proceeds from the sale of property and equipment

 
73

Net cash used in investing activities
(47
)
 
(413
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from initial public offering, net of issuance costs
64,935

 

Proceeds from issuance of long term debt

 
1,000

Payment of debt issuance costs

 
(844
)
Payment of success fee obligation
(1,220
)
 

Proceeds from exercise of common stock options
223

 

Net cash provided by financing activities
63,938

 
156

Net increase (decrease) in cash and cash equivalents
38,444

 
(15,923
)
Cash and cash equivalents, beginning of period
79,466

 
46,817

Cash and cash equivalents, end of period
$
117,910

 
$
30,894

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
1,436

 
$
1,088

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Reclassification of warrants to additional paid-in capital
$
476

 
$

Conversion of preferred stock to common stock upon closing of the initial public offering
$
197,888

 
$

Initial public offering costs incurred but unpaid at period end
$
402

 
$

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

7

Table of Contents

AXCELLA HEALTH INC.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)
(in thousands, except share data)
 
Redeemable convertible preferred stock
 
 
Common stock
 
 
 
Treasury stock
 
 
 
Total
 
Shares
 
Amount
 
 
Shares
 
Par Value
 
Additional paid-in capital
 
Shares
 
Amount
 
Accumulated deficit
 
 stockholders’ equity (deficit)
BALANCE - December 31, 2017
21,549,244

 
$
138,828

 
 
4,648,078

 
$
5

 
$
4,621

 
418,981

 
$

 
$
(120,980
)
 
$
(116,354
)
Accretion of preferred stock to redemption value
 
 
38

 
 
 
 
 
 
(38
)
 
 
 
 
 
 
 
(38
)
Stock-based compensation
 
 
 
 
 
 
 
 
 
368

 
 
 
 
 
 
 
368

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(8,100
)
 
(8,100
)
BALANCE - March 31, 2018
21,549,244

 
138,866

 
 
4,648,078

 
5

 
4,951

 
418,981

 

 
(129,080
)
 
(124,124
)
Exercise of common stock options
 
 
 
 
 
535,320

 
1

 
 
 
 
 
 
 
 
 
1

Accretion of preferred stock to redemption value
 
 
41

 
 
 
 
 
 
(41
)
 
 
 
 
 
 
 
(41
)
Stock-based compensation
 
 
 
 
 
 
 
 
 
710

 
 
 
 
 
 
 
710

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(9,423
)
 
(9,423
)
BALANCE - June 30, 2018
21,549,244

 
138,907

 
 
5,183,398

 
6

 
5,620

 
418,981

 

 
(138,503
)
 
(132,877
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE - December 31, 2018
26,831,246

 
$
197,842

 
 
5,193,915

 
$
6

 
$
7,290

 
418,981

 
$

 
$
(157,049
)
 
$
(149,753
)
Exercise of common stock options
 
 
 
 
 
1,335

 
 
 
12

 
 
 
 
 
 
 
12

Accretion of preferred stock to redemption value
 
 
46

 
 
 
 
 
 
(46
)
 
 
 
 
 
 
 
(46
)
Stock-based compensation
 
 
 
 
 
 
 
 
 
1,137

 
 
 
 
 
 
 
1,137

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(11,573
)
 
(11,573
)
BALANCE - March 31, 2019
26,831,246

 
197,888

 
 
5,195,250

 
6

 
8,393

 
418,981

 

 
(168,622
)
 
(160,223
)
Exercise of common stock options
 
 
 
 
 
44,697

 
 
 
211

 
 
 
 
 
 
 
211

Conversion of preferred stock to common stock upon closing of the initial public offering
(26,831,246
)
 
(197,888
)
 
 
14,641,997

 
15

 
197,873

 
 
 
 
 
 
 
197,888

Issuance of common stock, net of issuance costs of $6,896
 
 
 
 
 
3,571,428

 
3

 
64,529

 
 
 
 
 
 
 
64,532

Reclassification of warrants to additional paid-in capital
 
 
 
 
 
 
 
 
 
476

 
 
 
 
 
 
 
476

Exercise of common stock warrant
 
 
 
 
 
45,414

 
 
 

 
 
 
 
 
 
 

Stock-based compensation
 
 
 
 
 
 
 
 
 
1,507

 
 
 
 
 
 
 
1,507

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(14,447
)
 
(14,447
)
BALANCE - June 30, 2019

 
$

 
 
23,498,786

 
$
24

 
$
272,989

 
418,981

 
$

 
$
(183,069
)
 
$
89,944

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

8

Table of Contents

AXCELLA HEALTH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. NATURE OF BUSINESS
Axcella Health Inc. and subsidiaries ("Axcella," the "Company" or "we") is a biotechnology company that was incorporated in Delaware on August 27, 2008 and has a principal place of business in Cambridge, Massachusetts. The Company is pioneering the research and development of novel multifactorial interventions to support health and address dysregulated metabolism across a broad spectrum of consumers and patients who have limited options.
The Company is subject to risks 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 consumer 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.
On April 29, 2019, the Company filed an amended and restated certificate of incorporation to effect a one-for-1.842 reverse stock split of the Company’s common stock. All share and per share data shown in the accompanying condensed consolidated financial statements and related notes have been retroactively revised to reflect the reverse stock split.
On May 13, 2019, the Company completed an initial public offering (the “IPO”) of 3,571,428 shares of its common stock for aggregate gross proceeds of $71.4 million and its shares started trading on The Nasdaq Global Market under the ticker symbol “AXLA.” The Company received $64.5 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company. Upon closing of the IPO, all of the Company's outstanding shares of redeemable convertible preferred stock automatically converted into 14,641,997 shares of common stock.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has historically funded its operations with proceeds from sales of preferred stock and borrowings under a loan and security agreement. As of June 30, 2019, the Company had an accumulated deficit of $183.1 million. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash and cash equivalents at June 30, 2019 will be sufficient to fund its operations for at least the next twelve months from the date of the issuance of the interim condensed consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company's condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP").
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

9

Table of Contents

Unaudited Interim Financial Information
The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-230822), which was filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended ("Securities Act"), on May 9, 2019 (the “Prospectus”). The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. The Company bases its estimates on historical experience, known trends and other market-specific or relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions.
Deferred Offering Costs
The Company capitalized certain legal, professional accounting and other third-party fees that were directly associated with the IPO as deferred offering costs. As of December 31, 2018, the Company capitalized $0.3 million of deferred offering costs related to the IPO. After consummation of the IPO, which closed on May 13, 2019, these costs were recorded in stockholders' equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Accounting Pronouncements Issued and Not Adopted

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2016-02, Leases, which alters the accounting model and financial statement presentation and disclosure of leases. The new standard requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the Company beginning January 1, 2020. The Company is assessing the impact the adoption of ASU 2016-02 will have on its condensed consolidated financial statements and will recognize a lease obligation and right of use asset for its existing operating leases upon adoption. See additional information regarding the Company's lease obligations in Note 8.

10

Table of Contents

3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Laboratory equipment
$
3,511

 
$
3,489

Leasehold improvements
564

 
564

Office and computer equipment
294

 
294

Furniture and fixtures
122

 
122

Property and equipment
4,491

 
4,469

Less: accumulated depreciation and amortization
(3,733
)
 
(3,393
)
Property and equipment, net
$
758

 
$
1,076

Depreciation and amortization expense for the six months ended June 30, 2019 and 2018 was $0.4 million and $0.6 million, respectively.
4. FAIR VALUE MEASUREMENTS
The following table sets forth by level, within the fair value hierarchy, the assets and liabilities carried at fair value on a recurring basis (in thousands):
 
Fair value measurements at June 30, 2019 using:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash Equivalents
$
117,660

 
$

 
$

 
$
117,660

Total
$
117,660

 
$

 
$

 
$
117,660

 
Fair value measurements at December 31, 2018 using:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash Equivalents
$
79,216

 
$

 
$

 
$
79,216

Total
$
79,216

 
$

 
$

 
$
79,216

Liabilities:
 
 
 
 
 
 
 
Success Fee Liability
$

 
$

 
$
1,220

 
$
1,220

Preferred Stock Warrant Liability

 

 
425

 
425

Total
$

 
$

 
$
1,645

 
$
1,645

Cash equivalents are comprised of funds held in an exchange traded money market fund and the fair value of the cash equivalents is determined based upon quoted market price for that fund. The fair value of the preferred stock warrant was determined using the Black-Scholes option-pricing model with the assumptions as disclosed in Note 7.
The fair value of the success fee liability was determined using a probability weighted present value of cash flows. The Company has projected that 100% of the liability will be paid and that the time value of discounting those cash flows did not have a material impact on the fair value measurement due to the expected term.


11

Table of Contents

As a result of the IPO, the preferred stock warrants were converted to warrants to purchase common stock and the fair value of the warrant liability was reclassified to stockholders’ equity and subsequently settled. The success fee liability was also settled.
A roll forward of the fair value of the success fee liability and preferred stock warrant liability categorized with Level 3 inputs for the period ended June 30, 2019 is as follows (in thousands):
 
Success fee
 
Preferred stock warrant
liability
Balance — January 1, 2019
$
1,220

 
$
425

Increase in warrant fair value included in other expense

 
51

Reclassification to additional paid-in capital in connection with IPO

 
(476
)
Settlement of success fee
(1,220
)
 

Balance — June 30, 2019
$

 
$

There were no transfers among Level 1, Level 2, or Level 3 categories in the periods presented.
The carrying value of accounts payable and accrued expenses that are reported on the consolidated balance sheets approximate their fair value due to the short-term nature of these assets and liabilities. The carrying value of the long term debt approximates fair value as evidenced by the recent amendment.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other liabilities consisted of the following (in thousands):
June 30,
2019
 
December 31,
2018
Accrued employee compensation and benefits
$
1,329

 
$
1,957

Accrued external research and development expenses
1,829

 
1,679

Accrued professional fees
990

 
678

Other
738

 
985

Total accrued expenses and other current liabilities
$
4,886

 
$
5,299

6. DEBT FINANCING
Long term debt consisted of the following (in thousands):
June 30,
2019
 
December 31,
2018
Principal amount of long term debt
$
26,000

 
$
26,000

Debt discount
(530
)
 
(612
)
Deferred financing fees
(752
)
 
(867
)
Long term debt, net of discount
$
24,718

 
$
24,521


12

Table of Contents

In January 2018, the Company entered into a new secured debt facility (the "2018 Facility") with the existing lender that replaced the February 2017 amended facility. The 2018 Facility increased the funding up to $21.0 million. The Company paid a transaction fee of $0.9 million to the lender in connection with the 2018 Facility, and that fee was recognized as debt discount. The 2018 Facility required interest only payments through January 2019 with the ability to extend the interest only payment period through January 2020 if certain conditions were met. Monthly principal payments of $0.6 million were to commence in February 2019 for 36 months. The 2018 Facility has an interest rate equal to the LIBOR plus 8.50% per annum (10.94% as of June 30, 2019) payable monthly and a $1.1 million success fee which was payable upon the occurrence of certain events, including the IPO. The success fee was comprised of $0.7 million associated with the February 2017 amended facility and an additional $0.4 million arising from the January 2018 amendment. The fair value of the additional success fee was recorded as an obligation to the lenders and created an additional debt discount. The Company granted the lender a first priority security interest in all assets of the Company, excluding intellectual property and granted a negative pledge on such intellectual property.
In October 2018, the Company amended the 2018 Facility (the "Amended 2018 Facility") to extend the interest only period through July 2020 or January 2021 and the Maturity Date to July 2022 or January 2023 if certain conditions are met. The Amended 2018 Facility provides additional funding in the amounts of $5.0 million ("Term B Loan") and $4.0 million ("Term C Loan") if certain conditions are met. The Term B Loan of $5.0 million was drawn in December 2018. The success fee, increased to $1.2 million, which increased the debt discount by $0.1 million. Financing costs of $0.1 million were incurred related to the amendment. The interest rate was not changed through the amendment.
Upon completion of the IPO in May 2019, the interest only period was extended through January 2021 and the Maturity Date was extended to January 2023. Monthly principal payments of $1.1 million are to commence February 2021 for 24 months. The $1.2 million success fee was also paid.
For the six months ended June 30, 2019 and 2018, interest expense arising from the amortization of the debt discount and deferred financing fees was $0.3 million and $0.2 million, respectively.
Terminal Interest Fee
The Company's August 2015 debt facility, as amended, and the 2018 Facility, included a terminal interest fee obligation, which is due with the final principal payment of the loan and has been modified from time to time as the facilities were amended. The Company is accruing the terminal fee obligation over the term of the facility. At December 31, 2017, the terminal fee obligation was $1.1 million. The October 2018 amendment increased the terminal interest fee to $1.4 million. There was no change in the terminal interest fee during the six months ended June 30, 2019. The carrying value of the terminal interest fee was $0.8 million and $0.7 million at June 30, 2019 and December 31, 2018, respectively.
The scheduled principal maturity of the long term debt, reflecting the 2018 Amended Facility and the Term B Loan draw offers, as of June 30, 2019 is as follows (in thousands):
Year Ending December 31,
 
2020
$

2021
11,917

2022
13,000

2023
1,083

 
$
26,000

7. STOCKHOLDERS' EQUITY
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.

13

Table of Contents

Upon closing of the IPO in May 2019, all of the Preferred Stock converted into an aggregate of 14,641,997 shares of common stock.
In May 2019, the Company restated its certificate of incorporation, which, among other things, restated the number of shares of all classes of stock that the Company has authority to issue to 160,000,000 shares, consisting of (i) 150,000,000 shares of common stock, $0.001 par value per share, and (ii) 10,000,000 shares of preferred stock, $0.001 par value per share. The shares of preferred stock are currently undesignated.
Preferred Stock Warrants — In connection with the issuance of debt in 2012, the Company issued warrants to purchase 112,795 shares of Series A Preferred Stock with an exercise price of $1.95 per share and an expiration date of April 13, 2020. The fair value of the warrants was estimated using a Black-Scholes option-pricing model (see Note 4), and the resulting change in fair value was recorded in other income (expense) in the Company’s consolidated statement of operations.
Upon closing of the IPO on May 13, 2019, the outstanding warrants to purchase Series A Preferred Stock became outstanding warrants to purchase an aggregate of 61,235 shares of common stock at a weighted average exercise price of $3.59 per share. In June 2019, the holders of such warrants completed a cashless exercise of the warrants, resulting in the Company's issuance of 45,414 shares of common stock.
Stock-Based Compensation — The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires several key assumptions. The key assumptions used to apply this pricing model were as follows:
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Risk-free interest rate
1.84% - 2.34%

 
1.93% - 2.90%

 
1.84% - 2.50%

 
1.93% - 2.90%

Expected term (in years)
6.25

 
0.25 - 6.25

 
6.25

 
0.25 - 6.25

Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%
Expected volatility of underlying common stock
73.4
%
 
65.0
%
 
73.4
%
 
65
%
The risk-free interest rate was based on rates associated with U.S. Treasury issues approximating the expected life of the stock options. The expected term of options granted to employees was determined using the simplified method, which represents the midpoint of the contractual term of the option and the weighted-average vesting period of the option. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate the expected term. The expected dividend-yield assumption was based on the Company's expectation of no future dividend payments. The expected volatility of the underlying stock was based on the average historical volatility of comparable publicly traded companies based on weekly price returns as reported by a pricing service, as the Company has historically been a private company and lacks company-specific historical and implied volatility information.

14

Table of Contents

The weighted-average grant date fair value of the options granted during the six months ended June 30, 2019 and 2018, were $7.03 and $2.09 per share, respectively. As of June 30, 2019, there was $16.6 million of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 3.0 years. Stock-based compensation related to stock options and unvested stock awards are classified as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Research and development
$
586

 
$
230

 
$
1,068

 
$
444

General and administrative
918

 
477

 
1,576

 
634

 
$
1,504

 
$
707

 
$
2,644

 
$
1,078

The following table summarizes the option activity under the 2010 Stock Incentive Plan:
 
Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Life
(in Years)
 
Intrinsic
Value
(in thousands)
Outstanding January 1, 2019
4,039,487

 
$
5.67

 
8.6
 
$
5,331

Granted
941,353

 
15.64

 
 
 
 
Exercised
(46,038
)
 
4.76

 
 
 
 
Canceled
(110,500
)
 
6.69

 
 
 
 
Outstanding June 30, 2019
4,824,302

 
$
7.62

 
7.8
 
 
Options vested or expected to vest as of June 30, 2019
4,765,453

 
$
7.62

 
7.8
 
$
8,054

Options exercisable as of June 30, 2019
1,738,943

 
$
4.90

 
6.4
 
$
7,669

The intrinsic value of options exercised during the three months ended June 30, 2019 was nominal.
2010 Stock Option and Incentive Plan — The Company’s 2010 Stock Incentive Plan (the “2010 Plan”) provided for the Company to issue incentive stock options or nonqualified stock options, restricted stock, and other equity awards to employees, directors and consultants of the Company.
Upon effectiveness of the 2019 Plan, no future issuances will be made under the 2010 Plan.
2019 Stock Option and Incentive Plan — The 2019 Stock Option and Incentive Plan (the "2019 Plan") was approved by our board of directors on April 29, 2019 and became effective upon the IPO. 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, cash-based awards and dividend equivalent rights to the Company's officers, employees, directors and consultants. The number of shares initially reserved for issuance under the 2019 Plan is 905,000, which shall be cumulatively increased on January 1, 2020 and 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.

15

Table of Contents

2019 Employee Stock Purchase Plan — The 2019 Employee Stock Purchase Plan (the "2019 ESPP") was approved by our board of directors on April 29, 2019 and became effective upon the IPO. A total of 237,181 shares of common stock were initially reserved for issuance under this plan, which shall be cumulatively increased on January 1, 2020 and 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.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company entered into a facility lease agreement for laboratory and office space with an expiration date of April 1, 2021. The lease agreement and most recent amendment contained escalating rent payments. Rent expense is recorded on a straight-line basis. The Company had deferred rent of $0.1 million as of both June 30, 2019 and December 31, 2018. The Company is obligated to make minimum lease payments under the facility lease as follows (in thousands):
Years Ending December 31,
 
2019
$
599

2020
1,226

2021
415

Total
$
2,240

Rent expense for the six months ended June 30, 2019 and 2018 was $0.3 million and $0.3 million, respectively.

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, Non-IND, IRB-Approved Clinical Studies, Clinical Trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable by upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of service providers, up to the date of cancellation.
9. RETIREMENT PLAN
The Company has a 401(k) retirement and savings plan (the "Plan") covering all qualified employees. The Plan allows each participant to contribute a portion of his or her base wages up to an amount not to exceed an annual statutory maximum. The Company is permitted to make discretionary matching contributions to the Plan. The Company has not made any discretionary contributions.

16

Table of Contents

10. NET LOSS PER SHARE
Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(14,447
)
 
$
(9,423
)
 
$
(26,020
)
 
$
(17,523
)
Accretion of redeemable convertible preferred stock

 
(41
)
 
(46
)
 
(79
)
Net loss attributable to common stockholders
$
(14,447
)
 
$
(9,464
)
 
$
(26,066
)
 
$
(17,602
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
15,230,815

 
4,405,597

 
10,032,202

 
4,317,845

Net loss per share, basic and diluted
$
(0.95
)
 
$
(2.15
)
 
$
(2.60
)
 
$
(4.08
)
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:
 
Six Months Ended
June 30,
 
2019
 
2018
Redeemable convertible preferred stock (as converted to common stock)

 
11,735,178

Warrants to purchase redeemable convertible preferred stock (as converted to common stock)

 
61,235

Options to purchase common stock
4,824,302

 
3,084,510

 
4,824,302

 
14,880,923

11. SUBSEQUENT EVENTS

The Company has evaluated subsequent events for financial statement purposes occurring through August 12, 2019, the date that these condensed consolidated financial statements were issued.
* * * * * *


17

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of Axcella Health Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report, and the audited financial statements and notes included in our Prospectus filed pursuant to Rule 424(b) under the Securities Act, with the SEC, on May 9, 2019. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. We caution you that forward-looking statements are not guarantees of future performance, and that our actual results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate, may differ materially from the results discussed or projected in the forward-looking statements contained in this Quarterly Report. We discuss risks and other factors that we believe could cause or contribute to these potential differences elsewhere in this Quarterly Report, including under Item 1A. “Risk Factors” and under “Special Note Regarding Forward-Looking Statements.” In addition, even if our results of operations, financial condition and liquidity, and the developments in our business and the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
Overview
We are a biotechnology company pioneering the research and development of novel multifactorial interventions to support health and address dysregulated metabolism across a broad spectrum of consumers and patients who have limited options. Our AXA Candidates are generated from our proprietary, human-focused AXA Development Platform and harness the power of endogenous metabolic modulators, or EMMs, a broad family of molecules that fundamentally impact and regulate human metabolism.
Using our AXA Development Platform, we have rapidly generated a pipeline of AXA Candidates that are novel compositions of EMMs engineered in distinct ratios and designed to target and maximize the fundamental role that EMMs play in regulating multiple metabolic functions. Our AXA Candidates are administered orally and anchored by amino acids, which have a history of safe use as food. As such, we expect our AXA Candidates may also be combinable with other modalities. We believe our current dataset supports the potential of our AXA Candidates to support and modulate the metabolic pathways they target with favorable safety profiles. These features may make them an attractive development opportunity with significant commercial potential.

18

Table of Contents

https://cdn.kscope.io/c826ed41a75531c0071eb16691d86035-graphic02.jpg
(1)
In the above pipeline chart, “Development Path Decision” reflects the point in a program at which we decide whether to develop an AXA Candidate as a drug product candidate under an IND, develop it as a non‑drug product candidate or terminate development. We have made a decision to develop AXA1665 as a drug product candidate and anticipate interacting with the FDA again prior to submitting an IND. We have not made a development path decision for any of our other AXA Candidates.
(2)
We believe that this Clinical Trial has the potential to serve as a registrational (pivotal) Clinical Trial, subject to continuing IND discussions and allowance by the FDA.
Definitions: NAFLD = non‑alcoholic fatty liver disease; NASH = nonalcoholic steatohepatitis; OHE = overt hepatic encephalopathy.
On May 13, 2019, we completed our IPO, of 3,571,428 shares of our common stock at a public offering price of $20.00 per share. The gross proceeds from the IPO were $71.4 million and the net proceeds were $64.5 million, after deducting underwriting discounts and commissions and other estimated offering expenses.
To date, we have funded our operations with proceeds from the IPO, sale of redeemable convertible preferred stock and borrowing of debt. Through June 30, 2019, we had previously received gross proceeds of $197.8 million from sales of our redeemable convertible preferred stock and $26.0 million from borrowings under a loan and security agreement. Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability or even any product revenue will depend on the successful development and eventual commercialization of one or more of our AXA Candidates. For the six months ended June 30, 2019, our net loss was $26.0 million. As of June 30, 2019, we had an accumulated deficit of $183.1 million. We expect to continue to incur significant expenses and increasing operating losses and capital requirements for at least the next several years in connection with our ongoing activities, particularly as we:
further develop our AXA Development Platform;
continue to discover and develop additional AXA Candidates;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific, manufacturing and commercial personnel;
complete Non-IND, IRB-Approved Clinical Studies for AXA Candidates for which we have not yet made a drug development path decision or for which we have elected to develop as a non-drug product candidate;

19

Table of Contents

complete Clinical Trials for any AXA Candidates for which we make a drug development path decision, as we have done with AXA1665, and seek regulatory approvals for any drug product candidate that successfully completes Clinical Trials;
establish a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any AXA Candidates for which we may obtain regulatory approval;
establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval or identify an alternate regulatory pathway to market;
potentially acquire or in-license other product candidates and technologies; and
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.
Regulatory agencies, including the FDA, regulate many aspects of a product candidate's life cycle, including research and development and clinical testing. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our AXA Candidates or choose to market an AXA Candidate as a non-drug product. If we obtain regulatory approval for any of our AXA Candidates, we expect to incur significant expenses related to developing our commercialization capabilities to support product sales, marketing and distribution. Further, we expect to incur additional costs associated with operating as a public company.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, strategic alliances and marketing, distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our AXA Candidates.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or even terminate our operations.
As of June 30, 2019, our cash and cash equivalents totaled $117.9 million. We expect that our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure requirements and debt service payments through the second quarter of 2021. We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. See “—Liquidity and Capital Resources.”
Components of our results of operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our AXA 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.

20

Table of Contents

Operating expenses
Research and development expenses
Our research and development expenses consist primarily of costs incurred in connection with our research activities, including our drug discovery efforts, and the development of our AXA Candidates, which include:
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 AXA Candidates, including any Non-IND, IRB-Approved Clinical Studies and 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 and Non-IND, IRB-Approved Clinical Studies, including under agreements with third parties, such as consultants, contractors and CMOs;
laboratory supplies and research materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and
costs related to compliance with regulatory requirements as well as costs to protect our intellectual property.
We expense research and development expenses as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or services are performed.
Our direct external research and development expenses are tracked on a program-by-program basis and consist of costs that include fees, reimbursed materials and other costs paid to consultants, contractors, CMOs and CROs in connection with our preclinical and clinical development and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs, as well as our platform technology and, as such, are not separately classified.
AXA Candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, scope and duration of later-stage Clinical Trials. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities both in the near-term and beyond. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our AXA Candidates, as the successful development and commercialization of our AXA Candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

21

Table of Contents

the timing and progress of preclinical and clinical development activities;
the number and scope of preclinical and clinical programs we decide to pursue;
our ability to maintain our current research and development programs and to establish new ones;
our ability to establish new licensing or collaboration arrangements for both drug and non-drug products;
the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
FDA clinical and other requirements for the receipt and related terms of regulatory approval;
the successful initiation and completion of Non-IND, IRB-Approved Clinical Studies or Clinical Trials, with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
the receipt and related terms of regulatory approvals from applicable regulatory authorities;
the availability of raw materials for use in production of our AXA Candidates;
our ability to consistently manufacture our AXA Candidates for use in Non-IND, IRB-Approved Clinical Studies or Clinical Trials;
our ability to establish and secure manufacturing supply through relationships with third parties;
our ability to protect our rights in our intellectual property portfolio and maintain trade secret protection and regulatory exclusivity, both in the United States and internationally;
the commercialization of our AXA Candidates, if and when approved;
the acceptance of our AXA Candidates, if approved, by patients, the medical community, third-party payors or other parties, such as consumers;
obtaining and maintaining third-party insurance coverage and adequate reimbursement;
our ability to raise additional funds necessary to complete preclinical and clinical development of and commercialize our AXA Candidates;
competition with other products; and
a continued acceptable safety profile of our products following approval.
A change in the outcome of any of these variables with respect to the development of any of our AXA Candidates could significantly change the costs, timing and success associated with the development of that AXA Candidate. We expect research and development expenses to increase as compared to 2018 as we develop new AXA Candidates and advance existing AXA Candidates. We may never succeed in obtaining regulatory approval for any of our AXA Candidates.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, intellectual property, corporate development, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs including information technology, as well as professional fees for legal, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we expand our organization to support the continued research and development activities of our AXA Candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

22

Table of Contents

Other income (expense)
Interest expense, net
Interest expense consists of interest expense on outstanding borrowings under our loan and security agreement as well as amortization of debt discount and debt issuance costs. Interest income has historically been insignificant and consists of interest earned on our invested cash balances. We expect our interest income to increase as we invest the net proceeds from our IPO.
Change in fair value of preferred stock warrant liability
In connection with the issuance of debt in 2012, we issued warrants to purchase Series A preferred stock. We classify these warrants as a liability on our consolidated balance sheet that we remeasure to fair value as of each reporting date, and we recognize changes in the fair value of the warrant liability as a component of other income (expense) in our consolidated statements of operations. We will continue to recognize changes in the fair value of the warrant liability until the warrants are exercised, expire or qualify for equity classification.
Upon the closing of our IPO, the preferred stock warrants became exercisable for common stock instead of preferred stock, and the fair value of the warrant liability at that time was reclassified to additional paid-in capital. As a result, we will no longer remeasure the fair value of the warrant liability at each reporting date. In June 2019, the holders of such warrants completed a cashless exercise of the warrants, resulting in the Company’s issuance of 45,414 shares of common stock.
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, or 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 Credits will not be realized.
Results of Operations
Comparison of the Three Months Ended June 30, 2019 and 2018
The following table summarizes our results of operations for the three months ended June 30, 2019 and 2018:
 
Three Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
(in thousands)
Revenue
$

 
$

 
$

Operating expenses:
 
 
 
 
 
Research and development
9,343

 
6,007

 
3,336

General and administrative
4,728

 
2,901

 
1,827

Total operating expenses
14,071

 
8,908

 
5,163

Loss from operations
(14,071
)
 
(8,908
)
 
(5,163
)
Other income (expense):
 
 
 
 
 
Change in fair value of preferred stock warrant liability

 
4

 
(4
)
Interest income (expense), net
(376
)
 
(519
)
 
143

Total other expense, net
(376
)
 
(515
)
 
139

Net loss
$
(14,447
)
 
$
(9,423
)
 
$
(5,024
)

23

Table of Contents

Research and Development
 
Three Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
(in thousands)
Direct research and development expenses by program:
 
 
 
 
 
AXA1665
$
1,293

 
$
607

 
$
686

AXA1125/1957
2,740

 
998

 
1,742

AXA2678

 
130

 
(130
)
Platform development, early-stage research and unallocated expenses:
 
 
 
 
 
Personnel related
2,775

 
2,020

 
755

Stock-based compensation expense
586

 
230

 
356

External manufacturing and research
696

 
664

 
32

Laboratory supplies and research materials
251

 
251

 
0

Facility related and other
1,002

 
1,107

 
(105
)
Total research and development expenses
$
9,343

 
$
6,007

 
$
3,336

Research and development expenses were $9.3 million for the three months ended June 30, 2019, compared to $6.0 million for the three months ended June 30, 2018. The increase in direct costs related to our AXA1665 program of $0.7 million and to our AXA1125 and AXA1957 program of $1.7 million was primarily due to costs incurred with external CROs and CMOs for the ongoing Non-IND, IRB-Approved Clinical Studies. The increase in personnel related expense of $0.8 million and stock-based compensation expense of $0.4 million was primarily due to an increase in personnel to support the growth in research, development and clinical programs.
General and Administrative
 
Three Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
(in thousands)
Personnel related
$
1,535

 
$
1,530

 
$
5

Stock-based compensation expense
918

 
477

 
441

Professional and consultant fees
1,857

 
733

 
1,124

Facility related and other
418

 
161

 
257

Total general and administrative expenses
$
4,728

 
$
2,901

 
$
1,827

General and administrative expenses were $4.7 million for the three months ended June 30, 2019, compared to $2.9 million for the three months ended June 30, 2018. The increase in general and administrative expenses of $1.8 million was primarily due to growth of operations and clinical programs and required personnel and professional services to support that growth. The increase in stock-based compensation expense of $0.4 million was primarily due to an increase in the number of awards granted and the per share fair value of such awards. Professional and consultant fees increased by $1.1 million primarily due to increases in legal fees related to business development, regulatory and intellectual property costs, accounting and audit fees and public and investor relations fees.


24

Table of Contents

Interest Income (Expense), Net
The decrease in net interest expense during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 was attributable to increased income earned on our invested cash, which was driven by a larger cash balance during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.
Comparison of the Six Months Ended June 30, 2019 and 2018
The following table summarizes our results of operations for the six months ended June 30, 2019 and 2018:
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
(in thousands)
Revenue
$

 
$

 
$

Operating expenses:
 
 
 
 
 
Research and development
16,906

 
11,462

 
5,444

General and administrative
8,196

 
5,037

 
3,159

Total operating expenses
25,102

 
16,499

 
8,603

Loss from operations
(25,102
)
 
(16,499
)
 
(8,603
)
Other income (expense):
 
 
 
 
 
Change in fair value of preferred stock warrant liability
(51
)
 
41

 
(92
)
Interest income (expense), net
(867
)
 
(1,065
)
 
198

Total other expense, net
(918
)
 
(1,024
)
 
106

Net loss
$
(26,020
)
 
$
(17,523
)
 
$
(8,497
)
Research and Development
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
(in thousands)
Direct research and development expenses by program:
 
 
 
 
 
AXA1665
$
2,355

 
$
866

 
$
1,489

AXA1125/1957
4,061

 
1,768

 
2,293

AXA2678

 
318

 
(318
)
Platform development, early-stage research and unallocated expenses:
 
 
 
 
 
Personnel related
5,419

 
4,010

 
1,409

Stock-based compensation expense
1,068

 
444

 
624

External manufacturing and research
1,512

 
1,426

 
86

Laboratory supplies and research materials
498

 
492

 
6

Facility related and other
1,993

 
2,138

 
(145
)
Total research and development expenses
$
16,906

 
$
11,462

 
$
5,444

Research and development expenses were $16.9 million for the six months ended June 30, 2019, compared to $11.5 million for the six months ended June 30, 2018. The increase in direct costs related to our AXA1665 program of $1.5 million and to our AXA1125 and AXA1957 program of $2.3 million was primarily due to costs incurred with external CROs and CMOs for the ongoing Non-IND, IRB-Approved Clinical Studies. The increase in personnel related expense of $1.4 million and stock-based compensation expense of $0.6 million was primarily due to an increase in personnel to support the growth in research, development and clinical programs.

25

Table of Contents

General and Administrative
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
 
 
 
 
 
 
(in thousands)
Personnel related
$
3,285

 
$
2,661

 
$
624

Stock-based compensation expense
1,576

 
634

 
942

Professional and consultant fees
2,757

 
1,473

 
1,284

Facility related and other
578

 
269

 
309

Total general and administrative expenses
$
8,196

 
$
5,037

 
$
3,159

General and administrative expenses were $8.2 million for the six months ended June 30, 2019, compared to $5.0 million for the six months ended June 30, 2018. The increase in general and administrative expenses of $3.2 million was primarily due to growth of operations and clinical programs and required personnel and professional services to support that growth. The increase in stock-based compensation expense of $0.9 million was primarily due to an increase in the number of awards granted and the per share fair value of such awards. Personnel-related costs increased by $0.6 million primarily due to the hiring of additional personnel in our general and administrative functions as we continued to expand our operations and to support operating as a public company. Professional and consultant fees increased by $1.3 million primarily due to increases in legal fees related to business development, regulatory and intellectual property costs, accounting and audit fees and public and investor relations fees.
Interest Income (Expense), Net
The decrease in net interest expense during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 was attributable to increased income earned on our invested cash, which was driven by a larger cash balance during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant operating losses. We have not yet commercialized any of our AXA Candidates, and we do not expect to generate revenue from any AXA Candidates for several years, if at all. To date, we have funded our operations with proceeds from the sales of redeemable convertible preferred stock and borrowings under our loan and security agreement. In May 2019, we completed an IPO of 3,571,428 shares of its common stock for aggregate gross proceeds of $71.4 million. The Company received $64.5 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company. Through June 30, 2019, we had previously received gross proceeds of $197.8 million from sales of our redeemable convertible preferred stock, $26.0 million from borrowings under a loan and security agreement and. As of June 30, 2019, we had cash and cash equivalents of $117.9 million.

26

Table of Contents

Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
 
Six Months Ended
June 30,
 
2019
 
2018
Cash used in operating activities
$
(25,447
)
 
$
(15,666
)
Cash used in investing activities
(47
)
 
(413
)
Cash provided by financing activities
63,938

 
156

Net increase (decrease) in cash and cash equivalents
$
38,444

 
$
(15,923
)
Net Cash Used in Operating Activities
Net cash used in operating activities for the six months ended June 30, 2019 was $25.4 million, which was primarily due to our net loss of $26.0 million, a increase in prepaid expense of $2.7 million and a decrease in accrued expense of $0.2 million. This was partially offset by non-cash charges, including stock-based compensation expense of $2.6 million, depreciation expense of $0.4 million and an increase in accounts payable of $0.1 million.
Net cash used in operating activities for the six months ended June 30, 2018 was $15.7 million, which was primarily due to our net loss of $17.5 million and a decrease in accrued expenses of $0.3 million. This was partially offset by non-cash charges, including stock-based compensation expense of $1.1 million, depreciation of $0.6 million and an increase in accounts payable of $0.2 million.
Net Cash Used in Investing Activities
Net cash used in investing activities was $0.0 million for the six months ended June 30, 2019 compared to net cash used in investing activities of $0.4 million for the six months ended June 30, 2018. Net cash used in investing activities for the six months ended June 30, 2019 and 2018 consisted of the purchase of capital equipment used during the period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2019 was $63.9 million, which primarily consisted of net proceeds from the issuance of common stock upon the completion of the IPO.
Net cash provided by financing activities for the six months ended June 30, 2018 was $0.2 million, which consisted of the net proceeds from the additional draw down from our debt facility.
Loan and security agreement
At June 30, 2019, we had $26.0 million in outstanding long term debt. Monthly principal payments of $1.1 million will commence August 2020 for 24 months. The terminal interest fee of 5.35% ($1.4 million) is due with the final principal payment of the loan. We granted the lender a first priority security interest in all of our assets, excluding intellectual property and granted a negative pledge on such intellectual property.

Upon completion of the IPO in May 2019, the interest only period was extended through January 2021 and the Maturity Date was extended to January 2023. Monthly principal payments of $1.1 million are to commence February 2021 for 24 months. The $1.2 million success fee was also paid.


27

Table of Contents

Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities, Non-IND, IRB-Approved Clinical Studies and Clinical Trials, if applicable, for our AXA Candidates in development. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating and capital expenditures will depend largely on:

the timing and progress of preclinical and clinical development activities;
the commencement, enrollment or results of the planned Non-IND, IRB-Approved Clinical Studies of our AXA Candidates or any future or additional Non-IND, IRB-Approved Clinical Studies or Clinical Trials we may conduct or may be required to conduct;
our decision to initiate a Non-IND, IRB-Approved Clinical Study or Clinical Trial, not to initiate a Non-IND, IRB-Approved Clinical Study or Clinical Trial or to terminate an existing Non-IND, IRB-Approved Clinical Study or Clinical Trial, or being required to do so by any regulatory authority;
the timing and outcome of regulatory review of our AXA Candidates;
changes in laws or regulations applicable to our AXA Candidates, including but not limited to Clinical Trial requirements for approvals;
developments concerning our CMOs;
our ability to obtain materials to produce adequate product supply for any approved product or inability to do so at acceptable prices;
our ability to establish and maintain a manufacturing and a supply chain for supply of AXA Candidates for Non-IND, IRB-Approved Clinical Studies and Clinical Trials and for commercial supply;
our ability to establish collaborations, if needed;
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
the costs, timing and success of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our AXA Candidates for which we obtain marketing approval as a drug or market as a non-drug product;
the costs involved in prosecuting patent applications and enforcing patent claims and other intellectual property claims;
additions or departures of key scientific or management personnel; and
unanticipated serious safety concerns related to the use of our AXA Candidates.
We believe that our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure requirements, and debt service payments through the second quarter of 2021. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

28

Table of Contents

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the condensed consolidated financial statements prospectively from the date of change in estimates.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates” in our Prospectus filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on May 9, 2019. During the six months ended June 30, 2019, there were no material changes to our critical accounting policies from those previously disclosed.
Off‑Balance Sheet Arrangements
We did not have during the periods presented, and we do not have, any off‑balance sheet arrangements, as defined under applicable SEC rules.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.


29

Table of Contents

Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2019 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
 
Payments due by period
 
Total
 
Less than
1 year
 
1 to
3 years
 
4 to
5 years
 
More than
5 years

 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Operating lease commitments (1)
$
2,240

 
$
599

 
$
1,641

 
$

 
$

Debt obligations (2)
33,465

 
1,422

 
30,950

 
1,093

 

Total
$
35,705

 
$
2,021

 
$
32,591

 
$
1,093

 
$

(1)
Amounts in table reflect payments due for our leases of office and laboratory space in Cambridge, Massachusetts under one operating lease agreement that expires in April 2021.
(2)
Amounts in table reflect the contractually required principal and interest payments payable under the Amended 2018 Facility. For purposes of this table, the interest due under the Amended 2018 Facility was calculated using an assumed interest rate of 10.94% (LIBOR plus 8.50%) per annum, which was the interest rate in effect as of June 30, 2019.
We enter into contracts in the normal course of business with CROs, CMOs and other third parties for preclinical research studies, Non-IND, IRB-Approved Clinical Studies, Clinical Trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the table above as the amount and timing of such payments are not known.
Emerging growth company status
The Jumpstart Our Business Startups Act of 2012 permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO; (b) in which we have total annual gross revenue of at least $1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior March 31st; and (2) the date on which we issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As of June 30, 2019, we had cash and cash equivalents of $117.9 million, which consisted of cash and money market funds. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates would not have a material impact on the fair market value of our investment portfolio.

As of June 30, 2019, we had $26.0 million of borrowings outstanding under the Amended 2018 Debt Facility. An immediate 10% change in the LIBOR rate would not have had a material impact on our debt-related obligations, financial position or results of operations.
       

30

Table of Contents

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors that are located in Europe and Australia. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.
     
Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the six months ended June 30, 2019 and 2018.
Item 4. Controls and Procedures

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

Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

31

Table of Contents

Part II. Other Information
Item 1. Legal Proceedings
From time to time, we may be involved in various claims, threatened or actual, and legal proceedings relating to claims arising out of our operations or products, if any. We are not currently a party to any material legal proceedings. The outcome of claims or litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations.
Item 1A. Risk Factors
Careful consideration should be given to the following risk factors, in addition to the other information set forth in this Quarterly Report and in other documents that we file with the SEC, in evaluating the Company and our business. Investing in our common stock involves a high degree of risk. If any of the following risks and uncertainties actually occurs, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks described below are not intended to be exhaustive and are not the only risks that we face. New risk factors can emerge from time to time, and it is not possible to predict the impact that any factor or combination of factors may have on our business, prospects, financial condition and results of operations.
Risks related to our financial position and capital needs
We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.
We are a biotechnology company with a limited operating history. Investment in product development in the healthcare industry, including of biotechnology products, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and/or become commercially viable. Our AXA Candidates are currently being studied in Non-IND, IRB-Approved Clinical Studies as food products. We have no products approved for commercial sale, have not generated any revenue from product sales to date and continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in 2008. Our net loss was $26.0 million for the six months ended June 30, 2019 and $36.1 million for the year ended December 31, 2018, respectively. As of June 30, 2019, we had an accumulated deficit of $183.1 million. We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and development of, and if we choose to develop our AXA Candidates under an IND seek regulatory approvals for, our AXA Candidates. We anticipate that our expenses will increase substantially if, and as, we:
conduct preclinical studies and additional Non-IND, IRB-Approved Clinical Studies and, for any AXA Candidate we elect to develop as a drug product candidate, initiate Clinical Trials to develop an AXA Candidate under an IND or its equivalent in non-U.S. jurisdictions;
further develop our proprietary human-focused product development platform, our AXA Development Platform;
continue to discover and develop our current AXA Candidates as well as additional AXA Candidates;
maintain, expand and protect our intellectual property portfolio;
hire or contract additional clinical, scientific, manufacturing and commercial personnel to support our product research, development and commercialization efforts;
continue to develop, scale and validate a manufacturing process and specifications for our AXA Candidates;
continue to establish in-house manufacturing capabilities for our research and product development efforts;
establish a commercial manufacturing source and secure supply chain capacity sufficient to provide preclinical study material, Non-IND, IRB-Approved Clinical Study material, Clinical Trial material for any

32

Table of Contents

AXA Candidate we elect to develop as a drug product candidate under an IND, and commercial quantities of any AXA Candidates that we may commercialize as a drug or non-drug product candidate, following receipt of any necessary approvals or authorizations;
acquire or in-license other candidates and technologies;
seek various non-drug product marketing pathways and, if applicable, drug regulatory authorizations;
establish a sales, marketing and distribution infrastructure to commercialize any AXA Candidates for which we may obtain regulatory approval or identify an alternate regulatory pathway to market; and
add operational, compliance, financial and management information systems and personnel to support our operations as a public company.
To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including, but not limited to: completing preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials for any AXA Candidate we elect to develop as a drug product candidate under an IND; obtaining marketing approval or identifying alternate regulatory pathways for AXA Candidates; manufacturing, marketing and selling products for which we may obtain marketing approval; or successfully identifying alternate regulatory pathways and satisfying any pre- or post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company, which could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.
Even if we succeed in commercializing one or more of our AXA Candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional AXA Candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business, which may be significant. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders' equity and working capital.
We will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete development and commercialization of our AXA Candidates.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts for our current and future programs: to conduct further research and development, preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials for any AXA Candidate we elect to develop as a drug product candidate under an IND, as we plan to do for our AXA1665 product candidate; to validate the manufacturing process and specifications for our AXA Candidates; to seek regulatory approvals for or identify alternate regulatory pathways to market for our AXA Candidates; and to launch and commercialize any products for which we receive regulatory approval or identify an alternate regulatory pathway to market, including potentially building our own commercial organization. As of June 30, 2019, we had $117.9 million of cash and cash equivalents on hand. Based on our current operating plan, we believe that our existing cash and cash equivalents, will enable us to fund our operating expenses, capital expenditure requirements and debt service obligations through the second quarter of 2021. However, our future capital requirements and the period for which our existing resources will support our operations may vary significantly from our expectations, and we will in any event require additional capital in order to complete clinical development of any of our current AXA Candidates. Our monthly spending levels will vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with development of our AXA Candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

33

Table of Contents

our decisions regarding the development path under which we will develop our AXA Candidates (i.e., either continuing to develop our AXA Candidates as non-drug products, or initiating development as drug product candidates under an IND or non-U.S. equivalent);
the initiation, progress, timing, costs and results of preclinical studies, Non-IND, IRB-Approved Clinical Studies and, depending on our development path decision, Clinical Trials for our AXA Candidates and any need to conduct additional such studies as may be required by a regulator, including additional studies that may be required by a regulator in order to allow the initiation of Clinical Trials under an IND or the non-U.S. equivalent for any of our AXA Candidates;
any clinical development plans we establish for these AXA Candidates;
further development of our AXA Development Platform and supporting infrastructure;
the number and characteristics of AXA Candidates that we develop or may in-license;
the terms of any partnership or collaboration agreements we may choose to initiate or conclude;
the outcome, timing and cost of meeting regulatory requirements established by the FDA, any other regulatory authorities in the United States, and, when applicable, comparable foreign regulatory authorities, such as the EMA;
the effect of changes in regulations or policy relating to the development and commercialization of our AXA Candidates by the FDA, any other regulatory authorities in the United States and, when applicable, other comparable foreign regulatory authorities such as the EMA;
the costs of establishing, maintaining and overseeing a quality system compliant with current Good Manufacturing Practices, or cGMPs, and a supply chain for the development and manufacture of our AXA Candidates;
the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us, our AXA Candidates or our AXA Development Platform;
the effect of competing technological and market developments;
the cost and timing of establishing, expanding and scaling manufacturing capabilities; and
the cost of establishing sales, marketing and distribution capabilities for any AXA Candidates for which we may receive regulatory approval or identify alternate regulatory pathways in regions where we choose to commercialize our products on our own.
We do not have any committed external source of funds or other support for our development efforts and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product or royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, your ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our AXA Candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future AXA Candidates at an earlier stage than otherwise would be desirable or relinquish our rights to AXA Candidates or technologies that we otherwise would seek to develop or commercialize ourselves. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products or AXA Candidates or one or more of our other research and

34

Table of Contents

development initiatives. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline, causing you to lose all or part of your investment.

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

To obtain the requisite regulatory approvals to commercialize any AXA Candidate that we decide to develop as a drug product candidate, we must demonstrate through extensive preclinical studies and Clinical Trials that our AXA Candidates are safe and effective in humans for their intended use. Non-IND, IRB-Approved Clinical Studies to commercialize non-drug products also require a significant financial investment to generate data that supports the claims we would make for such products and the safety and tolerability of the product. Clinical testing is expensive, difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. We may be unable to establish, where applicable, endpoints, dose levels and regimens or bioanalytical assay methods that applicable regulatory authorities would consider clinically meaningful or legally permissable, and a Clinical Trial can fail at any stage of testing. Additionally, our Non-IND, IRB-Approved Clinical Studies or other studies may not result in data that supports intended claims for non-drug products. The outcome of preclinical studies, Non-IND, IRB-Approved Clinical Studies and early Clinical Trials may not be predictive of the success of later preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials, and interim results of these studies or trials do not necessarily predict final results. Differences in trial design between early-stage Clinical Trials and later-stage Clinical Trials make it difficult to extrapolate the results of earlier Clinical Trials to later Clinical Trials. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and Clinical Trials have nonetheless failed to obtain marketing approval of their product candidates, or have data that supports desirable marketing claims even where marketing approval is not required.

Successful completion of Clinical Trials is a prerequisite to submitting a new drug application, or NDA, to the FDA, or its equivalent in other foreign regulatory authorities such as a marketing authorization application to the EMA, for each product candidate for therapeutic indications and, consequently, the ultimate approval and commercial marketing of any product candidates for therapeutic indications. We do not know whether we will be able to initiate or complete Clinical Trials for AXA Candidates we decide to develop as drug product candidates on schedule, if at all.

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

we may be unable to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of Clinical Trials for therapeutic indications for any drug product candidates or the marketing of our products as non-drug products;
the FDA may not allow us to use data from any Non-IND, IRB-Approved Clinical Studies to support an IND for AXA1665 or any other AXA Candidate we decide to develop as a drug product candidate instead of a non-drug product candidate;
the FDA or other regulatory authorities may disagree with the design, implementation or results of our Non-IND, IRB-Approved Clinical Studies or Clinical Trials, which may delay or prevent us from pursuing certain regulatory pathways for product developments, or require us to submit additional data such as long-term toxicology studies or impose other requirements before permitting us to initiate or complete a Clinical Trial. For example, the FDA could require that we stop a Non-IND, IRB-Approved Clinical Study for an AXA Candidate and continue such study only under an IND, and we may not be able to obtain such an IND, if at

35

Table of Contents

all, without additional study or we may be subject to an enforcement action for conducting a Non-IND, IRB-Approved Clinical Study not under an IND;
regulators, IRBs or ethics committees may not authorize us or our investigators to commence or conduct a Non-IND, IRB-Approved Clinical Study or Clinical Trial at a prospective study or trial site;
we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective study or trial sites and prospective CROs, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and study or trial sites;
Non-IND, IRB-Approved Clinical Studies or Clinical Trials of any AXA Candidates may fail to show safety or effectiveness, or produce negative or inconclusive results and we may decide or be required to conduct additional preclinical studies, Non-IND, IRB-Approved Clinical Studies, Clinical Trials or any other studies, or we may decide to abandon product development programs;
the number of subjects or patients required for Non-IND, IRB-Approved Clinical Studies or Clinical Trials of any AXA Candidates may be larger than we anticipate, enrollment in these clinical studies or trials may be slower than we anticipate or participants may drop out of these clinical studies or trials or fail to return for required follow-up post study or trial completion at a higher rate than we anticipate;
we may need to add new or additional Non-IND, IRB-Approved Clinical Study or Clinical Trial sites;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or may deviate from the Non-IND, IRB-Approved Clinical Study or Clinical Trial protocol or drop out of the study or trial, which may require that we add new clinical study or trial sites or investigators;
the cost of preclinical studies, Non-IND, IRB-Approved Clinical Studies, Clinical Trials or any other studies of any AXA Candidates may be more than we anticipate or more than our available financial resources;
the supply or quality of our AXA Candidates or other materials necessary to conduct Non-IND, IRB-Approved Clinical Studies and Clinical Trials may be insufficient or inadequate and may not achieve compliance with applicable cGMPs;
our AXA Candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, IRBs or ethics committees to suspend or terminate Non-IND, IRB-Approved Clinical Studies and Clinical Trials, or reports may arise from preclinical or clinical testing of our AXA Candidates that raise safety or other concerns about one or more of our AXA Candidates; and
preclinical studies, Non-IND, IRB-Approved Clinical Studies or Clinical Trials of our AXA Candidates may produce negative or inconclusive results, which may result in our deciding, or being required, to conduct additional clinical studies or trials or abandon product development programs.

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

36

Table of Contents

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

Risks related to our business, technology and industry
We have a limited operating history, which may make it difficult to evaluate our technology and product development capabilities and predict our future performance.
We are early in our development efforts and we have not initiated Clinical Trials for any of our AXA Candidates to allow for development of such candidates as drug product candidates. In addition, as an organization, we have not yet commenced or completed any Clinical Trials. With the exception of AXA1665 for which we plan to file an IND, we are currently developing our AXA Candidates as non-drug products under food regulations, although the ultimate pathway under which we will develop our other AXA Candidates is subject to change depending on a number of factors. We were formed in 2008, have no products approved for commercial sale as drugs or marketed via other regulatory pathways (e.g., non-drug products) and have not generated any revenue from product sales. Our ability to generate product revenue or profits, which we do not expect will occur for many years, if ever, will depend on the successful development and eventual commercialization of our AXA Candidates, which may never occur.
Our limited operating history may make it difficult to evaluate our technology and industry and predict our future performance. Specifically, to date we have conducted Non-IND, IRB-Approved Clinical Studies for our AXA Candidates to evaluate safety and tolerability only in healthy subjects or subjects with certain disease conditions. If we decide to develop an AXA Candidate under an IND as a drug product with patient populations reflecting the desired indication for such AXA Candidate, the physiological structure and function data we observed in our Non-IND, IRB-Approved Clinical Studies for such AXA Candidate may not be replicated in or consistent with results from Clinical Trials and such AXA Candidate may not meet therapeutic efficacy endpoints in Clinical Trials.
Our short history as an operating company makes any assessment of our future success or viability subject to significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in evolving fields. If we do not address these or other risks successfully, our business will suffer. Similarly, we expect that our financial condition, expenditures and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.
In addition, as an early-stage company, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown circumstances, which may be significant. As we advance our AXA Candidates, we will need to transition from a company with a research focus to a company capable of supporting clinical development and, if successful, commercial activities. We may not be successful in such transitions.
Any use of our AXA 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 AXA 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 AXA Candidates.

37

Table of Contents

Using EMMs in the compositions, ratios and formulations we use in our AXA Candidates and the potential drug and non-drug applications of our AXA Candidates represents a novel approach. Our AXA Candidates in general may not be successfully developed or commercialized or gain the acceptance of the public or the medical community. For any AXA Candidate that we choose to develop as a drug product candidate, our success will depend upon physicians who specialize in the treatment of diseases targeted by our AXA Candidates, prescribing potential treatments that involve the use of our AXA Candidates in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical data may be available. For any AXA Candidate that we choose to develop as a non-drug product candidate, our success will depend on finding partners in a non-drug market who can help successfully commercialize AXA Candidates. In addition, our success will also depend on consumer acceptance and adoption of our products that we, or a future partner, commercialize, if any. Adverse events in Non-IND, IRB-Approved Clinical Studies and Clinical Trials of our AXA Candidates or in studies or Clinical Trials of others developing similar products and the resulting publicity, as well as any other adverse events in the field of EMMs and metabolic pathways, could result in a decrease in demand for any product that we may develop. In addition, responses by the U.S. federal, state or foreign governments to negative public perception or ethical concerns may result in new legislation or regulations that could limit our ability to develop or commercialize any AXA Candidates, obtain or maintain regulatory approval, if applicable, identify alternate regulatory pathways to market or otherwise achieve profitability. More restrictive statutory regimes, government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects, and may delay or impair the development and commercialization of our AXA Candidates or demand for any products we may commercialize.
All of our AXA Candidates for which we make a drug development path decision, including any targeting the metabolic pathways of the liver and muscle that if dysregulated could result in loss of health or disease, will require significant additional preclinical and clinical development before we can seek regulatory approval for and launch a drug product commercially.
For any AXA Candidate that we choose to develop as a drug product candidate, such as our AXA1665 drug product candidate for which we plan to submit an IND, our business and future success will depend on our ability to obtain regulatory approval of and then successfully launch and commercialize such AXA Candidate as a drug targeting a disease, which may involve dysregulated metabolism, such as cirrhosis, non-alcoholic steatohepatitis or muscle atrophy. Any future Clinical Trials of AXA1665 and any other AXA Candidates that we decide to develop as drug product candidates may experience preliminary complications in trial execution, such as complexities surrounding regulatory clearance to initiate Clinical Trials, the need for additional preclinical data to support authorization to proceed with Clinical Trials, modifications in trial design and trial protocols, bioanalytical assay method development, dose level and regimen selection, patient recruitment and enrollment, quality and supply of clinical doses or safety issues. Additionally, even if additional preclinical studies, Non-IND, IRB-Approved Clinical Studies or Clinical Trials are successfully executed, there is no guarantee that the results produced by such additional studies will confirm or be consistent with the results obtained in our Non-IND, IRB-Approved Clinical Studies to date for our AXA Candidates.
Any AXA Candidates that we decide to develop as drug product candidates will require significant additional development, including preclinical and clinical development, regulatory review or approval in the jurisdictions that we target for commercialization, identification of appropriate non-drug regulatory pathways to commercialization, substantial investment, access to sufficient validated and cGMP-compliant commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. In addition, if we choose to develop AXA1665, our lead candidate, as a drug product candidate and AXA1665 encounters safety, efficacy, supply or manufacturing problems, developmental delays, regulatory or commercialization issues or other problems, our development plans, including for our other AXA Candidates, and business would be significantly harmed.
The successful development of our AXA Candidates is highly uncertain.
Successful development of our AXA Candidates is highly uncertain and is dependent on numerous factors, many of which are beyond our control. AXA Candidates that appear promising in the early phases of development may fail to reach the market for several reasons, including, but not limited to:

38

Table of Contents

results from preclinical or Non-IND, IRB-Approved Clinical Studies may demonstrate that our AXA Candidates are not safe, not tolerable or have unanticipated impacts on the normal structure and function of the body and could result in data showing one or more AXA Candidates to have harmful or problematic side effects or toxicities;
Clinical Trial results may show any AXA Candidate we decide to develop as a drug product candidate to be less effective than expected (e.g., a Clinical Trial could fail to meet its primary endpoint(s)) or to have unacceptable side effects or toxicities;
failure to execute the Non-IND, IRB-Approved Clinical Studies or Clinical Trials caused by slow enrollment in Non-IND, IRB-Approved Clinical Studies or Clinical Trials, as applicable, study subjects dropping out of Clinical Trials or volunteers or study subjects dropping out of Non-IND, IRB-Approved Clinical Studies, length of time to achieve clinical endpoints, additional time requirements for data analysis, inability to validate the manufacturing process or to achieve cGMP compliance for our AXA Candidates;
failure to receive the necessary regulatory approvals or authorizations, where applicable, or to meet and maintain compliance with applicable regulatory requirements, or a delay in such compliance or receiving such approvals or authorizations for, including, but not limited to, a NDA, or delays in NDA preparation, the need to submit a new dietary ingredient, or NDI, notification or other filings with the FDA, discussions with the FDA and other regulatory authorities in jurisdictions we target or pursue, responding to an FDA request or other regulatory authority for additional preclinical or clinical data or unexpected safety or manufacturing issues;
manufacturing costs, formulation issues, manufacturing deficiencies or other factors that make our AXA Candidates uneconomical;
proprietary rights of others and their competing products and technologies that may prevent our product candidates from being commercialized; and
For those AXA Candidates that we may decide to develop as drug product candidates, the length of time necessary to complete Clinical Trials and to submit an application for marketing approval of a drug product candidate, where applicable, for a final decision by a regulatory authority may be difficult to predict for any such AXA Candidates, in large part because of their limited regulatory history.
Even if we are successful in obtaining marketing approval for those AXA Candidates that we decide to develop as drugs, commercial success of any approved drugs will also depend in large part on marketing acceptance, the availability of insurance coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, and managed care organizations, which may be affected by existing and future healthcare reform measures designed to reduce the cost of healthcare. Third-party payors could require us to conduct additional studies, including post-marketing studies related to the cost-effectiveness of a product, to qualify for reimbursement, which could be costly and divert our resources. If government and other healthcare payors were not to provide adequate insurance coverage and reimbursement levels for one or any of our drug products once approved, market acceptance and commercial success would be reduced.
In addition, if any AXA Candidate we decide to develop as a drug product candidate is approved for marketing, we will be subject to significant regulatory obligations regarding the submission of safety and other post-marketing information and reports and registration. If approved, our drug products may be subject to restrictions on our products' labels and other conditions of regulatory approval that may limit our ability to market our products for therapeutic indications. We will also need to comply (and ensure that our third-party contractors comply) with cGMPs and Good Clinical Practice, or GCP, as we (and our third-party contractors) will be required to comply with cGMPs for products used in Clinical Trials and for any Clinical Trials that we conduct post-approval with cGMPs for either drug or non-drug candidates. In addition, we will need to comply with full GCPs in development efforts for any therapeutic indications we develop for approval and for any additional therapeutic indications we develop after approval of our first drug candidate. In addition, there is always the risk that we or a regulatory authority might identify previously unknown problems with a drug product post-approval or with non-drug products after commercialization, such as adverse events of unanticipated severity or frequency. Compliance with regulatory requirements to address such issues

39

Table of Contents

could be costly and any failure to comply or other issues with our drug products post-approval or non-drug products post-commercialization could have a material adverse effect on our business, financial condition and results of operations.
Similarly, the success of any AXA Candidate we decide to develop as a non-drug product will depend on market acceptance, and even if we succeed in developing a non-drug product, we may still be subject to significant regulatory requirements, including, but not limited to, those with respect to the manufacture, development, processing, handling, labeling, and marketing of our products.
Our planned Non-IND, IRB-Approved Clinical Studies or any future Clinical Trials, if applicable, or those of our future collaborators may reveal significant adverse events not seen in our preclinical studies, Non-IND, IRB-Approved Clinical Studies or other Clinical Trials and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of our AXA Candidates.
Before obtaining regulatory approvals for the commercial sale of any products for therapeutic indications, we must demonstrate through lengthy, complex and expensive preclinical studies and Clinical Trials that our AXA Candidates are both safe and effective for use in each target indication. ANy non-drug products must also be demonstrated to be safe and tolerable. Preclinical and clinical studies and testing are expensive and can take many years to complete, and their outcome is inherently uncertain. Failure can occur at any time during the preclinical or clinical study or trial process. The results of preclinical studies, Non-IND, IRB-Approved Clinical Studies as well as early Clinical Trials of our AXA Candidates that we decide to develop as drug products may not be predictive of the results of later-stage clinical studies or trials. In addition, initial results in Non-IND, IRB-Approved Clinical Studies and Clinical Trials, in particular as shown by any interim data, may not be indicative of results obtained when such Non-IND, IRB-Approved Clinical Studies and Clinical Trials are completed. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical studies and trials. Our AXA Candidates have been generally well tolerated in our Non-IND, IRB-Approved Clinical Studies, but we cannot be certain that we will be able to dose participants at a high enough dose in any future Clinical Trials if we pursue a drug pathway so as to demonstrate efficacy without unacceptable safety risk.
AXA Candidates in later stages of Non-IND, IRB-Approved Clinical Studies may fail to show the desired safety profile despite having progressed through successful preclinical studies and earlier Non-IND, IRB-Approved Clinical Studies. AXA Candidates that we decide to develop as drug product candidates and that progress to Clinical Trials may fail to show the desired safety and efficacy profile despite having progressed successfully through preclinical studies, Non-IND, IRB-Approved Clinical Studies and, if applicable, initial Clinical Trials. A number of companies in the healthcare industry have suffered significant setbacks in later development, notwithstanding promising results in earlier trials. Most product candidates that commence Clinical Trials are never approved as products for therapeutic indications, and there can be no assurance that any of our current or future Non-IND, IRB-Approved Clinical Studies or Clinical Trials will ultimately be successful or support further clinical development of any of our AXA Candidates.
If significant adverse events or other side effects are observed in any of our current or future Non-IND, IRB-Approved Clinical Studies or Clinical Trials, we may have difficulty recruiting subjects or patients for our Non-IND, IRB-Approved Clinical Studies or Clinical Trials, subjects or patients may drop out of our Non-IND, IRB-Approved Clinical Studies or Clinical Trials or we may be required to significantly redesign or abandon Non-IND, IRB-Approved Clinical Studies or Clinical Trials or our development efforts of one or more AXA Candidates altogether. We, the FDA or other applicable regulatory authorities or an IRB may suspend Non-IND, IRB-Approved Clinical Studies or Clinical Trials of an AXA Candidate at any time for various reasons, including a belief that subjects or patients in such Non-IND, IRB-Approved Clinical Studies or Clinical Trials are being exposed to unacceptable health risks or adverse side effects or that our Non-IND, IRB-Approved Clinical Studies are designed to evaluate our AXA Candidates as drug product candidates. Some potential non-drug products and drug product candidates that initially showed promise for further development in early-stage testing, including in Non-IND, IRB-Approved Clinical Studies or Clinical Trials, have later been found to cause side effects that prevented their further development. Even if the side effects do not preclude an AXA Candidate from obtaining or maintaining marketing approval, if applicable, or being commercialized, undesirable side effects may inhibit market acceptance of the commercialized product due to its

40

Table of Contents

tolerability versus other non-drug products or drugs. Any of these developments could materially harm our business, financial condition and prospects.
If we encounter difficulties enrolling study subjects or patients in our Non-IND, IRB-Approved Clinical Studies or any future Clinical Trials, our development activities could be delayed or otherwise adversely affected.
We may experience difficulties in subject and patient enrollment in our Non-IND, IRB-Approved Clinical Studies and Clinical Trials for a variety of reasons. The timely completion of Non-IND, IRB-Approved Clinical Studies or Clinical Trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of subjects or patients who remain in the Non-IND, IRB-Approved Clinical Study or Clinical Trial until its conclusion. The enrollment of subjects or patients depends on many factors, including, but not limited to:
the severity of the disease or condition under investigation in the case of a Clinical Trial conducted under an IND for an AXA Candidate that we decide to develop as a drug product candidate;
the subject or patient eligibility and exclusion criteria defined in the protocol;
the size of the study subject or patient population required for analysis of the primary endpoint(s) of the Non-IND, IRB-Approved Clinical Study or Clinical Trial;
the proximity of subjects or patients to study and trial sites;
the design of the clinical study or trial;
our ability to recruit investigators with the appropriate competencies and experience;
clinicians', subjects' or patients' perceptions as to the potential advantages and risks of the AXA Candidate being studied in relation to other available drugs or non-drug products, as applicable;
the efforts to facilitate timely enrollment in clinical studies or trials;
the subject or patient referral practices of physicians;
the ability to monitor subjects or patients adequately during and after study product administration;
our ability to obtain and maintain subject and patient consents; and
the risk that subjects or patients enrolled in Non-IND, IRB-Approved Clinical Studies or Clinical Trials will drop out of the Non-IND, IRB-Approved Clinical Studies or Clinical Trials before completion.
In addition, our Non-IND, IRB-Approved Clinical Studies and Clinical Trials will compete with other clinical studies or trials for product candidates that are in the same target markets as our AXA Candidates, and this competition will reduce the number and types of subjects or patients available to us, because some individuals who might have opted to enroll in our clinical studies or trials may instead opt to enroll in a study or trial being conducted by one of our competitors. Because the number of qualified clinical investigators is limited, we expect to conduct some of our Non-IND, IRB-Approved Clinical Studies or Clinical Trials at the same sites that some of our competitors use, which will reduce the number of subjects or patients who are available for our Non-IND, IRB-Approved Clinical Studies and Clinical Trials in such sites. Moreover, because our AXA Candidates represent a departure from more commonly used methods in the non-drug and drug areas we may pursue, potential subjects or patients and their doctors may be inclined to use conventional products or therapies, rather than enroll subjects or patients in any future clinical study or trial.
Delays in subject or patient enrollment may result in increased costs or may affect the timing or outcome of our planned Non-IND, IRB-Approved Clinical Studies or future Clinical Trials, which could prevent completion of these clinical studies or trials and adversely affect our ability to advance the development of our AXA Candidates.
Interim and preliminary data from our Non-IND, IRB-Approved Clinical Studies or future Clinical Trials that we announce or publish from time to time may change as more subject or patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

41

Table of Contents

To date, our Non-IND, IRB-Approved Clinical Studies have been exploratory in nature, with a primary focus on the assessment of safety and tolerability, and have been conducted in small numbers of subjects. Data from larger subsequent studies may not support or may be inconsistent with our observations in our completed Non-IND, IRB-Approved Clinical Studies. From time to time, we may conduct Non-IND, IRB-Approved Clinical Studies and Clinical Trials that result in interim or preliminary data. These data are subject to the risk that one or more of the outcomes may materially change as preclinical studies complete, subject enrollment continues and more subject data become available. Preliminary or top-line data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Material inconsistencies between preliminary or interim data and final data could significantly harm our business prospects.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our research and development activities may involve the use of biological and hazardous materials and may produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may negatively impact our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of biological waste or hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. We do not carry specific biological waste or hazardous waste insurance coverage, workers compensation or property and casualty and general liability insurance policies that include coverage for damages and fines arising from biological or hazardous waste exposure or contamination.
If product liability claims or lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our AXA Candidates.
We face an inherent risk of product liability as a result of testing our AXA Candidates in Non-IND, IRB-Approved Clinical Studies and Clinical Trials, if we decide to develop any AXA Candidate as a drug product candidate, and will face an even greater risk if we commercialize any products. For example, we may be sued, or claims may be made against us, if our informed consents for subjects or patients in any preclinical, Non-IND, IRB-Approved Clinical Studies or Clinical Trials are or are alleged to be inadequate or inaccurate in any way or fail to fully inform subjects or patients of any potential risks involved with their participation or other material or required information. We may also be sued, or claims may be made against us, if our AXA Candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during Non-IND, IRB-Approved Clinical Studies, Clinical Trials, manufacturing, marketing or after sale. Any such product liability claims may include, without limitation, allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability,

42

Table of Contents

marketing or promotional claims or a breach of warranties. Claims could also be asserted under state consumer protection or other statutes or regulations. If we cannot successfully defend ourselves against product liability claims or any other claims related to our products, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims could have a material adverse effect on our business and operations, and may result in, among other things:
inability to bring an AXA Candidate to the market;
decreased demand for and decline in the price charged for our products;
damage to our reputation;
withdrawal of Non-IND, IRB-Approved Clinical Study or Clinical Trial participants and inability to enroll future participants or continue Non-IND, IRB-Approved Clinical Studies or Clinical Trials;
initiation of investigations by regulators or other regulatory action;
costs to defend the related litigation;
diversion of management's time and our resources;
substantial monetary awards to participants or patients;
product recalls, withdrawals or labeling, packaging, marketing or promotional modifications or restrictions;
loss of revenue;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any AXA Candidates via any regulatory pathway; and
decline in our share price.
We maintain Clinical Trial insurance. We review our Clinical Trial insurance policy annually and we believe that our coverage is currently adequate to cover any claims that may arise in connection with our Non-IND, IRB-Approved Clinical Studies or Clinical Trials. There is no guarantee that we will be able to obtain additional Clinical Trial insurance at an acceptable cost in the future, which could prevent or inhibit the ongoing development of our products.
Since we have not yet commenced marketing of any products we do not yet hold product liability insurance for commercialization of our products. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop, alone or with collaborators. If and when coverage is secured, our insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no or inadequate coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
The market opportunities for our AXA Candidates may be limited and our estimates of the incidence and prevalence of our target patient populations may be inaccurate.
Our projections of both the non-drug and drug market sizes we may target and the number of people who have the diseases or conditions we may target, as well as the subset of people with these diseases or conditions in a position to receive any drug or non-drug we develop, if approved, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, input from key opinion leaders, patient foundations or secondary market research databases, and may prove to be incorrect. Further, new studies may change the estimated market sizes or the incidence or prevalence of target diseases we may target with AXA Candidates that we decide to develop as drug product candidates. For those AXA Candidates we develop under an IND, regulatory approvals may include limitations for use or contraindications that decrease the addressable patient population. The

43

Table of Contents

number of subject individuals may turn out to be lower than expected. Additionally, the potentially addressable patient population for our AXA Candidates that we decide to develop as drugs may be limited or may not be amenable to treatment with our AXA Candidates. For instance, we estimate that there are approximately 633,000 patients currently diagnosed with cirrhosis in the United States and upwards of 518,000 patients undergoing or recovering from procedures that are associated with limb immobilization-induced acute atrophy. Even if we obtain significant market share for our AXA Candidates, because certain potential target populations are small, we may never achieve profitability without obtaining regulatory approval for additional indications for drugs or expanding the target market size for non-drug products.
We are early in our development efforts and may not be successful in our efforts to use our AXA Development Platform to build a pipeline of AXA Candidates and develop marketable products.
We are developing our AXA Candidates and AXA Development Platform to reprogram metabolism and maintain and restore metabolic health. However, our AXA Development Platform has not yet led, and may never lead, to marketable drug or non-drug products. We are developing our initial AXA Candidates and have additional AXA Candidates that we intend to investigate, including in liver, muscle, central nervous system and blood. We may have problems applying our technologies to these and other future target areas, and our AXA Candidates may not demonstrate a comparable ability in supporting or maintaining health or treating disease, where applicable. Even if we are successful in identifying additional AXA Candidates, they may not be suitable for clinical development as a result of limited efficacy, unacceptable safety profiles or other characteristics that indicate that they are unlikely to be products that will receive marketing approval or achieve market acceptance. The success of our AXA Candidates will depend on several factors, including the following:
completion of preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials with positive results;
receipt of marketing approvals from applicable regulatory authorities, if necessary;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our AXA Candidates;
making arrangements with third-party manufacturers for, or establishing our own, commercial manufacturing capabilities;
launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;
entering into new collaborations throughout the development process as appropriate, from preclinical studies through to commercialization;
acceptance of our products, if and when approved or launched for commercialization under applicable regulations, by patients, consumers, the medical community and third-party payors;
effectively competing with other drugs and non-drug products, depending on the development pathway that we choose for an AXA Candidate;
obtaining and maintaining coverage and adequate reimbursement by third-party payors, including government payors, for our AXA Candidates developed as drug products, if approved by the FDA;
protecting our rights in our intellectual property portfolio;
operating without infringing or violating the valid and enforceable patents or other intellectual property of third parties;
achieving and remaining in compliance with applicable laws and regulations that apply to the research, development and commercialization of our AXA Candidates and having productive interactions and positive regulatory decisions that lead to successful product commercialization;
maintaining a continued acceptable safety profile of the products following approval or commercialization; and

44

Table of Contents

maintaining and growing an organization of scientists and business people who can develop and commercialize our products and technology.
If we do not successfully develop and commercialize AXA Candidates using our AXA Development Platform, we will not be able to obtain product revenue in future periods, which could result in significant harm to our financial position and adversely affect our stock price.
We face significant competition from other healthcare companies, and our operating results will suffer if we fail to compete effectively.
The healthcare industry is characterized by intense competition and rapid innovation. Our competitors may be able to develop other drug or non-drug products that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical, nutritional foods companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff, experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel drugs or to in-license novel drugs that could make any AXA Candidate that we develop as a drug product candidate obsolete. Mergers and acquisitions in the healthcare industry may result in even more resources being concentrated amongst our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on exclusive basis non-drug products that are more effective, safer, more easily commercialized or less costly than our AXA Candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and products. We believe the key competitive factors that will affect the development and commercial success of our AXA Candidates are efficacy, safety, tolerability, reliability, convenience of use, price and reimbursement, if applicable depending on the development path we choose. We also anticipate that we will face increased competition in the future as additional companies enter our market and scientific developments surrounding other non-drug products and drugs targeted at metabolic pathways continue to accelerate.
In addition, there are additional companies that are working on modulating specific metabolic pathways involved in various health and disease conditions, although we are not aware of any company creating AXA Candidate-like products with multifactorial activity. Companies with clinical programs that could compete with our AXA Candidates include Madrigal Pharmaceuticals, Inc., Intercept Pharmaceuticals, Inc., Gilead Sciences, Inc., Novartis AG, Bristol-Myers Squibb Co., Esperion Therapeutics, Inc., Viking Therapeutics, Inc., Scholar Rock Holding Corporation, NGM Biopharmaceuticals Inc., Genfit SA and Kaleido Biosciences, Inc., among others.
We also anticipate competing with the largest consumer health companies and nutritional and amino acid companies in the world, such as Nestlé Health Science S.A., Abbott Laboratories, Johnson & Johnson, The Procter & Gamble Company and Ajinomoto Co., Inc., all of which are currently conducting research in competitive indications or may be interested in using amino acids and other EMMs as therapeutics as well as nutritional supplements.
Even if we obtain regulatory approval to market our AXA Candidates as drugs or are successful in identifying alternate regulatory pathways to market our AXA Candidates under regulations that would apply to non-drug products, the availability and price of our competitors' products could limit the demand and the price we are able to charge for our AXA Candidates. We may not be able to implement our business plan if the acceptance of our AXA Candidates is inhibited by price competition or the reluctance of consumers to accept of our AXA Candidates and choose them over other competitive products on the market or, for AXA Candidates we develop as drugs, of physicians to switch from existing methods of treatment to our AXA Candidates, or if physicians switch to other new drug or biologic products or choose to reserve our AXA Candidates for use in limited circumstances.
Even if an AXA Candidate we develop as a drug product candidate receives marketing approval, or otherwise is commercialized as a non-drug product, such products may fail to achieve the degree of market acceptance by

45

Table of Contents

physicians, patients, third-party payors, consumers and others in the medical or healthcare community or other target markets necessary for commercial success.
If any AXA Candidate we decide to develop as a drug product candidate receives marketing approval or otherwise is commercialized under applicable regulations as a non-drug product, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors, consumers and others in the medical or health community or other target markets. If the AXA Candidates we develop do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of any AXA Candidate, if approved for commercial sale, will depend on a number of factors, including, but not limited to:
efficacy (for any AXA Candidate developed as a drug product candidate), safety and potential advantages compared to alternative products;
the labeled uses or limitations for use, including age limitations or contraindications, for our AXA Candidates compared to alternative products;
convenience and ease of administration compared to alternative products;
the willingness of the target patient or consumer population to try new drugs or non-drug products, respectively, and, with respect to any AXA Candidates developed as drug product candidates, of physicians to prescribe these therapies or, in the case of non-drug products, the willingness of target consumers in the market of health products to try and healthcare professionals to recommend consumers purchase our products;
public perception of new drugs and non-drug products, including our AXA Candidates;
the strength of marketing and distribution support;
the ability for us to partner in the manufacture and distribution of these products;
the ability to offer our products, if approved, as applicable, for sale at competitive prices;
the ability to obtain sufficient third-party insurance coverage and adequate reimbursement, as applicable depending on the development path we pursue; and
the prevalence and severity of any side effects.
We will need to grow the size of our organization and we may experience difficulties in managing this growth.
As of June 30, 2019, we had 55 full-time employees. As our research, development, manufacturing and commercialization plans and strategies develop, and as we transition into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including, but not limited to:
identifying, recruiting, compensating, integrating, maintaining and motivating additional employees;
managing our internal research and development efforts effectively, including identification of clinical candidates, scaling our manufacturing process and navigating the clinical and the FDA review process for our AXA Candidates; and
improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to commercialize our AXA Candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain organizations, advisors and consultants to provide certain services, including many aspects of regulatory affairs, clinical management and manufacturing. There can be no assurance that the services of these organizations, advisors and consultants will continue to be available to us on a timely basis when needed or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy

46

Table of Contents

of the services provided by consultants is compromised for any reason, our clinical development may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our AXA Candidates, if required, or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our AXA Candidates and, accordingly, may not achieve our research, development and commercialization goals.
Our current operations are located in Massachusetts; and we or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Our current operations are located in Massachusetts. Any unplanned event, such as flood, fire, explosion, earthquake, extreme weather condition, medical epidemics, power shortage, telecommunication failure or other natural or manmade accidents or incidents that result in us being unable to fully utilize our facilities, or the manufacturing facilities of our third-party contract manufacturers, may have a material and adverse effect on our ability to operate our business, particularly on a daily basis, and have significant negative consequences on our financial and operating conditions. Loss of access to these facilities may result in increased costs, delays in the development of our AXA Candidates or interruption of our business operations. Natural disasters could further disrupt our operations, and have a material and adverse effect on our business, financial condition, results of operations and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our research facilities or the manufacturing facilities of our third-party contract manufacturers, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business. As part of our risk management policy, we maintain insurance coverage at levels that we believe are appropriate for our business. However, in the event of an accident or incident at these facilities, we cannot assure our investors that the amounts of insurance will be sufficient to satisfy any damages and losses. If our facilities or the manufacturing facilities of our third-party contract manufacturers are unable to operate because of an accident or incident or for any other reason, even for a short period of time, any or all of our research and development programs may be harmed. Any business interruption may have a material and adverse effect on our business, financial condition, results of operations and prospects.
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 AXA Candidates will be impaired, could result in loss of markets or market share and could make us less competitive.
Our ability to compete in the highly competitive biotechnology industry depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including David Epstein, our Chairman of the Board, William Hinshaw, our Chief Executive Officer and President, Thomas Leggett, our Chief Financial Officer and Senior Vice President of Finance, Shreeram Aradhye, M.D., our Executive Vice President and Chief Development Officer, Manu Chakravarthy, M.D., Ph.D., our Chief Medical Officer and Senior Vice President of Clinical Development, Tony Tramontin, Ph.D., our Chief Scientific Officer and Senior Vice President of Research and Development, Stephen Mitchener, PharmD, our Chief Business Officer and Senior Vice President and Paul Fehlner, J.D., Ph.D., our Chief Intellectual Property Officer and Senior Vice President. The loss of the services of any of our executive officers, other key employees and other scientific and medical advisors, and our inability to find suitable replacements could result in delays in product development and harm our business.
We conduct our operations in Massachusetts. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

47

Table of Contents

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Employment of our key employees is at-will, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain "key man" insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, and those of our CROs, contract manufacturing organizations, or CMOs, manufacturers of the raw materials used in our AXA Candidates and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. For our Non-IND, IRB-Approved Clinical Studies, we rely on third-party manufacturers to produce our AXA Candidates, on CROs for conducting various portions of such studies and on various consultants throughout the study process. For materials to be used in any future Clinical Trials for AXA Candidates that we decide to develop as drug product candidates, we plan to rely on an external CMO for the entire manufacturing supply chain and plan to continue using CROs and consultants in connection with conducting such trials. Our ability to obtain supplies of our AXA Candidates and services from CROs and consultants could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.
Our internal computer systems, or those used by our CROs, CMOs or other contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems and those of our CROs, CMOs and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of data from any future Clinical Trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we currently rely on third parties for the manufacture of our AXA Candidates and to conduct Non-IND, IRB-Approved Clinical Studies, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our AXA Candidates could be delayed.
Regulators globally are also imposing greater monetary fines for privacy violations. For example, in 2016, the European Union adopted a new regulation governing data practices and privacy called the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR applies to any company that collects and uses personal data in connection with offering goods or services to individuals in the European Union or the monitoring of their behavior. Non-compliance with the GDPR may result in monetary penalties of up to €20 million or 4% of worldwide revenue, whichever is higher. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase the cost of providing our AXA Candidates, if approved, or even prevent us from offering our AXA Candidates, if approved, in certain jurisdictions.

48

Table of Contents

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless or negligent conduct that fails to comply with the laws of the FDA and other similar foreign, state or local regulatory bodies, provide true, complete and accurate information to the FDA and other similar foreign, state or local regulatory bodies, comply with manufacturing standards we have established, comply with healthcare fraud and abuse laws in the United States and similar foreign, state or local fraudulent misconduct laws or report financial information or data accurately or to disclose unauthorized activities to us. If we obtain FDA approval of any of our AXA Candidates and begin commercializing those products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our current activities with principal investigators and research subjects, as well as proposed and future sales, marketing and education programs.
A variety of risks associated with testing and developing our AXA Candidates internationally could materially adversely affect our business.
In addition to researching, developing and commercializing our AXA Candidates in the United States, we also intend to engage in these activities outside of the United States and, accordingly, we expect that we will be subject to additional risks related to operating in foreign countries, if our AXA Candidates are approved, including, but not limited to:
differing regulatory requirements in foreign countries;
unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
difficulties staffing and managing foreign operations;
workforce uncertainty in countries where labor unrest is more common than in the United States;
potential liability under the Foreign Corrupt Practices Act, or FCPA, or comparable foreign regulations;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geo-political actions, including war and terrorism.
Additionally, we intend to contract with third parties to conduct some of our Clinical Trials outside the United States, which will subject us to additional risks and regulations. These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.
We currently have no marketing and sales organization and have no experience in marketing products for therapeutic or non-drug uses. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our AXA Candidates, we may not be able to generate product revenue.

49

Table of Contents

We currently have no sales, marketing or distribution capabilities and have no experience in marketing products for therapeutic uses or other non-drug uses. We intend to develop an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other healthcare companies to recruit, hire, train and retain marketing and sales personnel.
In addition to establishing internal sales, marketing and distribution capabilities, we intend to optimistically pursue collaborative arrangements regarding the sales and marketing of our products, in particular for products we develop as non-drug products; however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our AXA Candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our AXA Candidates.
There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States or overseas. Even to the extent we are able to develop such capabilities or relationships, the sale, marketing and distribution of our AXA Candidates will be subject to extensive government regulation and if we or related third parties fail to comply with such regulations, we may be subject to regulatory action, third-party claims or other potential liability.
Comprehensive tax reform legislation could adversely affect our business and financial condition.
The Tax Cuts and Jobs Act, or the TCJA, that significantly reforms the Internal Revenue Code of 1986, as amended, or the Code contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal tax rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for NOLs to 80% of current year taxable income and elimination of NOL carrybacks, in each case, for losses generated after December 31, 2018 (though any such NOLs may be carried forward indefinitely), and modification or repeal of many business deductions and Credits, including reduction of the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as "orphan drug." We continue to examine the impact this tax reform legislation may have on our business. We urge investors to consult with their legal and tax advisers regarding the implications of the TCJA on an investment in our common stock.
Our ability to use NOLs and research and development credits to offset future taxable income may be subject to certain limitations.
As of December 31, 2018, we had U.S. federal and state NOL carryforwards of $140.6 million and $139.4 million, respectively, both of which expire at various dates beginning in 2030. As of December 31, 2018, we also had U.S. federal and state research and development tax credit carryforwards of $4.2 million and $1.6 million respectively, both of which expire at various dates through 2038. These NOL and tax credit carryforwards could expire unused and be unavailable to offset future taxable income or tax liabilities, respectively. In addition, in general, under Sections 382 and 383 of the Code, and corresponding provisions of state law, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its pre-change NOL carryforwards or Credits to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation's stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Our existing NOLs or Credits may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after our IPO, our ability to utilize NOLs or Credits could be further limited by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or Credits may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs or Credits. Furthermore, our ability to utilize our NOLs or Credits is conditioned upon our attaining profitability and generating U. S. federal and state taxable income. We have incurred significant net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future; and therefore, we

50

Table of Contents

do not know whether or when we will generate the U.S. federal or state taxable income necessary to utilize our NOLs or Credits. The reduction of the corporate tax rate under the TCJA caused a reduction in the economic benefit of our NOL carryforwards and other deferred tax assets available to us. Under the TCJA, NOLs generated after December 31, 2018 will not be subject to expiration; however, any NOLs generated after December 31, 2018 may only offset 80% of our annual taxable income and may not be carried back.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.
As widely reported, global credit and financial markets have experienced extreme volatility and disruptions in the past, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that future volatility, disruption or deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets continue to be volatile or are disrupted or deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.
As of June 30, 2019, we had cash and cash equivalents of $117.9 million. While we are not aware of any downgrades, material losses or other significant deterioration in the fair value of our cash equivalents since June 30, 2019, no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or our ability to meet our financing objectives. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.
Our loan agreement subjects us to operating restrictions and financial covenants and may restrict our business and financing activities.
On January 9, 2018, we entered into a loan and security agreement with Solar Capital Ltd., or Solar, for term loans in an aggregate principal amount of $26 million, which we amended on October 5, 2018 and November 30, 2018. Our obligations under the loan agreement are secured by a first priority security interest in our assets, excluding intellectual property and certain other exceptions. We are subject to a negative pledge covenant with respect to our intellectual property. The loan agreement contains customary representations, as well as customary affirmative and negative covenants. Among other restrictions, the negative covenants, subject to exceptions, prohibit or limit our ability to: declare dividends or redeem or purchase equity interests; incur additional liens; make investments; incur additional indebtedness; engage in mergers, acquisitions and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing business. These covenants may restrict our ability to finance our operations and to pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control.
Risks related to government regulation
We are very early in our development efforts. AXA Candidates we decide to develop as drug product candidates will require significant additional preclinical and clinical development before we seek regulatory approval. AXA Candidates that we decide to bring to market as non-drug products may also require additional development, and all AXA Candidates may require significant interactions with regulators and investments before their respective commercial launches. If we are unable to advance our AXA Candidates to final development, meet regulatory requirements, including obtaining regulatory approval, where applicable, or ultimately commercialize our AXA Candidates or experience significant delays in doing so, our business will be materially harmed.

51

Table of Contents

We are very early in our development efforts and have invested substantially all of our efforts and financial resources in the identification and early clinical development of AXA Candidates. To date, we have not marketed or commercialized products and, although we have made a development path decision to develop AXA1665 as a drug product candidate under a planned IND submission, we have not done so for any of our other AXA Candidates, including whether to continue their development under food or dietary supplement regulations or to pursue their development as drugs. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend on the successful development and eventual commercialization of our AXA Candidates, which may never occur. We currently generate no revenue from sales of any products, and we may never be able to develop or commercialize a marketable product. The success of our AXA Candidates will depend on several factors, including the following:
successful enrollment in, and completion of, preclinical studies, Non-IND, IRB-Approved Clinical Studies and, if applicable, Clinical Trials;
clearance of INDs for future Clinical Trials for AXA Candidates that we decide to develop as drug product candidates;
receipt of regulatory approvals from applicable regulatory authorities for drug product candidates or, alternatively, compliance with regulatory requirements applicable to non-drug products;
establishing cGMP-compliant supply and commercial manufacturing operations or making arrangements with cGMP-compliant third-party manufacturers for supply and commercial manufacturing;
obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our AXA Candidates;
launching commercial sales of our AXA Candidates, if and when approved or allowed for marketing, whether alone or in collaboration with others;
acceptance of our drug product candidates, if and when approved, by patients, the medical community and third-party payors, if we decide to develop any of our AXA Candidates as drug product candidates, or acceptance of our non-drug products we may market by consumers;
effectively competing with other drugs for any AXA Candidate developed and approved as a drug or competing with other non-drug products for any AXA Candidate developed and marketed as such;
obtaining and maintaining third-party insurance coverage and adequate reimbursement, as applicable;
enforcing and defending intellectual property rights and claims;
the marketing of our products; and
maintaining a continued acceptable safety profile of the AXA Candidates following approval or commercialization.
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our AXA Candidates, which would materially harm our business. If we do not receive regulatory approvals or identify and successfully execute on alternate regulatory pathways to market for our AXA Candidates, we may not be able to continue our operations.
Regulatory requirements for development of our AXA Candidates as drugs or as non-drug products are uncertain and evolving. Changes in these laws, including our ability to conduct Non-IND, IRB-Approved Clinical Studies, 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.
In the United States, under sections 201(s) and 409 of the Federal Food, Drug, and Cosmetic Act, or the FD&C Act, any substance that is reasonably expected to become a component of food is considered to be a food additive, and therefore subject to FDA premarket review and approval, unless the substance is generally recognized, among

52

Table of Contents

qualified experts, as having been adequately shown to be safe under the conditions of its intended use. Moreover, under federal law, dietary supplement products must only contain certain permissible dietary ingredients, and any ingredients considered to be an NDI under the FD&C Act will require pre-market notification to the FDA.
Based on the large body of studies and scientific literature on the human exposure to and safety profiles of certain amino acids, the FDA's promulgation of regulations governing the use of certain amino acids under certain conditions as safe and permissible food additives when used as nutrients, our own data on amino acids used in AXA Candidates and the fact that we use amino acids in our AXA Candidates within amounts previously studied safely in humans, we believe we have designed our AXA Candidates to have favorable safety profiles, and we further have evaluated or will evaluate the safety and tolerability of these AXA Candidates in Non-IND, IRB-Approved Clinical Studies. Under the FDA's framework governing studies of non-drug products, we believe that use of our AXA Candidates containing amino acids may be studied for safety and tolerability without an IND. However, the FDA or comparable regulators may disagree with this approach and determine that our studies should be conducted under an IND, which may result in negative consequences.
In prior or future studies or trials of our AXA Candidates, we may have or will expressly or implicitly characterize or classify such candidates as encompassed within a specific regulatory scheme (e.g., as foods or dietary supplements). Regulators may not agree with the regulatory classification of the AXA Candidates used in our Non-IND, IRB-Approved Clinical Studies or any subsequent classification of such candidates prior to commercialization. To date, we have had one pre-IND meeting with FDA regarding our AXA1665 program and have not discussed the development of our other AXA Candidates evaluated in Non-IND, IRB-Approved Clinical Studies or our utilization of specific regulatory pathways for our other AXA Candidates with the FDA or comparable foreign regulatory authorities and any such regulator may not agree with our current activities or future approach or plans for further development. The FDA may determine that our AXA Candidates are not safe or appropriate for use in Non-IND, IRB-Approved Clinical Studies or are not governed by food regulations and therefore may classify any of our AXA Candidates as being ineligible for investigation in clinical studies without an IND. The FDA or other regulatory authorities may also take enforcement action, or otherwise delay or prevent further development or commercialization of our AXA Candidates.
The FDA may determine that our AXA Candidates cannot be marketed as or do not meet the regulatory requirements for marketing or testing as non-drug products. The FDA may take the position that we failed to satisfy the premarket requirements for ingredient compositions, including that the particular product is not generally recognized as safe, or GRAS, is an unapproved food additive, is a NDI requiring premarket review or that our products contain otherwise impermissible ingredients, in which case some or all of our products may be deemed adulterated or misbranded in violation of the FD&C Act. Moreover, if we choose to study a product under an IND before the product candidate has been marketed as a non-drug product, the FD&C Act could prevent us from marketing the product as a non-drug product if we are unable to secure FDA approval as a new drug. Any delay in the regulatory consultation process, or a warning, finding or determination that any of our operations or product candidates do not meet the regulatory requirements of the FDA, including but not limited to any applicable GRAS, food additive or NDI requirements, could subject the company to regulatory enforcement action or other legal action, and/or cause a delay in or prevent the commercialization of one or more of our product candidates, which may lead to reduced acceptance by the public or others for any products we are able to commercialize and could materially adversely affect our business.
The FDA may determine that the only pathway for conducting studies of our AXA Candidates is under an IND or that our Non-IND, IRB-Approved Clinical Studies already conducted should have been conducted under an IND. Any such determination could prevent our reliance on existing regulatory frameworks to conduct Non-IND, IRB-Approved Clinical Studies for other AXA Candidates or prevent us from relying on or including data from our Non-IND, IRB-Approved Clinical Studies in any regulatory submissions to support further clinical development or marketing approval, and could significantly increase the cost of and delay the development or commercialization of AXA Candidates. If the FDA disagrees with our determination that we may conduct Non-IND, IRB-Approved Clinical Studies without filing an IND, they could require that we halt any Non-IND, IRB-Approved Clinical Studies or Clinical Trials we have commenced, or we may be subject to enforcement action. Should we choose to commercialize our AXA Candidates as non-drug products and if the FDA determines our AXA Candidates fall outside the food regulations, we may be subject to regulatory enforcement action and we could be required to stop selling, withdraw,

53

Table of Contents

recall, re-label or re-package any products we have commercialized as non-drug products on the market. In addition, if new safety issues are raised by Non-IND, IRB-Approved Clinical Studies in advance of deciding whether to file an IND that suggest safety concerns for all of our AXA Candidates, then the FDA could ask us to modify approved labeling for or withdraw from the market any previously approved products for therapeutic uses or products being commercialized for other non-drug uses. A decision by the FDA that we cannot conduct Non-IND, IRB-Approved Clinical Studies without filing an IND would significantly impact our current business model and we may incur significant expense and operational difficulties.
Changes in the legal and regulatory environment could limit our future business activities, increase our operating or regulatory costs, reduce demand for our AXA Candidates or result in litigation.
The conduct of our business, including, but not limited, to the development, testing, production, storage, distribution, sale, display, advertising, marketing, labeling, packaging, health and safety practices and regulatory classification and approval (where necessary) use of many of our AXA Candidates, is subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to laws and regulations administered by government entities and agencies outside the United States in markets in which we conduct clinical studies or trials under foreign food or drug regulations or in which our AXA Candidates and components thereof (such as packaging) may be manufactured or sold.
These laws and regulations and interpretations thereof may change, sometimes dramatically, as a result of a variety of factors, including political, economic or social events. Such changes may include changes in:
food and drug laws, including FDA regulations;
laws related to product labeling;